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Blue Star: Cooling Products dominate the business - Views on News from Equitymaster
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Blue Star: Cooling Products dominate the business
Aug 6, 2015

Blue Star has announced first quarter results for financial year 2015-2016 (1QFY16). The company reported a 8.4% YoY increase in sales while net profits grew by 26% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 8.4% YoY during 1QFY16.
  • The operating profits grew by 8.9% YoY during the quarter. Operating margins come in almost the same as that of the previous year's quarter.
  • Net profits increased 26% YoY. Fall in interest expenses along with depreciation expenses led to the higher growth in profits.
  • Order book as on 30th June 2015 stood at Rs 14.93 bn, representing a 5% YoY decline.

(Rs m) 1QFY15 1QFY16 Change
Income from operations  8,322 9,025 8.4%
Expenditure 7,775 8,428 8.4%
Operating profit (EBDITA) 548 596 8.9%
Operating profit margin (%) 6.6% 6.6%  
Other income 70 66 -6.7%
Interest 110 83 -24.9%
Depreciation 94 91 -3.7%
Exceptional items (52)    
Profit before tax 362 488 35.0%
Tax 52 98  
Profit after tax/(loss) 310 390 25.9%
Net profit margin (%) 3.7% 4.3%  
No. of shares   89.9  
Basic & diluted earnings per share (Rs)*   17.9  
P/E ratio (x)*   21.0  

What has driven performance in 1QFY16?
  • This was mainly due to a 17% YoY growth in the Cooling Products (CP) segment. Despite the fact that the summer was not harsh with rains in several parts of the country in April and May, the business did much better than the industry as per the management mainly due to the company's brand recall coupled with an enhanced product portfolio and distribution. As for the other businesses, both the Professional Electronics & Industrial Systems (PEIS) segment and the Electro Mechanical & Project Services (EMPS) segment saw a small YoY decline in sales.

  • The EMPS business saw a fall in EBIT margins from already low levels. The decrease in profitability was mainly due to sluggish execution of projects resulting in lower billings with a higher cost structure along with cost overruns in specific legacy projects.

  • Exceptional item for the previous quarter consists of cost revisions made by the company on major contracts

  • Starting FY16, the Professional Electronics and Industrial business has been carried on by a wholly owned susidiary of the company. However, certain contracts of the PEIS business were also executed by the standalone company. Thus results for the current quarter are not fully comparable with previous periods. It must be noted that the Professional Electronics and Industrial Systems business had been transferred to its subsidiary, Blue Star E&E Ltd with effect from April 1, 2015.

  • During 1QFY16, due to commercial considerations, certain contracts were executed by the standalone parent Blue Star Limited. Thus, the revenues and profit for this business during the quarter were split between the parent company and its subsidiary. The management has mentioned though that on a combined basis, the business recorded a revenue growth of 59% YoY during the quarter, while EBIT grew 72%.

    Segment-wise performance
    (Rs m) 1QFY15 1QFY16 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,367 3,271 -2.9%
    % share  40.2% 36.0%  
    PBIT margin 3.1% 2.7%  
    Cooling Products (CP)
    Revenue 4,748 5,562 17.2%
    % share  56.7% 61.2%  
    PBIT margin 14.9% 14.2%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 262 253 -3.3%
    % share  3.1% 2.8%  
    PBIT margin 16.3% 19.4%  
    Total
    Revenue 8,376 9,086 8.5%
    PBIT margin 10.2% 10.2%  
What to expect?
The company's management has opined that a normal monsoon will result in enhanced demand for cooling products due to increased purchasing power amongst the rural masses. Though the commercial construction cycle is yet to pick up, the company is looking forward to cashing in as and when the growth opportunities revive.

During the rest of the year, while the Company is expected to sustain this performance, a normal monsoon coupled with enhanced commercial construction activities are the factors that will enable it to register significantly higher growth.

At the current price of Rs. 375; the stock trades at 21x its trailing twelve month earnings. We are currently in the process of upgrading to FY18 estimates for the company and would subsequently come out with a revised view on the stock. Until then, we recommend that investors avoid buying the stock at current levels.

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