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Blue Star: EMPS woes persist - Views on News from Equitymaster
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Blue Star: EMPS woes persist
Feb 8, 2012

Blue Star has announced third quarter results for financial year 2011-2012 (3QFY12). The company reported a 3.9% YoY decline in sales with a net loss of Rs 328 m during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by around 3.9% YoY during 3QFY12. Disappointing performance from the electro-mechanical projects & packaged air-conditioning systems (EMPS) impacted topline growth. However, revenues from professional electronics and industrial systems (PEIS) and cooling products (CP) registered growth of 16.0% YoY and 28.1% YoY respectively.
  • The company reported an operating loss of Rs 31 m during 3QFY12 due to continuing inflationary pressures and fixed price nature of the contracts.
  • The company reported a net loss of Rs 328 m in 3QFY12 compared to a profit of Rs 224 m in 3QFY11. Muted performance at the operating level, cost overruns, exchange losses and sharp rise in the interest costs led to a decline in net profits.
  • Order book as on December 31, 2011 stood at Rs 21.6 bn, representing a 4% YoY growth.

Standalone performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Income from operations 6,134 5,897 -3.9% 19,730 18,990 -3.7%
Expenditure 5,651 5,928 4.9% 17,986 18,603 3.4%
Operating profit (EBDITA) 483 (31) -106.5% 1,744 387 -77.8%
Operating profit margin (%) 7.9% -0.5%   8.8% 2.0%  
Other income 0 6 1800.0% 17 16 -7.5%
Interest 89 221 147.8% 135 608 352.3%
Depreciation 80 81 0.7% 235 232 -1.1%
Profit before tax 314 (328)   1,392 (438)  
Tax 90     414    
Exceptional items       4.3    
Profit after tax/(loss) 224 (328)   982 (438)  
Net profit margin (%) 3.6% -5.6%   5.0% -2.3%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)         (4.9)  
P/E ratio (x)*         NM  
*On a trailing twelve month basis
What has driven performance in 2QFY12?
  • Blue Star's net sales declined 3.9% YoY during 3QFY12. Decline in revenues from the EMPS business segment impacted the overall performance. Revenues from the EMPS business segment declined 15.3% YoY due to execution delays. Amidst significant raw material price inflation, the company is reviewing the cost and revenue structure of the balance projects in hand. Based on the review undertaken till date (Rs 10 bn of order book has been reviewed) it is estimated that the impact of cost overruns has resulted in margin erosion of about 7%. The company expects to complete the review on remaining jobs by 4QFY12.

  • Revenues from the PEIS and CP business segments increased 16.0% YoY and 28.1% YoY respectively during the quarter. Focus to expand presence in the residential air conditioning market and planned channel expansion in tier 2-3 cities boosted revenue growth in the CP segment.

  • The EMPS segment reported a loss at the EBIT level in the current quarter. Continuing inflationary trends (majority of the contracts are of fixed price in nature) and cost over-runs impacted the profitability of the EMPS segment. However, the business is expected to reach the long term profitability levels by FY14. Further, the capital employed of the segment has improved considerably due to improvement in debtor collection cycle.

  • Margins from the CP segment declined to 4.4% in 3QFY12 compared to 8.0% in 3QFY11. This was on account of increase in input cost, logistics and freight cost and distribution expenses incurred on channel expansion. Margins from the PEIS segment too declined to 22.5% in 3QFY12 from 26.0% in 3QFY11.

    Segment-wise performance
    (Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 4,342 3,677 -15.3% 12,813 10,918 -14.8%
    % share 71.6% 63.0%   65.8% 57.9%  
    PBIT margin 6.7% -4.1%   8.3% -2.5%  
    Cooling Products (CP)
    Revenue 1,278 1,637 28.1% 5,226 6,487 24.1%
    % share 21.1% 28.1%   26.8% 34.4%  
    PBIT margin 8.0% 4.4%   11.8% 9.2%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 448 520 16.0% 1,445 1,447 0.1%
    % share 7.4% 8.9%   7.4% 7.7%  
    PBIT margin 26.0% 22.5%   23.6% 25.5%  
    Total
    Revenue 6,068 5,833 -3.9% 19,484 18,852 -3.2%
    PBIT margin 8.4% 0.6%   10.4% 3.7%  

  • The company reported operating loss of Rs 31 m during the quarter due to cost overruns, change in business mix and slow execution pace across key projects.

  • The company reported a net loss of Rs 328 m during the quarter. Muted performance at the operating level and increase in financial expenses impacted profits. Financial expenses increased due to general rise in borrowing cost and occurrence of an exchange loss to the tune of Rs 137.8 m. It may be noted that exchange loss was clubbed under the financial expenses head during the quarter.
What to expect?
Management intends to complete the order review of balance EMPS projects in hand by the end of the fourth quarter. This should give more clarity in terms of margins and revenues in the future. While the next few quarters would remain challenging, management expects margins to revert to long term average levels by FY14. Further, it may be noted that the company has turned selective in order booking with focus on large bundled projects and has reduced exposure to long gestation residential projects. It is also bidding on variable price clauses wherever feasible to negate the impact of cost inflation.

As far the CP segment is concerned, management is confident that it would be able to maintain its growth momentum as witnessed in the past. However, margins may remain under pressure due to high import component (depreciating rupee) and increasing distribution expenses.

Thus, overall while there are concerns emanating from the core business, management is taking calibrated steps to overcome the same and also expects the standalone business to return to profitability in the next year. Based on these factors, we maintain our positive view on the stock.

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