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Blue Star: Slow moving projects hurt - Views on News from Equitymaster

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Blue Star: Slow moving projects hurt
Jan 23, 2013

Blue Star has announced third quarter results for financial year 2012-2013 (3QFY13). The company reported a 2.5% YoY increase in sales and a net profit of Rs 54 m in the quarter compared to a loss of Rs 328 m in 3QFY12. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 2.5% YoY during 3QFY13. This was mainly due to a 5.1% YoY fall in the Cooling Products (CP) and 9.4% YoY fall in the Professional Electronics and Industrial Systems (PEIS) segment.
  • The company reported operating profits of Rs 254 m during the quarter compared to a loss of Rs 88 m in the same quarter previous year.
  • Net profit stood at Rs54 m compared to a loss of Rs 328 m in 3QFY12. The tax expenses were nil during the quarter due to a set off arising from the carried forward losses of the previous year.
  • Order book as on 30th December 2012 stood at Rs 16.2 bn, representing a 24.6% YoY decline. Slow down in order bookings and focus on improving the quality of orders (sensible bidding) led to a fall in the order book.

Standalone performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Income from operations 5,840 5,988 2.5% 18,872 19,088 1.1%
Expenditure 5,928 5,734 -3.3% 18,603 18,297 -1.6%
Operating profit (EBDITA) (88) 254   269 791 194.1%
Operating profit margin (%) -1.5% 4.2%   1.4% 4.1%  
Other income 62 21 -67.0% 134 156 16.1%
Interest 221 137 -37.9% 608 375 -38.4%
Depreciation 81 84 3.8% 232 240 3.4%
Profit before tax (328) 54   (438) 332  
Tax - -   - -  
Profit after tax/(loss) (328) 54   (438) 332  
Net profit margin (%) -5.6% 0.9%   -2.3% 1.7%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)         3.7  
P/E ratio (x)*         NM  
* On a trailing 12 months earnings. TTM EPS is negative so PE is not menaningful

What has driven performance in 3QFY13?
  • Blue Star's net sales increased 2.5% YoY during 3QFY13. This was mainly due to a 5.1% YoY fall in the CP segment and 9.4% YoY fall in the PEIS segment. However, revenues from the Electro Mechanical & Project Services (EMPS) segment increased 7.6% YoY.

  • Revenues from the PEIS business declined due to unfavorable business climate, declining demand and delay in finalization of orders. The PEIS segment comprises of agency business, system integration business and industrial project business. Due to a slowdown in the capital goods sector both system integration and industrial project business were impacted which led to a fall in top line.

  • Revenues from the CP segment declined due to seasonality. It may be noted that 3Q is generally a lean season for offtake of ACs. Also, it may be noted that with Bureau of Energy Efficiency norms coming into effect from 01 Jan 2013, there was a significant offtake in 3QFY12 which was not there in the current quarter. As such, high base effect contributed to the fall in revenues. Margins from the CP segment declined by 200 bps on a YoY basis due to reduction of margins in sourcing and installation.

    Segment-wise performance
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,680 3,960 7.6% 10,932 11,389 4.2%
    % share  63.0% 66.1%   57.9% 59.7%  
    PBIT margin -4.1% 5.8%   -2.5% 5.4%  
    Cooling Products (CP)
    Revenue 1,640 1,557 -5.1% 6,494 6,580 1.3%
    % share  28.1% 26.0%   34.4% 34.5%  
    PBIT margin 4.4% 2.4%   9.2% 7.5%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 520 471 -9.4% 1,447  1,119 -22.7%
    % share  8.9% 7.9%   7.7% 5.9%  
    PBIT margin 22.5% 20.3%   25.5% 17.3%  
    Total
    Revenue 5,840 5,988 2.5% 18,872 19,088 1.1%
    PBIT margin 0.6% 6.1%   3.7% 6.8%  

  • The operating profits stood at Rs 254 m compared to a loss of Rs 88 m in the same quarter previous year.

  • The company reported a net profit of Rs 54 m as compared to a loss in 3QFY12. Fall in interest expenses, zero taxation and strong operating performance helped the company post profits at the bottom line level. It may be noted that the provision for taxation was nil in the current quarter due to a set-off of the carried forward business loss of the previous year.

What to expect?
As low margin jobs have started to culminate, the execution and margins of the EMPS business have started improving. However, Rs 12-13 bn worth of slow moving jobs are still there in the system. Roughly, Rs 1 bn of them will yield zero margins and Rs 3-4 bn of them can fetch a margin of about 5%. Thus, 7-9% kind of margins that were witnessed in the past in the EMPS segment appears a remote possibility for the future. Also, it should be noted that the capital employed in the EMPS business has increased from Rs 4.2 bn in 2QFY13 to Rs 4.7 bn in 3QFY13 signifying that the collection issues are still present. As a result, working capital will remain high and thus debt.

Though the performance of the CP segment was not encouraging, it was impacted by seasonality in the current quarter. We expect the volumes to improve in the next quarter. PEIS segment is also expected to recover by 2HFY14, once the capex cycle improves. Based on these factors, which signal a recovery in the near future, we maintain our HOLD view on the stock.

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