Tuesday, Oct 04, 2022

Blue Star stock rating: ‘Accumulate’

Blue Star’s Q3FY11 numbers are lower than expectations.

Blue Star’s Q3FY11 result numbers are lower than expectations as sedate revenue booking in the Central Aircsegment fails to offset the fixed costs,resulting in compression.

Net sales were flat on a YoY basis but down on a QoQ basis. Segment-wise,the Central Aircon- ditioning (CAC) segment saw a degrowth of 6% YoY,which was quite contrary to expectations since this segment had grown at a healthy pace in the H1FY11. This line of business comprises the central airconditioning,packaged airconditioning and electrical contracting business,collectively called Electro Mechanical Projects and Packaged Airconditioning Systems. Since this segment is project-based continuing slackness in commercial real estate development is reflecting in execution momentum.

As the traditional lines of user segments like IT and retail have slowed down,Blue Star has enhanced its exposure to infrastructure (electrical),healthcare,hospitality and education segments. The company is receiving orders from power project companies such as Siemens and ABB for their airconditioning requirements. The cooling products business comprises room aircondi- tioners and refrigeration products and systems. This segment grew 34% YoY in the third quarter,thus,maintaining the growth momentum of previous quarters. This segment also includes the cold chain equipment,which has vast growth potential considering the sheer magnitude of agri-produce that is wasted due to the lack of proper storage facilities.

The professional electronics business posted a growth of 28% YoY. This is a product-cum-project business catering to the requirement of the industrial sector. Over the years,the company has changed its business model from merely being a distributor of leading global manufacturers to that of a system integrator and value added reseller,thereby moving up the value chain.

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As a result of changes in project mix and sedate revenue booking Ebitda (earnings before interest,taxes,depreciation and amortisation) margins declined 240 bps (basis points) to 6.7% from 9.1% in Q3 FY10. While material costs have been kept under check,there has been a sharp rise in the purchase of traded items. During the quarter,prices of steel,aluminum,copper traded firm resulting in material cost pressures. This may be the prime reason for loss of margins in the cooling products division.

The company is working on extracting cost savings in its equipment manufacturing business which should start yielding results from Q4FY11.

Order booking in the Central Airconditioning projects in FY09 -10 was affected by the slowdown in construction,retail and IT segments. As a result,growth in order booking declined to 10.6% and 4.9% in FY09 and FY10,respectively,from 41% in FY08.


We believe the company may also be cautious on taking fresh orders due to the poor pricing scenario and longer cash conversion cycle. The profile of order backlog has changed with more number of infrastructure orders in the mix. Thus from a central airconditioning projects company,Blue Star is evolving into an infrastructure projects company capable of doing electrical,plumbing and fire fighting systems jobs. This has had negative implications on margins and execution cycle.

Taking cue from the way the MEP (mechanical,electrical and plumbing) business has evolved in India,Blue Star foresees that in years to come,the customer would be looking at a single vendor to provide entire services also covering maintenance of buildings systems (including systems like security,elevator etc),in addition to traditional MEP.

In H1FY11,Blue Star had indicated that it expects to grow by 20% plus in terms of revenues in FY11. However,in view of the subdued Q3,we have revised our revenue growth for current fiscal to Rs 29,663 m. Taking cognizance of the Q3 numbers (and also the firm material price trend),we have also adjusted our margin expectations downwards for Q4 and FY12.


The Blue Start stock is currently trading at 22.3x (times) and 17.0x FY11 and FY12 earnings respectively. In view of the earnings revision,we have reduced our one-year forward DCF (discounted cash flow) based target price to Rs 448 (Rs 500 earlier) and maintain Accumulate on Blue Star.

—Kotak Securities-Private Client Research

First published on: 07-02-2011 at 02:51:09 am
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