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Blue Star: Input costs pinch bottomline - Views on News from Equitymaster

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Blue Star: Input costs pinch bottomline

Jul 26, 2010

Blue Star has announced its 1QFY11 results. The company has reported 25% YoY growth in sales. Net profit has however declined by 10% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 25% YoY during 1QFY11. Growth seen across all business segments. The biggest segment of electro-mechanical projects & packaged air-conditioning systems (EMPS) grows by 19% YoY during the quarter.
  • Operating margins decline to 9.2% during the quarter, from 12% in 1QFY10. This is on the back of higher raw material costs.
  • On the back of weaker operating margins and higher interest and tax charges, net profit declines by 10% YoY.
  • Order backlog as on June 30th, 2010 stood at Rs 19.7 bn, a growth of 15% YoY.
  • Acquires the plumbing & fire fighting business of D. S. Gupta Constructions Pvt. Ltd. for a consideration of Rs 800 m.

Financial performance snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 5,310 6,648 25.2%
Expenditure 4,675 6,040 29.2%
Operating profit (EBDITA) 635 609 -4.2%
Operating profit margin (%) 12.0% 9.2%  
Other income 4 4 -7.3%
Interest 15 20 37.9%
Depreciation 82 76 -7.8%
Profit before tax 543 517 -4.8%
Tax 131 150 14.2%
Extraordinary gain/(loss) - 4  
Profit after tax/(loss) 412 371 -9.8%
Net profit margin (%) 7.8% 5.6%  
No. of shares 89.9 89.9  
Diluted earnings per share (Rs)*   23.1  
P/E ratio (x)*   18.6  
* On a trailing 12 months earnings

What has driven performance in 1QFY11?
  • The 25% YoY growth in Blue Star's net sales during 1QFY11 was a result of a good performance from its cooling products business division. This segment (38% of total sales) led the growth in the company's topline with a 33% YoY growth in sales during the quarter.

    Segment-wise performance
    (Rs m) 1QFY10 1QFY11 Change
    Electro-Mech. Proj. Packaged A/C Sys. (EMPS)
    Revenue 3,147 3,742 18.9%
    % share 59% 57%  
    PBIT margin 11.0% 9.1%  
    Cooling Products (CP)
    Revenue 1,903 2,534 33.1%
    % share 36% 38%  
    PBIT margin 17.5% 13.9%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 247 323 30.9%
    % share 5% 5%  
    PBIT margin 28.6% 16.9%  
    Revenue 5,297 6,598 24.6%
    PBIT margin 14.1% 11.3%  

    The company's largest business line of EMPS (57% of total sales) also recorded a good performance during the quarter with its sales clocking in a growth of 19% YoY. The third business segment of PEIS also saw a recovery with a sales growth of 31% YoY during the 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). Cost of raw materials also saw a rise which is something that the management is working on bringing down in the quarter to come. Based on segments, all the company's individual business segments saw a fall in PBIT margins during the quarter.

  • On the back of the contraction in operating margins, higher interest costs and a higher effective tax rate, Blue Star's net profits saw a fall of almost 10% during the quarter.

What to expect?
At the current price of Rs 429, the stock is trading at a multiple of 13.5 times our estimated FY13 earnings.

Blue Star has entered into an agreement to acquire the plumbing & fire fighting business of D S Gupta Constructions Private Limited (DSG ) on a slump sale basis for a consideration of Rs 800 m. The company plans to assign its rights and obligations under this agreement to its wholly owned subsidiary Blue Star Electro Mechanical Ltd (BSEML), which would acquire and operate the said business once the acquisition formalities are completed.

At current levels though, we hold a cautious view on the stock (ResearchPro subscribers, kindly click here).

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