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Blue Star: EMPS to face challenges ahead - Views on News from Equitymaster
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Blue Star: EMPS to face challenges ahead
Jul 25, 2013

Blue Star has announced first quarter results for financial year 2013-2014 (1QFY14). The company reported a 5.4% YoY increase in sales while net profits grew by 10.9% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 5.4% YoY during 1QFY14. This was mainly due to an 18.8% YoY growth in the Cooling Products (CP) and 4.3% YoY growth in the Professional Electronics and Industrial Systems (PEIS) segments. However, revenues from the Electro Mechanical & Project Services (EMPS) segment declined 6.7%% YoY.
  • The operating profits grew by 14.6% YoY during the quarter. Growth in operating profits came on the back of 7.2% YoY decline in project cost.
  • Net profits increased 10.9% YoY. Strong performance at the operating level and fall in interest expenses (-6.6% YoY) led to growth in profits.
  • Order book as on 30th June 2013 stood at Rs 14.3 bn, representing a 22% YoY decline. Out of the total order book, roughly Rs 12 bn worth of orders pertains to projects business.

Standalone performance snapshot
(Rs m) 1QFY13 1QFY14 Change
Income from operations 7,314 7,708 5.4%
Expenditure  6,979  7,324 4.9%
Operating profit (EBDITA) 335 384 14.6%
Operating profit margin (%) 4.6% 5.0%  
Other income 70 44 -37.5%
Interest 125 117 -6.6%
Depreciation 75 83 11.5%
Profit before tax 205 228 10.9%
Tax - - -
Profit after tax/(loss) 205 228 10.9%
Net profit margin (%) 2.8% 3.0%  
No. of shares   89.9  
Basic & diluted earnings per share (Rs)    2.5  
P/E ratio (x)*   25.8  
*On a trailing twelve month basis.

What has driven performance in 1QFY14?
  • Blue Star's net sales increased 5.4% YoY during 1QFY14. Strong performance from the CP segment (+18.8% YoY) was well complimented by 4.3% YoY growth from the PEIS segment. However, revenues from the EMPS segment declined 6.7% YoY.
  • Revenues from the EMPS segment declined 6.7% YoY due to execution issues. However, margins improved to 5.9% in 1QFY14 due to better quality of new orders booked. Nonetheless, segmental working capital increased to Rs 4.6 bn from Rs 4.0 bn in the preceding quarter due to rising inventory levels.
  • Revenues from the CP segment increased 18.8% YoY due to strong volume growth. While volumes increased by approximately 15% YoY, room air conditioner prices were also increased during the quarter. It may be noted that 4Q and 1Q are generally best seasons for offtake of ACs. However, management expects to end the year on a lower note as prices of input components have been increasing due to depreciating rupee. While higher prices can be passed on to the customer's, management expects that this may impact volumes to a certain extent. Further, margins from the CP segment were relatively flat during the quarter.
  • Revenues from the PEIS segment increased by 4.3% YoY while margins fell from 23.3% in 1QFY13 to 10.5% in 1QFY14. Slowdown in the industrial projects business impacted the billing cycle and thus profitability.
    Segment-wise performance
    (Rs m) 1QFY13 1QFY14 Change
    Electro-Mech. Proj.& Packaged A/C Sys. (EMPS)
    Revenue 3,671 3,425 -6.7%
    % share  50.2% 44.4%  
    PBIT margin 3.4% 5.9%  
    Cooling Products (CP)
    Revenue 3,336 3,963 18.8%
    % share  45.6% 51.4%  
    PBIT margin 11.3% 10.7%  
    Professional Electronics& Industrial Systems (PEIS)
    Revenue  308 321 4.3%
    % share  4.2% 4.2%  
    PBIT margin 23.3% 10.5%  
    Total
    Revenue 7,314 7,708 5.4%
    PBIT margin 7.8% 8.5%  

  • The operating profits increased 14.6% YoY. Decline in direct project cost by 7.2% YoY boosted profits. Though employee cost increased by 10.2% YoY management stated that the benefit of the restructuring exercise will be visible in 2HFY14. As such, employee expenses are expected to reduce going ahead.

  • Net profits increased by 10.9% YoY. Decline in interest cost by 6.6% YoY and strong performance at the operating level boosted net profits. However, other income declined by 37.5% YoY.

What to expect?

At the current price of Rs 155, the stock is trading at a multiple of 8.6x our estimated FY16 earnings per share. The slow moving jobs that were in system during last quarter remain stagnant. There is no material change in the situation than what was prevailing in the last quarter. It may be noted that during 4QFY13, Rs 500 m worth of orders remained in the order book as zero margin jobs. About Rs 3 bn of the order book had margins in the region of 5% while rest in the region of 7-11%.

As far as the EMPS business is concerned, management expects a flat year ahead. As a result, revenue growth is likely to remain under pressure. The ordering environment is quite muted hence competitive intensity is on a rise. This may put some pressure on margins. With respect to the cooling products segment, the room air conditioner business generated healthy growth of 15% YoY in volume terms. However, considering the rise in input prices due to rupee depreciation, management expects volume growth to remain under check.

Taking into consideration the above factors we have revised our target marginally downwards to Rs 233 per share. We maintain our HOLD view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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