Previously I have written about how to identify stock investments

Like Peter Lynch here

Using Pause and Play here

By following smart money here

One of the pointers in Ten point investment map is to identify whether company has sustainable competitive advantages. Many of the investors have this question on how to define/find competitive advantage of company. We will try to ascertain competitive strength of  Symphony Ltd one of our top picks in Model Portfolio.  I am borrowing heavily from Warren Buffet’s letters to his shareholders.

1.  Will Company be in business for next 10 years ? Is there a big market to address – Symphony limited makes air coolers, also known as evaporative cooler, swamp cooler, desert cooler and wet air cooler, works on the evaporation technique; it uses the hot air in the room and water to generate cool air.  This is what I picked from there 2012-13 Annual report

In India,about 132 million households live in hot dry climatic regions (about 54% of the total) and about 11 million households live in moderate climatic regions. This represents an aggregate 143 million households (58% of total) of potential customers.

So we can safely assume that there is a big market opportunity to address, also given the cost of Air Conditioner and India’s per capita income. Air Coolers will be in business for foreseeable future. I don’t expect all households in India to have AC by 2024 for that matter even by 2050.Symphony limited is the market leader and the growing preference of middle class population for branded products in India, makes my position that Symphony is poised to gain market share in next decade.

2. Does the company has ability to raise prices ? – the ability to differentiate yourself in a real way, and a real way means you can charge a different price that makes a great business – Symphony limited has increased sales/ unit from Rs4740 in 2009 to Rs 5366 in 2013

2013 2012 2011 2010 2009
Sales (INR) 3084525000 2501260000 2327562000 1897700000 1242200000
YOY Growth 23.32% 7.46% Not Available 52.77% 67.60%
Sales (Units) 574750 495849 421355 262067
Sales/Unit 5366.72 5044.40 4503.80 4740.01

Source : Annual reports

A 13% increase over 5 years is not great when you consider that India’s inflation is 10% per year. However we have to also take into account that company is selling electrical appliances where generally prices have been going down as technology is becoming inexpensive. Lets check that if this is true then gross profit margins must have improved

SYM - GP

Source : Moneycontrol.com

Symphony limited has been able to consistently increase it’s gross profit margin, so economies of scale efficiencies have not only been shared with customers but also has been ploughed back to business.

3. Is the business capital intensive ? Is more money is required to generate more sales ? –  Few ways to look at this measure my preferred way to look at this

2013 2012 2011 2010 2009
Sales (INR) 3084525000 2501260000 2327562000 1897700000 1242200000
Cash to buy Fixed assets (INR) 49623000 38299000 205092000 77972000 14750000
Tangible Assets (INR) 295453000 305326000 317690000 129917000 65754000
Sales / Tangible Assets 10.44 8.19 7.33 14.61 18.89

Source : Annual reports

Symphony limited operates on asset light model, 2013 Sales are almost 10 times of tangible asset reported on balance sheet.  From 2011 annual report

A new model – This is how the transformation has panned out at Symphony. For years, the company assembled air coolers, chased raw material suppliers, pursued delivery deadlines and drove itself to despair balancing all variables. “We figured that there just had to be a better way of doing things,” says Mr. Achal Bakeri, Chairman and Managing Director. “So we began to identify all those who could probably assemble air coolers better – faster, cheaper with higher precision – than most people in the industry. We entered into a sourcing relationship with these OEMs through our VAVS model (value addition through vendor support) allowing us to concentrate on product development, innovation and marketing. This turned out to be win-win, resulting in a far more efficient business model.”

Significant investment was made in 2011 to acquire Mexican operations of legendary Impco. Over years Sales / Tangible assets ratio is improving.

4. Is the product / Service differentiated ? Corollary to the first question – Symphony Limited is price maker, Did an analysis few days back on flipkart on Air Coolers, Download this Sym – Price Analysis report. The color coding represents the similar models across competitors. Symphony limited commands premium in each category. The brand is able to distinguish itself and hence has price premium over competitors.  Can it sustain it’s position ? Yes year on year Symphony Limited has been pumping money on advertisement and sales promotion this will help to retain eye balls.

 

SYM - Advt

Source : Annual reports

2103 Annual report tells me it is going to continue

The average Indian needs a brand to stand out in his or her mind; Symphony increased its advertisement and sales promotion expenditure almost 55% over the previous year, enjoying more than 70% share of voice in media in the air cooler category, probably the highest for any brand in the country’s durable and appliances category.

5. View on management – Symphony Limited management commentary has been excellent, they have called out whenever they have erred. The annual reports have been treat to eyes and very informative. The top management has remained same through good and bad times. There are no corporate governance issues found. No Significant related party transaction, this  is a wonderful business run by clean people .  CMD and promoter was earning 0.34% sales, This is very reasonable.

6. Is company doing mindless imitation of peers ?  Symphony limited is pioneer in innovation be it products or business model. It has adopted game changing VAVS model. Even the product portfolio is unrivaled in industry. Symphony is the only company which has 100 Lts Air Cooler ( Storm i100) . It is a constant innovator and not imitator.

7. Is debt proportions for company are conservative ? Symphony is a zero debt company, so this one is no brainer

8. Do you understand the business ? Is this a industry you are comfortable talking about ? – Air Cooler is no sci-fi industry, easy to understand easy to explain.

9. Will customers buy if product is unbranded ?  –  Yes they will, however many of them are switching to branded products. Symphony is bound to gain from this shift as it is industry leader.

Since you read through so much here is bonus

Is business selling for substantially less than they’re worth ? – No Symphony is trading at fair value, Clean management, top numbers easy business will hardly be found at discount. It was available for discount in 2008-09 but not now the reason to buy was that the intrinsic value of the business is going to grow at a compound rate which is very satisfactory.

Lastly I leave you will comparative valuation

SYM - CompSource : Screener.in

Have a good week ahead