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Blue Star: Profitable growth - Views on News from Equitymaster
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Blue Star: Profitable growth
May 13, 2008

Performance summary
  • Topline grows 40% YoY in FY08. Robust growth recorded across all business segments, especially central air-conditioning and cooling products. Actual sales figure 3% lower than our estimates.
  • Operating margins expand by 3.2% YoY during the fiscal. Improvement aided by lower raw material and staff costs (both as percentage of sales).

  • Net profits surge by 145% YoY. Growth aided by strong expansion in operating margins and higher other income. Other income includes Rs 353 m as profit on sale of 29% stake in an associate company, Rolastar. Actual profit figure 7% higher than our estimates.

  • Recommends a dividend of Rs 7 per share, including a special dividend of Re 1 per share (dividend yield of 1.6%).

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 5,429 7,081 30.4% 16,013 22,330 39.5%
Expenditure 4,985 6,357 27.5% 14,844 19,985 34.6%
Operating profit (EBDITA) 445 725 63.0% 1,169 2,345 100.6%
Operating profit margin (%) 8.2% 10.2%   7.3% 10.5%  
Other income 44 361 715.6% 61 371 504.4%
Interest 30 22 -26.4% 96 76 -20.8%
Depreciation 62 62 -0.3% 209 220 5.1%
Profit before tax 397 1,001 152.2% 926 2,420 161.4%
Tax 57 297 421.8% 214 679 217.2%
Profit after tax/(loss) 340 704 107.0% 712 1,741 144.6%
Net profit margin (%) 6.3% 9.9%   4.4% 7.8%  
No. of shares       89.9 89.9  
Diluted earnings per share (Rs)       7.9 19.4  
P/E ratio (x)         23.2  

What has driven performance in FY08?
  • Blue Star’s 40% YoY growth in net sales during FY08 was a result of strong performance across all the three divisions. The CPAS business, however, remained the lead growth driver with 38% YoY increase in sales at a 70% contribution to the company’s total revenues. Apart from continued strong demand for air-conditioning services from sectors like real estate, retail and IT/ITES, the company also recorded traction in its products for the telecom shelter air-conditioning business.

    Growth in this segment during the fourth quarter and the fiscal was also aided by Blue Star’s acquisition the electrical contracting business of Bangalore based Naseer Electrical Pvt Ltd (NEPL) for a consideration of Rs 481 m. NEPL is an electrical contracting firm with a turnover of Rs 1 bn (FY07 figure; 7% of Blue Star’s FY07 sales) and a strong presence in South India. Its order book at the time of acquisition by Blue Star was around Rs 1 bn. Importantly, NEPL’s acquisition fills in the electrical contracting gap that the customers of Blue Star had been seeking from the company. This acquisition shall help the company to enhance its capabilities in the MEP (mechanical, electrical and plumbing) space, where its peer Voltas has a strong presence.

    Segment-wise performance
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Central & Packaged Air-conditioning Systems (CPAS)
    Revenue 3,870 5,014 29.5% 11,243 15,563 38.4%
    % share 71.3% 70.8%   70.2% 69.7%  
    PBIT margin 9.9% 11.9%   9.1% 12.2%  
    Return on capital employed       66.8% 93.4%  
    Cooling Products (CP)
    Revenue 1,220 1,704 39.6% 3,728 5,324 42.8%
    % share 22.5% 24.1%   23.3% 23.8%  
    PBIT margin 7.5% 10.5%   6.8% 10.9%  
    Return on capital employed       22.3% 39.4%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 339 364 7.6% 1,042 1,443 38.5%
    % share 6.2% 5.1%   6.5% 6.5%  
    PBIT margin 16.6% 19.9%   18.4% 20.0%  
    Return on capital employed       64.0% 89.1%  
    Revenue 5,429 7,081 30.4% 16,013 22,330 39.5%
    PBIT margin 9.8% 12.0%   9.2% 12.4%  
    Return on capital employed       49.5% 72.3%  

    The company’s second largest business line of CP recorded a 43% YoY growth during the year. Robust performance of split air-conditioners as well as refrigeration products and cold chain equipments led the growth for this segment during the fiscal. As for the third business of PEIS, sales grew by 39% YoY.

  • Lower raw material and staff costs helped Blue Star improve its operating margins to 10.5% in FY08, as against 7.3% in FY07. Based on segments, all three business segments recorded strong surge in profitability (see above table). As indicated by the management in its conference call after the third quarter results, 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. The FY08 operating margins of 10.5% exactly match our estimates for the fiscal.

  • On the back of a sharp expansion in operating margins and 500% YoY jump in other income, Blue Star recorded a 145% YoY growth in net profits during FY08. As a matter of fact, other income includes Rs 353 m as profit on sale of 29% stake in an associate company, Rolastar. Excluding this, the net profit growth still stands at a strong 95% YoY for the fiscal.

What to expect?
At the current price of Rs 450, the stock is trading at a multiple of 12.4 times our estimated FY10 earnings, which we believe makes it an attractive investment proposition for the long term. We had recommended a ‘hold’ on the stock in October 2007 with a target that has already been breached. Considering the company’s continued strong performance thereafter and the traction that it expects in the future, we maintain our positive view on the stock.

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Feb 19, 2018 11:29 AM


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