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Blue Star: EMPS returns to profitability - Views on News from Equitymaster
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Blue Star: EMPS returns to profitability
Aug 7, 2012

Blue Star has announced first quarter results for financial year 2012-2013 (1QFY13). The company reported a 3.9% YoY and 109.8% YoY growth in sales and net profits respectively during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 3.9% YoY during 1QFY13. This was mainly due to a 7.1% YoY growth from the electro-mechanical projects & packaged air-conditioning systems (EMPS) segment.
  • The operating profits grew 21.8% YoY during the quarter.
  • Net profits increased 109.8% YoY due to rise in other income and fall in tax expenses. Other income increased almost 8 folds mainly on account of income tax refunds and foreign exchange gains. The tax expenses were nil during the quarter due to a set off arising from the carried forward losses of the previous year.
  • Order book as on 30th June 2012 stood at Rs 18.4 bn, representing an 8.5% YoY decline.

Standalone performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Income from operations 7,040 7,314 3.9%
Expenditure 6,765 6,979 3.2%
Operating profit (EBDITA) 275 335 21.8%
Operating profit margin (%) 3.9% 4.6%  
Other income 7 70 860.3%
Interest 82 125 53.4%
Depreciation 71 75 4.8%
Profit before tax 130 205 58.5%
Tax 32 - -100.0%
Exceptional items      
Profit after tax/(loss) 98 205 109.8%
Net profit margin (%) 1.4% 2.8%  
No. of shares   89.9  
Basic & diluted earnings per share (Rs)   2.28  
P/E ratio (x)*   NA  
*On a trailing twelve month basis. TTM EPS is negative, so PE is not meaningful

What has driven performance in 1QFY13?
  • Blue Star's net sales increased 3.9% YoY during 1QFY13. This was mainly due to a 7.1% YoY growth in the EMPS segment. Revenues from the Cooling Products (CP) segment were relatively flat while those from the Professional Electronics and Industrial Systems (PEIS) segment declined 7.7% YoY. It may be noted that the review of balance projects, which the company had initiated a couple of quarters back, amidst significant variations in cost structure, is now complete.

  • Revenues from the PEIS business declined 7.7% YoY due to unfavorable business climate. However, revenues from the CP segment were relatively flat. Margins from both the segments declined on a YoY basis due to pricing pressures, appreciating dollar (applicable to the CP segment) and rising competitive intensity.

    Segment-wise performance
    (Rs m) 1QFY12 1QFY13 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,427 3,671 7.1%
    % share 48.7% 50.2%  
    PBIT margin -2.6% 3.4%  
    Cooling Products (CP)
    Revenue 3,280 3,336 1.7%
    % share 46.6% 45.6%  
    PBIT margin 13.5% 11.3%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 333 308 -7.7%
    % share 4.7% 4.2%  
    PBIT margin 23.9% 23.3%  
    Revenue 7,040.3 7,314.2 3.9%
    PBIT margin 6.1% 7.8%  

  • The operating profits increased 21.8% YoY due to better execution and decline in raw material cost and cost associated with purchase of traded goods (both as a percentage of sales).

  • The net profits of the company increased 109.8% YoY. This was mainly due to a strong performance at the operating level, rise in other income and fall in tax expenses. Other income increased by almost 8 folds due to income tax refunds and foreign exchange gains. The provision for taxation was nil in the current quarter due to a set-off of the carried forward business loss of the previous year.

What to expect?
Finally, by the end of this quarter, management completed the review of balance EMPS projects in hand. It may be noted that couple of quarters back, management had decided to review the cost and revenue structure of certain projects which were significantly impacted by raw material price inflation. An end to this review means that the margins from the EMPS segment are expected to revert to long term average by FY13. Management expects margins from the EMPS segment to be at about 7% (site level margins).

As far the CP segment is concerned, rupee depreciation and rising competition will keep margins and growth under check. Further, considering the overall slowdown in activity, the order inflow is likely to be muted this year.

Thus, overall while there are still some concerns emanating from the core EMPS business, with respect to order inflows and execution, the performance in the current quarter signifies that a turnaround is around the corner. This reflected from the fact that the EMPS segment returned to profitability in the current quarter after registering losses in the last four quarters. Also, management's calibrated steps in managing capital employed in prudent manner will bear fruits in the long term. Based on these factors, we maintain our hold view on the stock.

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