Blue star

Dated:- 22nd August 2019

Update on the Indian market:

In the past few days, all eyes are towards the government, expecting to announce stimulus measures for the economy to rekindle the risk appetite of investors. The Chief Economic Adviser (CEA) Krishnamurthy Subramanian’s comments reduced such a possibility, leading to a sell-off in the markets. NIFTY fell by 1.6%. Amongst the NSE 50, worst performers were Yes Bank (-12.2%), Vedanta Limited (-7.6%), Bajaj Finance Ltd (-5.2%) and Indiabulls Housing Finance Limited (-5.2%). While the best performers were Britannia (+1.7%) and Tech Mahindra (+1.5%). In the sectoral indices, the realty sector was the worst performer (-6.7%); followed by Metal (-3.6%), PSU Bank (-3.6%).

Bluestar (BLSTR): Company takes a cautious approach in the troubled times

In an interview on CNBC-TV18 on 21^st August 2019, Bluestar MD, Mr B Thiagarajan talked about industry scenario. Key highlights are below:

·       The performance of the Electro-Mechanical Projects and Packaged Air Conditioning Systems (EMP) was a conscious decision made by the management. The order inflows from across the segments remain healthy. BLSTR reported 34% YoY increase in the order book at ~Rs 28,410 mn.  BLSTR delayed the order execution with the focus on controlling working capital.

·       BLSTR reported ~9% YoY growth in 1QFY20 in the Unitary Products segment revenues. The Room Air Conditioners (RAC) revenues grew by ~25% YoY while the commercial refrigeration product revenues de-grew by ~22% YoY. The decline in the commercial refrigeration products sale was a result of efforts for migration to a new technology product range. The commercial refrigeration product sales peaked in 4QFY19 and were muted in 1QFY20. BLSTR is seeing improved demand in 2QFY20.

·       ~40% of the air conditioner sales are through consumer finance schemes. The payback period is ~10 months and currently, no repayment issues have been noticed. BLSTR deals through financers like Bajaj Finance.  The demand is higher for the lower end products.

·       The floods in certain parts of India may lead to subdued demand in the festive season. BLSTR expects ~10-15% growth in the unitary products segment for FY20E. The Rupee depreciation will put stress on costs. 

·       BLSTR intends to focus on margins and cash. The cash position has been improving at BLSTR. In 1QFY20, it became ~Rs 10 mn net cash company from a borrowing level of Rs 4,050 mn in 1QFY19.

Consensus Estimate (Source: market screener website)

·       The closing stock price of BLSTR was Rs 710/- as of 22-August-19. It traded at 31x / 25x / 22x the consensus EPS for FY 20E / FY 21E / FY 22E EPS of Rs 23.0 / 28.3/ 32.8 respectively.

·       Consensus target price of Rs 779/- implies a PE of 24x on FY22E EPS of Rs 32.8

Dated:- 16th August 2019

1QFY20 Results

·       Bluestar (BLSTR) reported consolidated revenue growth of 4% YoY to Rs 15,755 mn in 1QFY20. The Electro-Mechanical Projects and Packaged Air Conditioning Systems (EMP) segment reported muted revenues at Rs 6,239 mn impacted by a slowdown in the execution of projects business. The Main business of ACs – Unitary Products (UP) – segment revenues grew by 9% YoY to Rs 9,069 mn. The Professional Electronics and Industrial Systems (PEIS) segment revenues declined by 23% YoY to Rs 446 mn on a higher base of 1QFY19.

·       The EBITDA declined by 16% YoY to Rs 1,149 mn. The raw material costs increased by ~440 bps YoY while the other expenses reduced by ~325 bps YoY. The EBITDA margin contracted by ~180 bps YoY to 7.3%.

·       All segmental margins were lower YoY. In the UP segment, the EBIT margins declined by ~50bps YoY to 10.9%. The EMP segment margins declined by ~100 bps YoY to 5.4%. The PEIS segment margins declined by ~450 bps to 9.9% impacted by the variation in the mix of new orders.

·       The other income was higher at Rs 217 mn on account of receipt of an industrial promotion subsidy for the manufacturing facility at Wada.  The finance costs were lower at Rs 82 mn (v/s Rs 121 mn in 1QFY19) due to the effective management of working capital and consequently lower borrowings in Q1FY20. Consolidated PAT stood at Rs 768 mn v/s Rs 916 mn in 1QFY19.

Management Commentary

·       Rs 140 mn industrial promotion subsidy received for the manufacturing facility at Wada; includes Rs 84 mn allocated to the EMP segment and Balance Rs 56 mn allocated towards the UP segment.

·       For the EMP Segment, the order book reported a growth of 34% Yoy to Rs 28,410 mn and the order intake increased by ~55% YoY at ~Rs 9,669 mn

·       The UP-segment margins were impacted due to the adverse product mix. In 1QFY20, there was an increase in the demand for 2 Star – 3Star fixed speed ACs which are comparatively lower margin products.

·       Management guided for 12-15% YoY revenue growth for the Room AC segment for FY20E and margin guidance of ~9.5%-10%. BLSTR’s current market share is ~12.5% and the management expects to reach 13.5% by FY20E end.

·       The Market size of Room ACs is ~Rs 110 -120 bn with annual volumes of 5.5 mn-6 mn units. The industry market share of inverter AC segment was ~60% in Q1FY20, BLSTR’s inverter share was 52% during the quarter.

Consensus Estimate (Source: market screener website)

·       The closing price of BLSTR was Rs 702/- as of 16-August-19. It traded at 30x / 25x the consensus EPS for FY 20E / FY 21E EPS of Rs 23.3 / 28.3 respectively.

·       Consensus target price of Rs 776/- implies a PE of 27x on FY21E EPS of Rs 28.3.