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Blue Star Ltd Research Report - 03rd Jun 2016

Consumer Durables | Published on Jun 03rd 2016


Blue Star’s standalone numbers for 4QFY2016 were subdued on the margin and bottom-line front mainly on account of the company having to provide for the last leg of the legacy orders. Sans the provision for legacy orders, the operating profile was in-line with our estimates. The top-line grew by 9.8% yoy while the margin contracted by 170bp yoy to 5.2%. The company over the past two years has carried out multiple restructuring initiatives which include transferring its PEIS business to its wholly owned subsidiary and amalgamating its associate Blue Star Infotech (BSIL) with itself. There was net exceptional income of Rs48cr arising from profit on sale of IT business of BSIL, as well as cost update on major contracts. Also owing to BSIL’s merger, the depreciation expense was significantly higher. Adjusting for the exceptional item, the net profit for the quarter came in at Rs24cr. Improvement in macro scenario to support growth: The Cooling/Unitary Products Division (CPD/UPD) has been the key performer for the company, largely due to its room air conditioning (RAC) business. The RAC business has been outgrowing the industry by ~10% points over the last few quarters, resulting in the company consistently gaining market share from ~7% in FY2014 to 10.5% at present. Various industry players as well as the company Management have upgraded the FY2017 growth guidance for the industry from 12-15% earlier to 20% now which augurs well for the division. The company has also forayed into other products such as air coolers, water purifiers and air purifiers which should drive growth for the division. As for Electro Mechanical Projects and Packaged Air-conditioning Systems (EMPPAC) division, the order book is now clean and order inflow has started to pick up but execution is a near term monitorable. We expect the gradual improvement in the macro scenario to drive the performance of the division. Outlook and valuation: We have upgraded our numbers to factor in higher revenue guidance for the RAC business as well as improvement in performance of the EMPPAC division. As reported in our earlier report(s), the merger with BSIL has improved the balance sheet strength of the company by way of cash infusion which the company will utilize to grow the UPD division as well as the exports of the company. At the current market price, the stock trades at 20.1x its FY2018E earnings and at 0.8x FY2018E EV/sales (while its close peer Voltas trades at 1.4x its FY2018E EV/sales). We maintain our BUY recommendation on the stock with a target price of Rs495.

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CMP 415
Target Price 495
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others28.0
Grand Total100.0

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