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Blue Star: EMPS packs the punch - Views on News from Equitymaster

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Blue Star: EMPS packs the punch
Jul 29, 2008

Performance summary
  • Topline grows by 36% YoY during 1QFY09. Robust growth recorded across all business segments, especially electro-mechanical projects & packaged air-conditioning systems (EMPS) which grows sales by 37% YoY.

  • Operating margins expand by 0.8% YoY during the quarter. Improvement aided by lower raw material costs (both as percentage of sales).

  • Net profits grow by a robust 63% YoY. Improvement in operating margins aide this strong performance on the bottomline front.

  • Order backlog at the end of June 2008 stood at Rs 14 bn, a growth of 43% YoY.



Financial performance snapshot
(Rs m) 1QFY08 1QFY09 Change
Sales 4,623 6,309 36.5%
Expenditure 4,243 5,739 35.2%
Operating profit (EBDITA) 379 570 50.4%
Operating profit margin (%) 8.2% 9.0%  
Other income 1 17 2257.1%
Interest 22 20 -10.7%
Depreciation 50 57 13.7%
Profit before tax 308 510 65.8%
Tax 85 146 73.0%
Profit after tax/(loss) 223 364 63.1%
Net profit margin (%) 4.8% 5.8%  
No. of shares 89.9 89.9  
Diluted earnings per share (Rs)*   20.9  
P/E ratio (x)*   17.7  
* On a trailing 12 months earnings

What has driven performance in 1QFY09?
  • The 37% YoY growth in Blue Star’s net sales during 1QFY09 was a result of strong performance from all its three business divisions. The EMPS business (60% of total sales) remained the lead growth driver with a 37% YoY growth in sales during the quarter. As reported in the results press release, apart from continued strong demand for air-conditioning services from sectors like real estate, retail and IT/ITES, the company also recorded traction in its products for the telecom shelter air-conditioning business.

    Segment-wise performance
    (Rs m) 1QFY08 1QFY09 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)      
    Revenue 2,770 3,800 37.2%
    % share 59.9% 60.2%  
    PBIT margin 10.2% 11.3%  
    Cooling Products (CP)      
    Revenue 1,583 2,159 36.4%
    % share 34.2% 34.2%  
    PBIT margin 10.4% 12.8%  
    Professional Electronics & Industrial Systems (PEIS)      
    Revenue 269 350 29.8%
    % share 5.8% 5.5%  
    PBIT margin 18.2% 15.2%  
    Total      
    Revenue 4,623 6,309 36.5%
    PBIT margin 10.7% 12.1%  

    The company’s second largest business line of CP (34% of total sales) recorded a 36% YoY growth during the quarter. Robust performance of split air-conditioners as well as commercial refrigeration products and cold chain equipments led the growth for this segment during the fiscal. The third business segment of PEIS recorded sales growth of 30% YoY during the quarter.

  • Lower raw material costs (as percentage of sales) helped Blue Star improve its operating margins to 9% in 1QFY09 as against 8.2% in 1QFY08. These costs declined from 83.1% of sales in 1QFY08 to 77.4% in 1QFY09. Based on segments, while EMPS and CP recorded surge in profitability (see above table), the PEIS division witnessed a margin contraction.

  • On the back of a strong topline growth as also the expansion in operating margins, Blue Star’s net profits grew by 63% YoY during 1QFY09. The growth would have been even higher but for an increase in tax expenses – effective tax rate increased from 27.5% in 1QFY08 to 28.6% in 1QFY09.

What to expect?
At the current price of Rs 370, the stock is trading at a multiple of 9.5 times our estimated FY11 earnings, which we believe makes it an attractive proposition for long term investors. At the current price of Rs 370, the stock is trading at a multiple of 9.5 times our estimated FY11 earnings. The management has reiterated its focus on profitability being the key as it gets more aggressive in the domestic and international market for air-conditioning. It sees rising demand from new sectors like power and infrastructure to drive its EMPS segment growth in the future, even as there is some slowdown in off-take from the IT space. Almost 65% of the company’s order backlog is protected by price variation clause and to that extent there is safety on the profitability front.

The management has also reiterated its expectations of growing sales at above 30% levels annually going forward, though it has raised some caution on the receivables front. We maintain our positive view on Blue Star from a 2 to 3 years perspective.

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