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Blue Star: Not a cool performance - Views on News from Equitymaster

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Blue Star: Not a cool performance
Jan 28, 2011

Blue Star has declared its 3QFY11 results. The company reported a 4% YoY growth in sales while its net profits nearly halved. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by around 4% YoY during 3QFY11 and 17% YoY for 9mFY11. Sales growth was led by the cooling products and professional electronics and industrial systems segments, which grew by 35% and 29% respectively. It is the increase in sales of room air-conditioners that has driven the growth in cooling products business.
  • Operating profit declined 26% YoY during 3QFY11. Operating profit margins have contracted by 2.7% as compared to 3QFY10.
  • Net profits declined by 47% during 3QFY11. Sharp spike in the interest costs was responsible for the decline in net profits. The interest costs increased by a whopping 248% YoY during 3QFY11. This was because of increase in debt to fund the DS Gupta acquisition, increase in working capital and increase in interest rates.
  • Order book as on Dec 31, 2010 stood at Rs 20.7 bn, up 10% YoY.


Financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 5,862 6,068 3.5% 16,704 19,484 16.6%
Expenditure 5,310 5,661 6.6% 14,875 17,973 20.8%
Operating profit (EBDITA) 552 407 -26.3% 1,829 1,511 -17.4%
Operating profit margin (%) 9.4% 6.7%   11.0% 7.8%  
Other income 28 66 132.5% 83 263 216.2%
Interest 23 79 248.4% 60 148 148.0%
Depreciation 88 80 -8.2% 256 235 -8.3%
Profit before tax 470 314 -33.3% 1,597 1,391 -12.8%
Tax 134 90 -32.9% 407 414 1.9%
Extraordinary gain/(loss) 87 -   140 4  
Profit after tax/(loss) 423 224 -47.2% 1,329 981 -26.2%
Net profit margin (%) 7.2% 3.7%   8.0% 5.0%  
No. of shares       89.9 89.9  
Diluted earnings per share (Rs)*         19.6  
P/E ratio (x)*^         17.7  
* On a trailing 12 months earnings   ^Excluding extraordinary items

What has driven performance in 3QFY11?
  • The nearly 4% YoY growth in Blue Star's net sales during 3QFY11 was a result of a better performance from its cooling products (CP) and professional electronics & industrial systems (PEIS) divisions. Both these divisions together account for nearly 29% of the total sales and led the topline growth of 3.5% YoY during the quarter. The company is seeing a strong demand in equipment, air-conditioners and commercial refrigerators. However, there is a slump in the central air-conditioning and project related business.

  • The electro-mechanical projects & packaged air-conditioning systems (EMPS) business which accounts for the rest 71% of the sales saw a decline of 5% in sales. The segment continues to see subdued demand and delay in order finalization from most of the major sector. The demand from IT/ITeS and commercial real estate segment did not pick up significantly as expected. The telecom infrastructure roll-out is slow. The slow execution of infrastructure projects was yet another reason. These sectors which have been impacted adversely together account for nearly 70% of the order book. The sentiment in commercial real estate continues to be negative for the ongoing quarter and the company expects a flat growth for 4QFY11.

    Segment-wise performance
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 4,567 4,342 -4.9% 11,828 12,813 8.3%
    % share 77.9% 71.6%   70.8% 65.8%  
    PBIT margin 10.8% 6.7%   11.4% 8.3%  
    Cooling Products (CP)
    Revenue 948 1,278 34.8% 3,946 5,226 32.5%
    % share 16.2% 21.1%   23.6% 26.8%  
    PBIT margin 8.7% 7.9%   13.5% 11.8%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 346 448 29.3% 930 1,445 55.3%
    % share 5.9% 7.4%   5.6% 7.4%  
    PBIT margin 25.3% 26.1%   27.7% 23.6%  
    Total
    Revenue 5,862 6,068 3.5% 16,704 19,484 16.6%
    PBIT margin 8.0% 5.2%   9.6% 7.1%  

  • Blue Star's operating margins contracted by 2.7% as compared to 3QFY10. It was the EMPS business which led the sharp contraction in margins. The operating margins for this division declined by 4.1%, followed by the CP division where operating margins fell by 0.8%. Lower billing was the primary cause for the sharp contraction in margins of the EMPS business. On the other hand, the PEIS business saw a margin expansion of 0.8%.

  • Net profits nearly halved with the interest costs causing most of the erosion.

What to expect?
At the current price of Rs 350, the stock is trading at a multiple of 11 times our FY13 earnings estimates. The management has expressed concerns over order inflows because of delay in order finalizations, its decision to raise margins for new orders and tighter terms of payments from customer. On an average, the company had raised prices by around 3% for all its products taken together. These initiatives may help it offset the rising input costs to a certain extent. Though it sees a strong demand from sectors such as hotels, hospitals, retail, dairy, residential; however their contribution to revenues and order book is not significant enough to completely offset the subdued demand in other major sectors IT/ITeS, infrastructure and commercial real estate.

Order inflow concerns linger on account of higher billing for new orders and tighter payment conditions for customers in a bid to improve the working capital position. The management expects a flat growth for 4QFY11. The management expects the EMPS business to gain momentum in FY12 and within the EMPS business it expects the electrical and plumbing to drive growth. It expects the EMPS business to grow by 15% in FY12. On account for lower profitability for the first nine months of the year and taking into consideration the managementís concerns over new orders, we reiterate our cautious view on the stock.

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