Maintain REDUCE on Symphony - Trade inventory pressure continues, RoW mixed bag - HDFC Securities

Mr. Naveen Trivedi, Institutional Research Analyst, HDFC Securities

Symphony's 2QFY21 was in line with our estimates (down 43% YoY) as domestic business continued to face challenges due to high trade inventory. Recovery in exports was strong, although Rest of the World (RoW) delivered mixed results. GSK China continued to struggle, while IMPCO and CT delivered positive growth. Gross margin at 48% saw a sequential recovery, still lower than 50% guidance. Liquidation of channel inventory will continue to remain a key monitorable in FY21. Primary sales are expected to remain impacted over the next two quarters due to trade inventory and liquidity pressure in the channel. Our thesis around gradual recovery seems to be playing out, and we expect the recovery in demand to gain pace as the summer approaches. Hence, revenue in FY21 will remain muted. Domestic margin is expected to improve sequentially in 2HFY21. We maintain our EPS estimates for FY21/FY22/FY23. We value Symphony at 30x P/E on Sep-22E EPS and derive a target price of Rs 840. Maintain REDUCE.

Inventory bears down on domestic revenue: Standalone revenue declined by 43% YoY (+32% in 2QFY20 and -75% in 1QFY21), in line with our estimates. Domestic revenue declined 44% YoY while exports saw a 17% YoY growth. Near-term pressure will continue owing to high trade inventory (40-45% of volume). The company is taking several initiatives to revive domestic revenue, the result of which is expected to be visible in the upcoming season. RoW was up 4% YoY with CT (7-8% YoY) and IMPCO (marginal) seeing growth in 2QFY21; GSK continued to contract.

Sequential improvement in margins: Standalone GM was expanded by 103bps YoY (-350bps in 2QFY20 and -500bps in 1QFY21) vs an expectation of 182bps YoY expansion. Employee/Other expenses declined by 13/27% YoY, while ASP was flat YoY. EBITDA margin contracted by 539bps YoY to 25.9% (+88bps in 2QFY20 and loss of Rs 80mn in 1QFY21) vs an expectation of contraction of 692bps YoY. Standalone EBITDA declined by 53% YoY (HSIE-56%). PBT declined by 50% YoY while PAT declined by 53% YoY (lower tax rate in the base quarter). RoW losses stood at Rs 100mn vs Rs 10mn loss in 2QFY20. CT margins remained impacted owing to unavailability of imported raw material, as local sourcing is expensive. IMPCO is seeing improvement in operating margin.

Call takeaways: (1) Channel inventory in India is at 40-45% of sales during July 2019 to June 2020; (2) rural and semi-urban sales mix stood at 60%; (3) 75% of sales were to existing partners while 25% were to new trade partners; (4) IMPCO Mexico saw strong recovery and the company expects growth for FY21; (5) raw material inflation saw uptick towards the end of 2QFY21.

Shares of Symphony Limited was last trading in BSE at Rs.829.45 as compared to the previous close of Rs. 825.4. The total number of shares traded during the day was 2411 in over 460 trades.

The stock hit an intraday high of Rs. 838 and intraday low of 826.25. The net turnover during the day was Rs. 2001451.

Source : Equity Bulls

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