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Blue Star: Back on the growth track - Views on News from Equitymaster
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Blue Star: Back on the growth track
May 12, 2010

Blue Star has announced its FY10 results. The company has reported 1% YoY and 17% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows 22% YoY during 4QFY10; grows 1% YoY during the full year period. Growth is led by the electro-mechanical projects & packaged air-conditioning systems (EMPS) business where sales grow by 25% YoY during the quarter.
  • Operating margins contract by 1.3% during the quarter, on the back of a big spike in cost of traded goods.
  • Net profits grow 18% YoY during the quarter owing to higher depreciation costs and the contraction in operating margins; grows 10% YoY during FY10 (excluding extraordinary items).
  • Order book as on March 31, 2010 stands at Rs 17.3 bn compared to Rs 13.4 bn as at March 31, 2009, a growth of 29% YoY.
  • Recommends a dividend of Rs 8 (dividend yield of 1.9%)


Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales        6,999          8,546 22.1%         25,026         25,250 0.9%
Expenditure        6,159          7,628 23.8%         22,430         22,503 0.3%
Operating profit (EBDITA)            840               918 9.2%            2,596            2,747 5.8%
Operating profit margin (%) 12.0% 10.7%   10.4% 10.9%  
Other income            160              228 43.1%                217                 311 43.2%
Interest               54                 25 -53.4%                173                   85 -51.0%
Depreciation               71                 91 28.6%                259                347 34.2%
Profit before tax            875          1,030 17.7%            2,382            2,627 10.3%
Tax            208              245 17.6%                579                 651 12.4%
Extraordinary gain/(loss)                -                     -                        -                  140  
Profit after tax/(loss)            667              785 17.7%            1,803             2,115 17.3%
Net profit margin (%) 9.5% 9.2%   7.2% 8.4%  
No. of shares                     89.9               89.9  
Diluted earnings per share (Rs)*                       23.5  
P/E ratio (x)*         17.6  
* On a trailing 12 months earnings

What has driven performance in 4QFY10?
  • The 22% YoY growth in Blue Star's net sales during 4QFY10 was a result of a good performance from its EMPS business division. The EMPS business (72% of total sales) led the growth in the company's topline with a 25% YoY growth in sales during the quarter.

    Segment-wise performance
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue        4,922          6,130 24.5%          17,331         17,940 3.5%
    % share   70% 72%   69% 71%  
    PBIT margin 15.8% 12.9%   12.6% 11.9%  
    Cooling Products (CP)
    Revenue        1,605           1,869 16.5%            5,975            5,830 -2.4%
    % share   23% 22%   24% 23%  
    PBIT margin 14.3% 14.3%   12.6% 14.3%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue            473              547 15.6%            1,721            1,480 -14.0%
    % share   7% 6%   7% 6%  
    PBIT margin 22.6% 36.2%   22.3% 30.9%  
    Total
    Revenue        6,999          8,546 22.1%         25,026         25,250 0.9%
    PBIT margin 16.0% 14.9%   13.3% 13.5%  

    The company's second largest business line of CP (22% of total sales) also recorded a good performance during the quarter with its sales clocking in a growth of 17% YoY. The third business segment of PEIS finally recorded a growth in sales of 16% YoY during the quarter, after a 28% fall in the December 2009 quarter.

  • The operating margins of the company contracted during the quarter due to a big spike in cost of goods purchased for trading (as a percentage of sales). Staff costs and cost of raw materials on the other hand saw a fall. Based on segments, while the EMPS segment saw a fall in margins, the CP segment saw flat margins whereas the PEIS business recorded a growth in margins during the quarter.

  • On the back of a growth in contraction in operating margins and a high growth in depreciation charges, Blue Star's net profits grew at pace slower than its topline (18% YoY during 4QFY10).

What to expect?
At the current price of Rs 413, the stock is trading at a multiple of 13.3 times our FY12 earnings estimates. Order inflows during 4QFY10 stood at 7 bn compared to 4.9 bn in 4QFY09. For the central air conditioning business, the management sees growth currently coming from sectors like power, education and healthcare among others. Commercial office space is still showing no signs of recovery though. It feels that the worst of the slowdown is behind the company. However, margins are expected to come under pressure in the next year as orders booked during the last year (that will be under execution in FY11) were booked at lower margins as also commodity prices have been showing a rising trend. At current levels, we hold a cautious view on the stock.

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