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Blue Star: Resilient in face of slowdown - Views on News from Equitymaster
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Blue Star: Resilient in face of slowdown
May 15, 2009

Performance summary
  • Topline grows 15% YoY in FY09. Growth led by the electro-mechanical and air-conditioning business.
  • Operating margins expand by 0.1% YoY during the fiscal. Improvement aided by lower other expenditure (as percentage of sales).
  • Net profits up by 3.6% YoY. Exceptional items during the last year include Rs 353 m as profit on sale of 29% stake in an associate company, Rolastar. Excluding this, net profits for FY09 are higher by 30% YoY.
  • Recommends a dividend of Rs 7 per share (dividend yield of 3.1%).


Financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 7,081 7,247 2.3% 22,330 25,689 15.0%
Expenditure 6,357 6,304 -0.8% 19,985 22,964 14.9%
Operating profit (EBDITA) 725 943 30.2% 2,345 2,725 16.2%
Operating profit margin (%) 10.2% 13.0%   10.5% 10.6%  
Other income 7 23 206.8% 17 52 199.4%
Interest 22 19 -11.4% 76 136 79.2%
Depreciation 62 71 14.2% 220 259 17.8%
Profit before tax 648 876 35.1% 2,067 2,382 15.3%
Extraordinary income/(expense) 353 -   353 -  
Tax 298 208 -30.1% 679 579 -14.7%
Profit after tax/(loss) 704 668 -5.1% 1,741 1,803 3.6%
Net profit margin (%) 9.9% 9.2%   7.8% 7.0%  
No. of shares       89.9 89.9  
Diluted earnings per share (Rs)         20.0  
P/E ratio (x)         11.3  

What has driven performance in FY09?
  • Blue Starís 15% YoY growth in net sales during FY09 was led mainly by a 15% growth in the companyís EMPS business, which accounted for 69% of the total revenues during the fiscal. The cooling products segment also registered modest growth of 13% YoY. The professional electronics and industrial systems business grew by 21% YoY.

    Segment-wise performance
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 5,014 5,132 2.4% 15,563 17,909 15.1%
    % share 70.8% 70.8%   69.7% 69.7%  
    PBIT margin 11.9% 14.9%   12.2% 11.9%  
    Cooling Products (CP)
    Revenue 1,704 1,634 -4.1% 5,324 6,039 13.4%
    % share 24.1% 22.5%   23.8% 23.5%  
    PBIT margin 10.5% 14.0%   10.9% 12.4%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 364 481 32.0% 1,443 1,741 20.6%
    % share 5.1% 6.6%   6.5% 6.8%  
    PBIT margin 19.9% 21.2%   20.0% 20.7%  
    Total
    Revenue 7,081 7,247 2.3% 22,330 25,689 15.0%
    PBIT margin 12.0% 15.1%   12.4% 12.6%  

  • The operating margins expansion during the quarter from 10.2% in 4QFY08 to 13% in 4QFY09 was due to a combination of the softening of raw material prices and higher realisations that the company got during the quarter.

  • Blue Star recorded a net profit growth of 3.6% YoY during FY09. Excluding the exceptional income of Rs 353 m earned in FY08, net profits for FY09 were higher by 30% YoY mainly on the back of higher income as well as a lower effective tax rate.

What to expect?
At the current price of Rs 227, the stock is trading at a multiple of 8.6 times our estimated FY11 earnings, which we believe makes it an attractive investment proposition for the long term. Blue Starís order book at the end of FY09 stood at Rs 13.4 bn, a rise of 18% over the order book of Rs 11.4 bn as at the end of FY08. The management has indicated that the lower tax rate that the company enjoyed in FY09 due to tax benefits in selected factories is expected to continue in FY10 albeit to a lesser extent. Blue Starís subsidiary Naseer Electricals is performing well and is booking orders all over the country. The IT/ITES and retail sectors are showing a marked slowdown in terms of expansion due to which the business to Blue Star from these sectors has slowed, though business from other sectors has relatively held up better. In the current scenario, the company continues to witness pricing pressure and order inflows have also seen a decrease. The companyís current order book is divided between government/PPP orders, industrial orders and private sector orders in the proportion of 26%, 9% and 65% respectively. The management expects FY09 margins to sustain in FY10 and is seeing a lot of enquiries from sectors like telecom, automotive, power and metro projects. The company has outperformed our bottomline estimates by around 29% and as such we will have to revise our numbers upwards.

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