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Blue Star: Trail-blazing performance - Views on News from Equitymaster
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Blue Star: Trail-blazing performance
Jan 30, 2008

Performance summary
  • Topline grows 39% YoY in 3QFY08, 44% YoY in 9mFY08. Robust growth recorded across all business segments, especially central air-conditioning and cooling products.
  • Operating margins expand by 4.4% during 3QFY08 owing to lower raw material costs (as percentage of sales).

  • Net profits more than double during the quarter, grow 179% YoY during 9mFY08. Growth aided by strong expansion in operating margins, lower depreciation costs and effective tax rate.

Financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 3,701 5,149 39.1% 10,584 15,249 44.1%
Expenditure 3,463 4,592 32.6% 9,859 13,629 38.2%
Operating profit (EBDITA) 238 557 134.1% 725 1,621 123.6%
Operating profit margin (%) 6.4% 10.8%   6.8% 10.6%  
Other income 4 1 -73.8% 17 10 -41.5%
Interest 22 16 -27.3% 66 54 -18.4%
Depreciation 58 55 -4.5% 147 158 7.4%
Profit before tax 163 487 199.6% 529 1,419 168.2%
Tax 48 133 179.8% 157 382 142.9%
Profit after tax/(loss) 115 354 207.8% 372 1,037 178.9%
Net profit margin (%) 3.1% 6.9%   3.5% 6.8%  
No. of shares         89.9  
Diluted earnings per share (Rs)*         15.3  
P/E ratio (x)*         32.7  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • Blue Star recorded a 39% YoY growth in sales during 3QFY08. This was a combined result of strong performance across the three business segments, as shown in the table below. The company’s CPAS business, which formed 73% of its 3QFY08 revenues, led the way for the growth in topline during the quarter, aided by strong demand for air-conditioning services from sectors like real estate, retail and IT/ITES, which are witnessing a robust investment scenario.

    Segment-wise performance
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Central & Packaged Air-conditioning Systems (CPAS)
    Revenue 2,762 3,768 36.4% 7,372 10,549 43.1%
    % share 74.6% 73.2%   69.7% 69.2%  
    PBIT margin 7.4% 11.9%   8.8% 12.3%  
    Cooling Products (CP)
    Revenue 693 1,003 44.8% 2,508 3,621 44.4%
    % share 18.7% 19.5%   23.7% 23.7%  
    PBIT margin 6.1% 12.9%   6.5% 11.1%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 247 377 53.0% 704 1,079 53.3%
    % share 6.7% 7.3%   6.6% 7.1%  
    PBIT margin 19.0% 22.9%   19.3% 20.1%  
    Total
    Revenue 3,701 5,149 39.1% 10,584 15,249 44.1%
    PBIT margin 7.9% 12.9%   8.9% 12.6%  

    The company’s second largest business line of CP recorded a 45% YoY growth during the third quarter. The company has indicated that growth in this segment was driven by robust performance of split air-conditioners as well as refrigeration products and cold chain equipments. As for the third business of PEIS, sales grew by 53% YoY during 3QFY08. From a nine-months perspective, Blue Star is in line of meeting our FY08 topline estimate of a 44% YoY growth.

  • Lower raw material costs have helped Blue Star ramp up its operating margins to 10.8% in 3QFY08, from 6.4% in 3QFY07. This was largely on account of lower (as percentage of sales) raw material costs. Based on segments, all three business segments recorded strong surge in profitability (see above table). We believe that the expansion in profitability has been due to a host of factors like the rupee’s appreciation against the US dollar (as Blue Star is a net importer), reduction in customs duty on certain components and increase in the average size of contracts. We expect the company to improve its operating margins to 10.5% in FY08 (7.3% in FY07). Given the 9mFY08 performance, this does not seem a distant reality.

  • On the back of a sharp expansion in operating margins, Blue Star’s net profits have more than doubled as compared to 3QFY07. Lower depreciation expenses have also helped matters for the company on the bottomline front. Further, its effective tax rate declined from 29.2% in 3QFY07 to 27.3% in 3QFY08.

What to expect?
At the current price of Rs 500, the stock is trading at a multiple of 13.6 times our estimated FY10 earnings, which we believe makes it an attractive investment proposition for the long term. Importantly, not only is the company continuing its strong run on the topline front, the fact that it is doing so profitably (as seen from the improvement in margins) provides comfort. We maintain our view on the stock.

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