Symphony Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Highest-ever topline, margin reset: Q2 delivered the highest-ever standalone and consolidated topline, but consolidated EBITDA margin fell 4+ pp as the company absorbed a strategic product upgrade, one-time marketing costs, and higher freight.
• Tertiary sales surge drove warranty costs: Channel-to-consumer sales ran 70–80% higher than company-level sales, clearing two years of pent-up inventory and triggering a warranty expense catch-up that will persist through March.
• Climate Technologies deferred, not lost: Subdued segment performance reflects a demand shift that pushed sales into the December and March quarters; management sees full visibility on recovery and expects the full year to match or beat FY22.
• Trade support is being weaned, not yanked: Discounts and support are normalizing in a calibrated, gradual fashion, and the company intends to take price increases on upgraded models to rebuild margins by summer.
• What to watch next quarter: Whether the deferred Climate Technologies sales actually land, the pace of gross margin recovery as upgraded-SKU price increases take effect, and any demand signal from the US and Australia, where management is watching global headwinds closely.

Topline & Channel Dynamics

• Record topline, low base: H1 and Q2 each posted the highest-ever consolidated and standalone topline, though management is fully aware the YoY growth sits on a low COVID-era base.
• Channel inventory cleared: Company-level sales were achieved only after almost fully clearing the backlog of inventory lying with trade pre-March; that inventory was much higher than the summer sales registered from the company, so the trade channel contributed to sale 70–80% higher than company books.
• Off-season collection robust: Collections were absolutely in line with pre-COVID periods, and trade sentiment is positive and buoyant across geographies.
• India revenue ahead of pre-COVID: In the first six months, India revenue is significantly higher vis-à-vis pre-COVID levels.
• Commercial/industrial air coolers: Sales have been very robust, the highest sales percentage growth among all verticals; the potential is huge and the company has just begun to scratch the surface.

Bakeri: "That is one sort of vertical, which is constantly growing. Because the potential is huge, and we are merely sort of I would say we have just begun now, scratch the surface."

Margin Walk & Cost Headwinds

• Gross margin hit by strategic upgrade: Consolidated and standalone gross margin were impacted mainly because of a strategic value-accretive product upgradation in ~4 air cooler ranges, covering 20-plus SKUs; calibrated price increases are intended on those models.
• EBITDA margin down 4+ pp: The decline is attributed to three buckets: ~₹6 crores in off-season market research, sales promotion, and trade-channel marketing expenses with long-term benefits; ~₹3 crores in increased freight costs (1% of sales) from Brazil sales on a CIF basis plus rising domestic freight; and incremental warranty expenses. All-in, close to 5% of gross sales impact.
• Warranty expense catch-up: Incremental warranty expenses were driven by a significant increase in tertiary sales; primary sales grew, but tertiary sales from the channel to the consumer grew significantly higher because pent-up inventory from the last two years also sold out. The warranty expense to service that higher tertiary sales is now reflecting, and the incremental percentage will continue in the December and March quarters.
• Marketing spend profile: Q2 had no direct advertisement or sales promotion barring a negligible amount; the expenses were market research and trade-channel marketing related, long-term in nature but booked as revenue expenses. Some of these are one-time and will not continue, and for the full year, A&P as a percentage of sales may settle around the historical average or slightly higher.
• PAT growth muted: The lower increase in Q2 profit is explained by the margin impacts.

Bakeri: "Largely on account of the significant increase in tertiary sales. Primary sales from the company to the channel grew. But the growth in tertiary sales from the channel out to the consumer was significantly higher. And because of all the pent-up inventory that had built up over the last two years also got sold out. So the warranty expense incurred to service, that much higher tertiary sales is reflecting here."

Pricing, Trade Support & Margin Recovery Path

• Calibrated price increases underway: Price increases have been taken in the last two quarters, model to model, and are reflected in gross profit margin percentage even though commodity prices remain substantially higher than pre-COVID, though lower than the previous year. The company intends to take calibrated price increases on the upgraded 20-plus SKU models.
• Trade support normalization is gradual: Trade support and discounts are back to normal, but the withdrawal is being done in a gradual, calibrated fashion. Management compared it to weaning a patient off oxygen: you cannot simply pull away the tube.
• Margin normalization timeline: By the time summer arrives in two quarters, the company expects to have arrived at where it wants to be in terms of pricing, margins, and trade support; the process is continuous and will keep moderating through June/July.
• Gross margin improvement: There is a good possibility to improve gross margin, and it will happen in a phased manner.
• Regulatory tailwind: BLDC/BEE norms for fans from 1st January will increase fan prices; air coolers are unlikely to be affected by regulatory changes, but the overall inflationary environment will help in increasing prices.

Bakeri: "It is like somebody is on oxygen then you to wean away the oxygen. You can't simply pull away the tube."

Climate Technologies: Deferred, Not Lost

• Subdued Q2, skewed forward: Climate Technologies posted a subdued performance that impacted consolidated results; part of sales were deferred to the December quarter. The segment's performance is skewed to the December and March quarters, more so in the current year.
• Negative profitability explained: The segment registered negative profitability YoY mainly due to US-related sales and some other sales deferred to December/March on account of a switch in demand; Australia was also impacted.
• Full visibility on recovery: September quarter sales were deferred to December and March; YoY sales are lower, but there is complete visibility of sales and profitability down the line. The full-year performance is expected to be in line with or better than FY22.
• Global demand watch: Management is keeping a close watch on evolving global economic headwinds and the likely impact on demand, especially in the United States and Australia.

Shah: "Many times, you know, just quarterly performance may be skewed because many times due to a variety of factors and reasons, business doesn't happen just quarter-to-quarter. So the fair view is annual performance and that's what I'm trying to convey."

International Expansion & Subsidiaries

• Brazil sales commenced: Sales to Brazil commenced on a CIF basis, causing a substantial increase in freight costs.
• New market exploration: The company is actively exploring and seriously evaluating some markets in Southeast Asia and Latin America; initial traction is decent, including Brazil. It is also actively planning to expand in the MENA region. Growth will be pure organic; at this point, management is not actively looking for any inorganic growth.
• IMPCO Mexico performing: IMPCO is consistently doing well; residential air cooler moulds and dyes previously supplied from India have been shifted to IMPCO, and local outsourced manufacturing of household air coolers for IMPCO has begun, leveraging subsidiary synergies and helping explore the US and Latin America.
• GSK China breakeven: GSK China is not doing well and is in the red; however, overhead rationalization of ~35% completed about two quarters prior has led to EBITDA breakeven in H1.

Capital Allocation

• Dividend: The Board declared a second interim dividend of ₹2 per share (100%), amounting to ₹14 crores, in addition to a first interim dividend of an equivalent amount post 30th June; the company is back to a quarterly payout in line with pre-COVID.
• Payout policy unchanged: The 50% of PAT payout policy remains unchanged, whether by buyback or dividend.
• Buyback: A buyback may happen down the line; immediately, there is no plan. The Board will take appropriate decisions at the right time once there is much better financial performance.

Guidance & Commitments

Key Metrics