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Blue Star: EMPS segment continues to be a drag - Views on News from Equitymaster
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Blue Star: EMPS segment continues to be a drag
Jan 29, 2015

Blue Star has announced third quarter results for financial year 2014-2015 (3QFY15). The company reported a 8% YoY increase in sales while net profits grew by 126% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 8% YoY during 3QFY15.
  • The operating profits fell by 65% YoY during the quarter. Fall in operating profits came on the back of 0.8% YoY contraction in operating margins.
  • Net profits increased 126% YoY, despite fall in operating profits on the back of exceptional income from the sale of certain assets.
  • The company's order book as on 31st December 2014 stood at Rs 14.12 bn, a decline of 19% YoY.

Standalone performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Income from operations  5,459 5,908 8.2% 19,017 20,742 9.1%
Expenditure 5,394 5,885 9.1% 18,308 19,982 9.1%
Operating profit (EBDITA) 65 23 -65.1% 709 760 7.1%
Operating profit margin (%) 1.2% 0.4%   3.7% 3.7%  
Other income 174 86 -50.4% 245 203 -16.9%
Interest 126 105 -16.6% 371 321 -13.4%
Depreciation 85 103 21.2% 252 289 14.5%
Profit before tax 28 (99) - 331 353 6.7%
Exceptional items   183     183  
Tax   0 21     73  
Profit after tax/(loss) 28 63 125.8% 331 464 40.1%
Net profit margin (%) 0.5% 1.1%   1.7% 2.2%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)*          9.9  
P/E ratio (x)*         33.5  
(* On a trailing 12-month basis)

What has driven performance in 3QFY15?
  • The increase in sales was led by a healthy increase in the revenues of the Cooling Products (CP) segment and the Professional Electronics and Industrial Systems (PEIS) segment. However, revenues from the Electro Mechanical & Project Services (EMPS) segment saw a marginal fall. This is because the order inflow continues to be poor and job closures are still slow.

  • The fall in margins for the EMPS segment was a direct result of a significant correction in the estimates of specific legacy projects based on revised quantity estimates coupled with higher debtor provisioning by the company. Such legacy jobs continue to be a burden on the company's and the segment's profitability.

  • Revenues for the cooling products business saw a healthy growth while margins too saw an expansion. This was mainly on the back of better market penetration, benefit of excise duty reduction by the government, as well as a more favourable product mix.

  • The PEIS segment saw a robust growth too due to a favourable economic environment.

  • The bottomline got a boost from profits on certain asset sales that the company undertook during the quarter. Barring these, the company reported a loss during the period mainly due to the continued poor show by the EMPS segment arising from low margin legacy projects.

    Segment-wise performance
    (Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,612 3,571 -1.1% 10,966 10,886 -0.7%
    % share  66.2% 60.4%   57.7% 52.5%  
    PBIT margin 6.4% 0.8%   5.6% 2.6%  
    Cooling Products (CP)
    Revenue 1,554 1,965 26.4% 7,205 8,853 22.9%
    % share  28.5% 33.3%   37.9% 42.7%  
    PBIT margin 2.9% 5.1%   7.6% 10.7%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 293 372 27.0% 846 1,002 18.4%
    PBIT margin 12.9% 18.8%   20.0% 20.0%  
    Total
    Revenue 5,459 5,908 8.2% 19,017 20,742 9.1%
    PBIT margin 5.7% 3.4%   7.0% 6.9%  
What to expect?
The management has expressed that it continues to be selective in pursuing order with good commercial terms and healthy margins.

The management is of the view that with improving macroeconomic indicators, the economic environment is also improving. The residential and light commercial segments are seeing healthy growth with enhanced spends by consumers. It expects the commercial construction cycle to revive in FY16. In order to grow, the company intends to make investments in manufacturing, marketing and product development over the next few quarters.

Going forward, the company expects the cooling products business to continue to drive growth considering that Blue Star enjoys a strong brand perception in a low penetrated market thereby offering significant potential.

At the current price of Rs. 332; the stock trades at 22x its FY17E earnings. Considering these expensive valuations, re-iterate our SELL rating on the stock.

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