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Blue Star: Bottomline falls 47.7% YoY - Views on News from Equitymaster
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Blue Star: Bottomline falls 47.7% YoY
Feb 3, 2014

Blue Star has announced third quarter results for financial year 2013-2014 (3QFY14). The company reported 8.8% YoY decline in sales while net profits have declined by 47.7% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by around 8.8% YoY during 3QFY14. This was mainly due to an 11.9% YoY decline in the Electro Mechanical & Project Services (EMPS) segment and 11.4% YoY decline in the Professional Electronics and Industrial Systems (PEIS) segment. However, Cooling Products (CP) segment was flat during the quarter.
  • The operating profits declined by 41.4% YoY during the quarter.
  • Net profits declined 47.7% YoY. Poor performance at the operating level led to de-growth in profits despite 339.3% YoY increase in other income. Other income increased due to provision write backs.
  • Order book as on 30th Dec 2013 stood at Rs 17.3 bn, representing a 6.7% YoY growth. The legacy low margin orders have come down to Rs 2.75 bn during the quarter.

Standalone performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Income from operations 5,988 5,459 -8.8% 19,088 19,017 -0.4%
Expenditure 5,734 5,310 -7.4% 18,297 18,258 -0.2%
Operating profit (EBDITA) 254 149 -41.4% 791 759 -4.0%
Operating profit margin (%) 4.2% 2.7%   4.1% 4.0%  
Other income 21 91 339.3% 156 195 25.4%
Interest 137 126 -8.2% 375 371 -1.0%
Depreciation 84 85 1.5% 240 252 5.0%
Profit before tax 54 28 -47.7% 332 331 -0.2%
Tax - - - - - -
Profit after tax/(loss) 54 28 -47.7% 332 331 -0.2%
Net profit margin (%) 0.9% 0.5%   1.7% 1.7%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)         3.7  
P/E ratio (x)*         24.4  
*On a trailing twelve month basis.

What has driven performance in 3QFY14?
  • Blue Star's net sales declined 8.8% YoY during 3QFY14. Poor show from the EMPS segment (-11.9% YoY) and PEIS segment (-11.4% YoY) impacted the overall topline performance. Revenues from the CP segment declined 0.2% YoY.

  • Revenues from the EMPS segment declined 11.9% YoY due to execution issues with margins remaining more or less steady at 5.2%. The segmental working capital also remained more or less flat at Rs 4.7 bn.

  • Revenues from the CP segment remained flat as this is generally a slack season for room air-conditioners. Management expects to end the year with 15% growth. Further, with new BEE norms kicking in from January 2014, the prices are likely to increase by 5% odd.

  • Revenues from the PEIS segment declined by 11.4% YoY while margins fell from 7.9% in 3QFY13 to 7.6% in 3QFY14. Slowdown in the industrial projects business impacted the billing cycle and thus profitability.

    Segment-wise performance
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,960 3,488 -11.9% 11,389 10,649 -6.5%
    % share 66.1% 63.9%   59.7% 56.0%  
    PBIT margin 5.8% 5.2%   5.4% 5.5%  
    Cooling Products (CP)
    Revenue 1,557 1,554 -0.2% 6,580 7,205 9.5%
    % share 26.0% 28.5%   34.5% 37.9%  
    PBIT margin 2.4% 2.9%   7.5% 7.6%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 471 417 -11.4% 1,119 1,163 3.9%
    % share 7.9% 7.6%   5.9% 6.1%  
    PBIT margin 20.3% 20.6%   17.3% 17.5%  
    Revenue 5,988 5,459 -8.8% 19,088 19,017 -0.4%
    PBIT margin 6.1% 5.7%   6.8% 7.0%  
    *On a trailing twelve month basis.

  • The operating profits declined 41.4% YoY mainly due to poor performance at the topline level. Rise in employee expenses by 6.2% YoY also hurt profitability growth. Except for employee expenses all other expenses declined on a YoY basis.

  • Net profits declined by 47.7% YoY. The fall would have been worse had it not been for 339.3% YoY increase in other income. Provision write backs to the tune of Rs 120 m saw other income increase almost 3 times on a YoY basis.
What to expect?
At the current price of Rs 140, the stock is trading at a multiple of 24.4x its trailing twelve month earnings. The slow moving jobs that were in the system during last quarter have slowly started culminating. Though the progress is slow, currently orders worth Rs 2.75 bn are there in the system as compared to about Rs 3 bn in the last quarter.

As far as the EMPS business is concerned, management expects margins to be in the range of 5-6% over the long term as legacy projects are expected to culminate by 4QFY14. With respect to the cooling products segment, management expects growth to be in the region of 14% for FY14. However, high import element (60-70% of raw material requirements are imported) and rupee depreciation may put some pressure on margins.

Taking into consideration the above factors, we maintain our HOLD view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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