In this week’s Markets, we present a video explainer on the absurdity of Bengaluru rent prices and all the hype surrounding one summer stock that follows a very interesting strategy.
Why are rental prices in Bengaluru skyrocketing?
Ever since the pandemic, the real estate sector has been on a tear. But one place in particular is hogging much of the limelight--Bengaluru! Real estate and rental prices in Bengaluru have been increasing at a record pace and everybody is trying to figure out why. So we decided to make a simple video explaining what's happening here and what you can do about it if you're looking for a place to rent. Click to watch now!
The Story of Symphony
Every year, as the mercury rises, everyone gets excited about a bunch of stocks that are part of an exclusive club — it’s called the ‘summer stock’ club. And the companies that are part of this include ones that make air conditioners or even cold beverages.
Hotter weather means that people want to cool down. So these kinds of businesses should see an uptick in their fortunes. Ergo, their share price will see a nice rally too. And you can why this makes intuitive sense. Analysts publish reports. Media houses create lists of ‘stocks to watch out for’. It’s an exciting time.
But not everyone buys into this theory. Some folks think that the summer stock hype might just be a fairy tale.
You see, Moneycontrol recently picked a few of these popular stocks and plotted their returns over the past decade. And guess what? The average return from these stocks was typically negative from March to June.
Even Goldman Sachs did some of their own research. They looked at the growth of the air conditioning industry during the peak warm years. And found that it grew only in single digits. The demand simply wasn’t soaring alongside the temperature.
So much for being summer stocks, eh?
But we wanted answers too. So we decided to delve into this phenomenon for ourselves. And we did a couple of things differently.
Firstly, we decided to pick just one single stock — Symphony, the company that makes the air coolers that you see literally everywhere.
And secondly, we split the analysis into 3 distinct periods. We have the pre–summer period of February to March. The peak summer period of April to May when the heat gets unbearable. And the post-summer or what’s really the monsoon period from June to July. We did this for the past decade barring the pandemic-affected year.
Now what did this reveal, you ask?
Well, Symphony is not a summer stock! Yup, if you go by the true sense of the definition of a stock doing well during the summer months, it doesn’t seem to work well.
It has delivered positive returns to investors in 2 out of the last 10 years. It’s quite disappointing. And oftentimes, it has lost upwards of 10% in this summer period. If you look at the post-summer period, you’ll see a similar story as well. The stock fails to deliver more often than not.
However, if you dig a little deeper, you’ll find something quite fascinating. You’ll see that the pre-summer period is quite the opposite. In fact, Symphony has been in positive territory on 8 occasions! And it also racks up some solid double-digit returns in this period.
The bottom line is that it’s really a pre-summer stock or a spring stock then. Whatever you want to call it.
So, why is this happening?
Well, one explanation is that investors operate a little differently. They always look into the future and then place their bets. They already know that most of the sales for the company are likely to happen in the summer months. So they bet on the stock early in anticipation of the uptick in sales. And when the earnings are finally revealed, they might quietly exit the stock.
Maybe that’s what explains Symphony’s fortunes. So if you’re thinking of buying into all the summer stock hype right now, maybe it’ll be wise to keep this in mind.
But wait…why did we even pick Symphony to run this analysis, you ask?
Well, while the summer stock phenomena might be a temporary hype, Symphony has been around for a really long time. In fact, the company has quite an interesting backstory too.
See when the company began operations in 1988, the promoters didn’t really have experience dabbling in the home appliances space. They were realtors in Gujarat. But that didn’t stop them from trying. And they launched air coolers.
Not fans. Not air conditioners. But coolers.
Because this category fits right into the middle income spectrum. While a fan would set a rural household in India back by a month’s worth of savings, and air conditioners would probably mean dipping into a couple of years’ worth of it, coolers could be bought with 3–4 months of savings. And for urban households, the entry barrier would be even lower.
But companies often don’t like being a one-trick pony. They want to diversify. Put their eggs in many baskets and expand their expertise.
So Symphony began building out other products — geysers, washing machines, and air conditioners. Apparently even wheat flour mills for households. Yup! We were as surprised as you are when we found out about this.
But the strategy didn’t work and Symphony racked up losses very quickly. In fact, the situation was so bad that the company had to file for bankruptcy. And it took a long 3 years to restructure itself and make a comeback. But by then, they’d learned their lesson. It was better to be a ‘one product, many markets’ company than to try their hand at everything. So they went back to the core — air coolers.
And since then, the only diversification the company has attempted is geographical by tapping international markets. So you can see why this one-product company is a perfect example to illustrate a summer stock, no?
But what does the future hold for the company?
Well, if we’re going to break down the financials of Symphony, we might need another story in itself. But let’s look at the macro picture instead.
And here’s the thing. 88% of Indian households own an electric fan. But the market penetration for the next most affordable thing that can cool a room is only 14%. You’d imagine that with the heatwaves in the country rising each year and disposable incomes improving, the market for coolers will expand too.
There’s another factor that could work in Symphony’s favour.
See, over two-thirds of the market is still controlled by the unorganized segment. So, the opportunity to make inroads is right there for the taking. And Symphony which already dominates the organized market with a 50% market share knows this. Quite strategically it has ensured that it’s making its presence known in the hinterland of the country. And as per HDFC Securities, over 40% of its dealers are located in rural and semi-urban areas where the demand could emerge from.
With fairly robust results announced recently, Symphony does seem quite well placed at the moment to ride the summer waves.
But don’t forget the risks circling the stock too. At the end of the day, it’s still a one-product business that also has the disadvantage of being seasonal in nature. And if you combine an erratic summer with slowing economic growth and job losses, it can wipe out an entire year’s worth of revenue for the company in the blink of an eye.
Tell us — What do you think about this summer stock?