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Blue Star: Interest cost drags profits
May 26, 2011

Blue Star has announced fourth quarter results for financial year 2010-2011 (4QFY11). The company reported a 6.3% YoY growth in sales while its net profits have declined by 27.6% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline grows by around 6.3% YoY during 4QFY11 and by 13.1% YoY during FY11. Sales growth was led by the cooling products (CP) and professional electronics and industrial systems (PEIS) segments, which grew by 42.6% YoY and 13.3% YoY respectively.
  • Operating profit declined 8% YoY during 4QFY11. Operating profit margins have contracted by 1.7% as compared to 4QFY10.
  • Net profits declined by 27.6% during 4QFY11. Sharp spike in the interest costs and increase in tax expenses was responsible for the decline in net profits. The interest costs increased by a whopping 284.4% YoY during 4QFY11.
  • Order book as on March 31, 2011 stood at Rs 19.6 bn, up 16% YoY.
  • The company has proposed a dividend of Rs 7 per equity share.


Financial performance snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 8,546 9,085 6.3% 25,250 28,569 13.1%
Expenditure 7,507 8,129 8.3% 22,382 26,102 16.6%
Operating profit (EBDITA) 1,039 956 -8.0% 2,868 2,467 -14.0%
Operating profit margin (%) 12.2% 10.5%   11.4% 8.6%  
Other income 107 97 -9.7% 191 360 88.9%
Interest 25 96 284.4% 85 244 188.6%
Depreciation 91 82 -9.9% 347 317 -8.7%
Profit before tax 1,030 874 -15.1% 2,627 2,266 -13.7%
Tax 245 306 25.0% 651 720 10.5%
Extraordinary gain/(loss)   -   140 4  
Profit after tax/(loss) 785 568 -27.6% 2,115 1,550 -26.7%
Net profit margin (%) 9.2% 6.3%   8.4% 5.4%  
No. of shares         89.9  
Diluted earnings per share (Rs)*         17.2  
P/E ratio (x)*         18.9  
* On a trailing twelve month basis

What has driven performance in 4QFY11?
  • The 6.3% YoY growth in Blue Star's net sales during 4QFY11 was a result of a better performance from its cooling products (CP) and professional electronics & industrial systems (PEIS) divisions. Both these divisions together account for nearly 36% of the total sales. The management cited the reason for the growth being the launch of inverter based cooling products in FY11 that saw higher volume take off.

  • The electro-mechanical projects & packaged air-conditioning systems (EMPS) business which accounts for 64% of the sales saw a decline of 5.3% in sales. The segment continues to see subdued demand due to slowdown in completion of large projects. The setbacks were primarily in the telecom segment. Since most of the orders were from new operators, the regulatory changes and operational challenges in the sector affected sales. In addition just 6,000 telecom towers were added during the fiscal as against the expected 15,000 towers.

    Segment-wise performance
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 6,132 5,804 -5.3% 17,960 18,617 3.7%
    % share 71.8% 63.9%   71.1% 65.2%  
    PBIT margin 13.0% 12.0%   12.0% 9.5%  
    Cooling Products (CP)
    Revenue 1,864 2,658 42.6% 5,810 7,884 35.7%
    % share 21.8% 29.3%   23.0% 27.6%  
    PBIT margin 14.8% 10.8%   13.9% 11.4%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 550 623 13.3% 1,480 2,068 39.7%
    % share 6.4% 6.9%   5.9% 7.2%  
    PBIT margin 36.2% 32.9%   30.9% 26.4%  
    Total
    Revenue 8,546 9,085 6.3% 25,250 28,569 13.1%
    PBIT margin 14.8% 13.1%   13.5% 11.2%  

  • Blue Star's operating margins contracted by 1.7% as compared to 4QFY10. Both EMPS and CP businesses led the sharp contraction in margins. The operating margins for the EMPS division declined by 1%, followed by the CP division where operating margins fell by 4%. On the other hand, the PEIS business saw a margin expansion of 0.5%. The margins were impacted by the rise in cost of steel and copper. To counter the rise in input costs, Blue Star raised prices of its products at the fag end of FY11. Also, the company believes that cost cutting and tighter control of working capital will help it contain rise in interest costs.

  • Net profits declined 27.6% YoY due to increase in interest cost and higher tax expenses. While the effective tax rate was nearly 32% in FY11, the company expects tax rate be around 29% in FY12 due to benefits on capex.

  • The company has planned capex of Rs 500 m in FY12 against Rs 220 m in FY11.

What to expect?
At the current price of Rs 318, the stock is trading at a multiple of 9.9 times our FY13 earnings estimates. The management of Blue Star did not deny the possibility of a muted trend in topline growth in the near term. However the company remains confident of augmenting the same with new product launches and better pricing. Also it expects margins to improve once the higher realizations filter into profits. Notwithstanding the issues on the telecom front which may take some time to resolve, we believe that the company is well geared to meet our estimates for the 2 to 3 years. We reiterate our positive view on the stock (ResearchPro subscribers can view latest updates here.

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