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Blue Star: Profits up despite lower sales - Views on News from Equitymaster

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Blue Star: Profits up despite lower sales
Jul 27, 2009

Performance summary
  • Topline falls by 15% YoY during 1QFY10. Sales from the electro-mechanical projects & packaged air-conditioning systems (EMPS) decline by 15% YoY.
  • Operating margins expand by a robust 2.5% YoY during the quarter. Improvement aided by lower raw material costs as also reduced other expenditure (both as percentage of sales).
  • Net profits grow by 13% YoY. Improvement in operating margins aids this relatively better performance on the bottomline front.
  • Order backlog at the end of June 2009 stood at Rs 17.2 bn, a growth of 21% YoY.


Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 6,298 5,385 -14.5%
Expenditure 5,739 4,773 -16.8%
Operating profit (EBDITA) 560 612 9.4%
Operating profit margin (%) 8.9% 11.4%  
Other income 27 17 -38.5%
Interest 20 4 -79.0%
Depreciation 57 82 44.7%
Profit before tax 510 543 6.4%
Tax 146 131 -10.2%
Profit after tax/(loss) 364 412 13.1%
Net profit margin (%) 5.8% 7.6%  
No. of shares 89.9 89.9  
Diluted earnings per share (Rs)*   20.6  
P/E ratio (x)*   18.0  
* On a trailing 12 months earnings

What has driven performance in 1QFY10?
  • The 15% YoY fall in Blue Starís net sales during 1QFY10 was a result of a weak performance from all its three business divisions. The EMPS business (60% of total sales) pulled the total topline downwards with a 15% YoY fall in sales during the quarter. In our recent interaction with the company, the management had indicated that the central air-conditioning business may continue to see a dull performance in the short to medium term due to the lower level of business coming from sectors like construction, IT/ITES and retail.

    Segment-wise performance
    (Rs m) 1QFY09 1QFY10 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,793 3,230 -14.9%
    % share 60.2% 60.0%  
    PBIT margin 11.4% 10.5%  
    Cooling Products (CP)
    Revenue 2,160 1,909 -11.6%
    % share 34.3% 35.4%  
    PBIT margin 12.8% 17.3%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 345 247 -28.4%
    % share 5.5% 4.6%  
    PBIT margin 15.4% 28.2%  
    Total
    Revenue 6,298 5,385 -14.5%
    PBIT margin 12.1% 13.7%  

  • The companyís second largest business line of CP (35% of total sales) recorded a 12% YoY decline during the quarter. The third business segment of PEIS too could not hold up in the face of the ongoing slowdown; it saw its sales fall by 28% YoY during the quarter.

  • Lower raw material costs, along with lower other expenditure (as percentage of sales) helped Blue Star improve its operating margins to 11.4% in 1QFY10 as against 8.9% in 1QFY09. These costs declined from 73.5% of sales in 1QFY09 to 67.7% in 1QFY10. Based on segments, while CP and PEIS recorded surge in profitability (see above table), the EMPS division witnessed a margin contraction.

  • Despite the fall in revenues, the healthy expansion in operating margins, as also substantially lower interest expenses and a lower effective tax rate during the quarter helped Blue Starís net profits grow by 13% YoY during 1QFY10. Though it may be mentioned here that lower other income as compared to 1QFY09 as also higher depreciation expenses as a percentage of sales during the quarter were the factors that dragged down the profit growth during the quarter.

What to expect?
At the current price of Rs 375, the stock is trading at a multiple of 11.1 times our estimated FY12 earnings. As per the management, the economic situation continues to affect demand in several market segments, leading to delays in project execution and a consequent decline in topline growth. However the companyís cost control initiatives along with lower commodity prices as compared to this time last year, seem to have been factors that have worked for it in terms of improving operating profitability.

The order backlog saw a decent 21% YoY growth even during these tough times. As per the management, Blue Star has recently booked several large infrastructure related orders which are expected to be executed over the next few quarters. The EMPS business is seeing good traction from sectors like healthcare, government projects, education etc. and expects business to continue from infrastructure related sectors like power, railways, telecom as also some other like retail and hospitality segments that have started showing some initials signs of revival in terms of enquiries. However, the management sees slower billings and a downward pressure on price realisations as concerns for this business segment.

The cooling products business is seeing healthy demand from the education, banking and dairy spaces. Though it may be mentioned here that a part of the reason for the drop in sales during the quarter was a stock out of window ACs on account of a lower level of demand forecasted by the management.

Going forward, the management expects a higher proportion of orders from the private sector as and when things improve in terms of liquidity and project execution from the customersí side. We maintain our view on the stock from a 2-3 year perspective.

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