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Blue Star: Cooling Products steal the show - Views on News from Equitymaster

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Blue Star: Cooling Products steal the show
Aug 8, 2014

Blue Star has announced first quarter results for financial year 2014-2015 (1QFY15). The company reported a 9.9% YoY increase in sales while net profits grew by 36.2% YoY. Here is our analysis of the results.

Performance summary
  • Standalone topline increases by around 9.9% YoY during 1QFY15. This was mainly due to an 22.1% YoY growth in the Cooling Products (CP) segment. The Professional Electronics and Industrial Systems (PEIS) segment saw a 1.6% YoY growth. However, revenues from the Electro Mechanical & Project Services (EMPS) segment declined 3.8%% YoY.
  • The operating profits grew by 47% YoY during the quarter. Growth in operating profits came on the back of 1.5% YoY increase in operating margins.
  • Net profits increased 36.2% YoY. Strong performance at the operating level and fall in interest expenses (-5.6% YoY) led to growth in profits.
  • Order book as on 30th June 2014 stood at Rs 15.7 bn, representing a 9% YoY growth.

Standalone performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Income from operations 7,659 8,420 9.9%
Expenditure 7,322 7,924 8.2%
Operating profit (EBDITA) 337 496 47.0%
Operating profit margin (%) 4.4% 5.9%  
Other income  91  70 -22.4%
Interest 117 110 -5.6%
Depreciation 83 94 13.0%
Profit before tax 228 362 58.8%
Tax - 52  
Profit after tax/(loss) 228 310 36.2%
Net profit margin (%) 3.0% 3.7%  
No. of shares   89.9  
Basic & diluted earnings per share (Rs)*   9.4  
P/E ratio (x)*   31.2  
* On a trailing 12 months earnings.

What has driven performance in 1QFY15?
  • Blue Star's net sales increased 9.9% YoY during 1QFY15. Strong performance from the CP segment (22.1% YoY) was the biggest contributor to this. However, revenues from the PEIS segment were almost flat, while the EMPS segment declined 3.8% YoY.

  • Revenues from the EMPS segment declined 3.8% YoY due to slower execution of projects. Margins too saw a sharp fall to 1.6% for the segment during the quarter. The decrease in profitability was mainly due to the slower execution of projects resulting in lower billings coupled with cost overruns in specific legacy projects. However, the company has indicated that such legacy projects now form a small base of the total order book and the margin of this business is likely to improve over the next few quarters since the rest of the order book comprises projects with healthy margins.

  • Revenues from the CP segment increased 22.1% YoY due to strong volume growth. While volumes increased by approximately 15% YoY, room air conditioner prices were also increased during the quarter. It may be noted that 4Q and 1Q are generally best seasons for offtake of ACs. This time the extended summer and late onset of rains added to the sales growth. Further, margins from the CP segment too saw big gains; increasing by almost 3.9% YoY during the quarter. This was mainly due to higher manufacturing capacity utilization due to indigenisation, stable foreign exchange and higher price realisation.

  • Revenues from the PEIS segment increased by 1.6% YoY while margins fell from 21.7% in 1QFY14 to 16.3% in 1QFY15. Slowdown in the industrial projects business impacted the billing cycle and thus profitability.

    Segment-wise performance
    (Rs m) 1QFY14 1QFY15 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,489 3,354 -3.8%
    % share  45.3% 39.7%  
    PBIT margin 5.1% 1.6%  
    Cooling Products (CP)
    Revenue 3,963 4,839 22.1%
    % share  51.4% 57.2%  
    PBIT margin 10.7% 14.6%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 257 261 1.6%
    % share  3.3% 3.1%  
    PBIT margin 21.7% 16.3%  
    Total
    Revenue 7,708 8,455 9.7%
    PBIT margin 8.5% 9.5%  

  • The operating profits increased 47% YoY. Decline in raw material costs due to the company's indigenisation efforts boosted profits.

  • Net profits increased by 36.2% YoY. Decline in interest cost by 5.6% YoY and strong performance at the operating level boosted net profits. However, other income declined by 22.4% YoY.
What to expect?
The management has indicated that the economic environment is showing signs of improvement, more so with the formation of a stable government. While the electro mechanical projects business continues to be adversely impacted mainly due to significant correction in project estimates of specific legacy orders, the performance may improve in the medium term, contingent on a revival of the commercial construction segment. The cooling products business, driven by the residential segment, has been performing better than the industry as per the company.

At the current price of Rs. 292; the stock trades at 19.4x its FY17E earnings. We, therefore re-iterate our SELL rating on the stock.

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