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Blue Star: Sales stop falling, finally! - Views on News from Equitymaster

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Blue Star: Sales stop falling, finally!
Jan 25, 2010

Performance summary
  • Topline grows 5% YoY during 3QFY10; falls 8% YoY during the nine month period. Growth is led by the electro-mechanical projects & packaged air-conditioning systems (EMPS) business where sales grow by 10% YoY during the quarter.
  • Operating margins remain flat during the quarter.
  • Net profits excluding extraordinary items grow 4.4% YoY during the quarter owing to higher depreciation costs and a higher effective tax rate; grows 5% YoY during 9mFY10.
  • Order book as on December 31, 2009 stands at Rs 18.9 bn compared to Rs 16.3 bn as at December 31, 2008, a growth of 16% YoY.


Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 5,658 5,931 4.8% 18,413 16,947 -8.0%
Expenditure 5,145 5,392 4.8% 16,660 15,151 -9.1%
Operating profit (EBDITA) 513 538 5.0% 1,753 1,796 2.4%
Operating profit margin (%) 9.1% 9.1%   9.5% 10.6%  
Other income 10 29 187.9% 58 83 43.4%
Interest 53 9 -82.9% 116 26 -77.5%
Depreciation 70 88 25.0% 188 256 36.3%
Profit before tax 400 470 17.5% 1,507 1,597 6.0%
Tax 78 134 71.4% 371 407 9.5%
Extraordinary gain/(loss) - 87   - 140  
Profit after tax/(loss) 322 423 31.5% 1,136 1,329 17.1%
Net profit margin (%) 5.7% 7.1%   6.2% 7.8%  
No. of shares       89.9 89.9  
Diluted earnings per share (Rs)*         20.6  
P/E ratio (x)*         18.1  
* On a trailing 12 months earnings

What has driven performance in 3QFY10?
  • The 5% YoY growth in Blue Star's net sales during 3QFY10 was a result of a relatively better performance from its EMPS business division. The EMPS business (78% of total sales) led the growth in the company's topline with a 10% YoY growth in sales during the quarter.

    Segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 4,221 4,628 9.6% 12,765 12,035 -5.7%
    % share 74.6% 78.0%   69.3% 71.0%  
    PBIT margin 9.9% 10.3%   10.9% 10.9%  
    Cooling Products (CP)
    Revenue 950 954 0.4% 4,400 3,978 -9.6%
    % share 16.8% 16.1%   23.9% 23.5%  
    PBIT margin 10.8% 9.4%   11.8% 13.6%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 487 349 -28.4% 1,248 933 -25.2%
    % share 8.6% 5.9%   6.8% 5.5%  
    PBIT margin 25.2% 24.8%   21.9% 27.4%  
    Total
    Revenue 5,658 5,931 4.8% 18,413 16,947 -8.0%
    PBIT margin 11.4% 11.0%   11.8% 12.5%  

    The company's second largest business line of CP (16% of total sales) recorded a flat performance during the quarter. The third business segment of PEIS recorded a fall in sales of 28% YoY during the quarter.

  • The operating margins of the company saw no change during the quarter. Based on segments, while the EMPS segment saw an expansion in margins, the CP and PEIS segments recorded a fall in their margins during the quarter.

  • On the back of a growth in the operating profits (5% YoY), Blue Star's net profits grew at a similar pace of 4.4% YoY during 3QFY10. This is excluding the extraordinary gain that the company saw during the quarter on a profit on the sale of its 80% stake in Ravistar Pvt. Ltd. to Systemair AB, Sweden. This divestment is part of the company's strategy of exiting non-core businesses and allocating resources to its core businesses.

What to expect?
At the current price of Rs 373, the stock is trading at a multiple of 11.6 times our FY12 earnings estimates. The management has indicated that a drop in business from the IT/ITES and retail sectors continues to mar the performance of the company's projects (EMPS) segment. However, it is seeing some initial signs of pickup from smaller retail customers.

For the company to really get back to a high growth trajectory, the management reckons that demand from the above two sectors needs to come back in a big way. However, it has also expressed that a lot of commercial real estate is still lying vacant. First, that needs to be filled up. And then, any new space that is created is what will propel demand for the company once again.

At current levels, we maintain a 'hold' view on the stock from a 2-year perspective.

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