Technology

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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