Capex of Rs 5500 mn to expand room air conditioner manufacturing capacity– Blue StarTanmay Gadre
Update on the Indian Equity Market:
On Monday, NIFTY ended at 17,118 (-1.0%) as it closed near the intraday low level of 17,096. Among the sectoral indices, METAL (+1.5%), MEDIA (+0.5%), and PHARMA (+0.0%) were the gainers, whereas FMCG (-1.7%), FINANCIAL SERVICES 25/50 (-1.4%) and AUTO (-1.2%) led the losers. Among the stocks, COALINDIA (+3.3%), HINDALCO (+2.2%), and UPL (+1.8%) led the gainers, while BRITANNIA (-3.5%), GRASIM (-3.1%), and TATACONSUM (-3.1%) led the losers.
Excerpts of an interview with Mr. B Thiagarajan, MD of Blue Star (BLUESTARCO) with The Economic Times on 17th March 2022:
- The company expects a very positive summer season after two consecutive poor summer seasons. The company will attempt to grow its sales 25-30% faster than the industry.
- BLUESTARCO has stocked its inventory till June-22 and it will hold the current prices till May-22. Two developments might affect the product prices- 1) The ongoing Russia-Ukraine war may sharply increase the commodity prices post May-22, 2) The company may exhaust its stock by May and may have to review the prices by mid-April.
- The company is expanding its room air conditioners manufacturing capacity, with a third factory coming up in Sri City. The company is making a total investment of Rs 5,500 mn in three phases, Rs 2,200 mn being invested in the first phase. The factory may get commissioned in the 3QFY23E.
- The company has applied for the PLI scheme under which it may receive Rs 730 mn for its investment in the factory.
- The company is expanding the manufacturing capacity for commercial refrigeration and deep freezer units by around 250,000 units. This factory located in Wada will get commissioned in the first week of April-2022.
- The CEO expects the semiconductor supply issue to stabilise during the 3-4 months before the Diwali-festival season. The company is betting on the fact that the penetration of room air conditions in India is 7% and will improve.
Asset Multiplier Comments
- We expect the demand for the room ACs to remain robust due to hybrid working models, online schooling, and low penetration in the Indian market.
- The upcoming deep freezer factory in Wada will help in substituting imports thereby reducing imports of some SKUs.
- The company has launched a comprehensive range of affordable ACs and is eyeing a market share of 14% in 2022. (Blue Star’s press release)
Consensus Estimate: (Source: market screener website)
- The closing price of Blue Star was ₹ 972/- as of 21-March-2022. It traded at 36x/28x the consensus earnings estimate of ₹ 27/35 for FY23E/FY24E respectively.
- The consensus target price of ₹ 1,092/- implies a P/E Multiple of 31x on FY24E EPS estimate of ₹ 35/-
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