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Blue Star: Profits decline - Views on News from Equitymaster

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Blue Star: Profits decline
Jan 30, 2009

Performance summary
  • Topline grows by 10% YoY during 3QFY09, 21% YoY during the nine months period. Growth led by the electro-mechanical projects & packaged air-conditioning systems (EMPS) where sales grew 12% YoY during the quarter.
  • Operating margins contract by 1.6% YoY during the quarter owing to a spike in costs of stocks in trade.
  • Net profits decline 9% YoY during the quarter on the back of higher interest and depreciation charges. Profits grow 10% YoY during 9mFY09.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 5,149 5,667 10.1% 15,249 18,442 20.9%
Expenditure 4,592 5,146 12.1% 13,629 16,660 22.2%
Operating profit (EBDITA) 557 522 -6.4% 1,621 1,782 9.9%
Operating profit margin (%) 10.8% 9.2% 10.6% 9.7%
Other income 1 1 -9.1% 10 29 191.0%
Interest 16 53 234.4% 54 116 115.8%
Depreciation 55 70 26.4% 158 188 19.2%
Profit before tax 487 400 -17.9% 1,419 1,507 6.2%
Tax 133 78 -41.1% 382 371 -2.8%
Profit after tax/(loss) 354.4 321.9 -9.2% 1,037 1,136 9.5%
Net profit margin (%) 6.9% 5.7% 6.8% 6.2%
No. of shares 90.0
Diluted earnings per share (Rs)* 20.4
P/E ratio (x)* 7.0
* On a trailing 12 months earnings

What has driven performance in 3QFY09?
  • The 10% YoY growth in Blue Starís net sales during 3QFY09 was a result of a decent performance from its EMPS business divisions. This segment (75% of total sales) was the lead growth driver with a 12% YoY growth in sales during the quarter. The companyís second largest business line of Cooling Products (17% of total sales) saw a dismal performance; it recorded a decline of 5% YoY during the quarter. The third business segment of PEIS recorded a 31% YoY surge in sales during the quarter.

    Segment-wise performance
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,768 4,223 12.1% 10,549 12,777 21.1%
    % share 73.2% 74.5% 69.2% 69.3%
    PBIT margin 13.0% 9.1% 12.3% 10.7%
    Cooling Products (CP)
    Revenue 1,003 949 -5.4% 3,621 4,405 21.7%
    % share 19.5% 16.8% 23.7% 23.9%
    PBIT margin 12.9% 10.4% 11.1% 11.8%
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 377 495 31.1% 1,079 1,260 16.8%
    % share 7.3% 8.7% 7.1% 6.8%
    PBIT margin 22.9% 20.8% 20.1% 20.5%
    Total
    Revenue 5,149 5,667 10.1% 15,249 18,442 20.9%
    PBIT margin 12.9% 10.4% 12.6% 11.6%

  • Higher raw material costs in the form of consumption of stocks in trade (as percentage of sales) were the causes for Blue Starís 1.6% YoY drop in operating margins during 3QFY09. Segment wise, all the three segments of EMPS, CP and PEIS recorded drop in profitability during the quarter (see above table).

  • Blue Star saw its interest costs balloon by 234%, which turned out to be another profit damper. Thus the overall dip in operating margins along with high interest costs and a spike in depreciation costs for the quarter led to a 9% YoY decline in the bottom line of the company.

  • The results for the 3QFY09 include the results of the Electrical Contracting business acquired from Naseer Electricals Pvt. Ltd. on January 24, 2008 and to that extent are not strictly comparable with the results for the 3QFY08.

What to expect?
At the current price of Rs 192, the stock is trading at a multiple of 5.6 times our estimated FY11 earnings. The companyís operating margins have been hurt mainly due to pile up of high cost inventory of raw materials. The slowdown in the sales growth has been mainly due to slower billing on account of a general slowdown in investment activity. This is due to customers delaying project execution, though no cancellations have taken place as of now. The general execution time frame of the companyís order book has increased from 8-9 months to 12 months. Order inflow for the quarter stood at Rs 6.3 bn compared to Rs 5.7 bn in 3QFY08. While the retail and ITES sectors have been adversely impacted, healthcare, hotels, infrastructure and telecom sectors are doing good. We maintain a positive view on the stock.

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