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Blue Star: ‘Cool’ performance - Views on News from Equitymaster
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Blue Star: ‘Cool’ performance
Oct 24, 2007

Performance summary
  • Sales grow 46% YoY in 2QFY08, 47% YoY in 1HFY08. Strong growth recorded across all business segments, especially central air-conditioning and cooling products.

  • Operating margins expand by 380 basis points (3.8%) owing to lower raw material and staff costs (as percentage of sales).

  • Net profits surge 150% YoY during 2QFY08, 166% YoY during 1HFY08, duly helped by expansion in operating margins and lower interest charges. Lower effective tax rate also helped matters.

Financial performance snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 3,759 5,478 45.7% 6,882 10,100 46.8%
Expenditure 3,431 4,794 39.7% 6,396 9,037 41.3%
Operating profit (EBDITA) 328 684 108.4% 487 1,063 118.5%
Operating profit margin (%) 8.7% 12.5%   7.1% 10.5%  
Other income 8 8 1.2% 13 9 -31.0%
Interest 24 16 -34.9% 44 38 -14.0%
Depreciation 46 52 14.4% 89 102 15.2%
Profit before tax 266 624 134.3% 367 932 154.2%
Tax 82 164 99.5% 110 249 126.9%
Profit after tax/(loss) 184 460 149.8% 257 683 165.8%
Net profit margin (%) 4.9% 8.4%   3.7% 6.8%  
No. of shares         89.9  
Diluted earnings per share (Rs)*         12.7  
P/E ratio (x)*         30.4  
* On a trailing 12 months basis

Company background
Blue Star is one of India’s largest central air-conditioning and commercial refrigeration companies. The company has divided its business segments as – central air-conditioning systems (70% of FY07 sales), cooling products (23%) and professional electronics & industrial equipments (7%). The first business involves designing, engineering, manufacturing, installation, commissioning and support of central air-conditioning plants and ducted systems. As for the second business unit, Blue Star offers a wide range of contemporary window and split air-conditioners. The company also manufactures and markets a range of commercial refrigeration products and services that cater to the industrial, commercial and hospitality sectors. As for the third division (Professional Electronics), the company has been a distributor in India for many internationally renowned manufacturers of hi-tech professional electronic equipment and services, as well as industrial products and systems. During the period FY02 and FY07, Blue Star has grown its sales and net profits at compounded annual rates of 26% and 23% respectively.

What has driven performance in 2QFY08?
Air-conditioning leads the way: Blue Star’s Central & Packaged Air-conditioning Systems (CPAS) business, which formed 73% of the company’s 2QFY08 revenues, led the way for the company’s topline growth. This business recorded 46% YoY growth in sales during the quarter, aided by the ongoing investments in the Indian real estate, retail and IT/ITES sectors that are the major users of the company’s air-conditioning services.

Segment-wise performance
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Central & Packaged Air-conditioning Systems (CPAS)
Revenue 2,747 4,011 46.0% 4,611 6,781 47.1%
% share 73.1% 73.2%   67.0% 67.1%  
PBIT margin 9.7% 14.2%   9.6% 12.6%  
Cooling Products (CP)
Revenue 697 1,034 48.4% 1,815 2,617 44.2%
% share 18.5% 18.9%   26.4% 25.9%  
PBIT margin 3.8% 10.4%   6.7% 10.4%  
Professional Electronics & Industrial Systems (PEIS)
Revenue 315 432 37.3% 457 702 53.5%
% share 8.4% 7.9%   6.6% 6.9%  
PBIT margin 25.1% 18.8%   19.5% 18.6%  
Total
Revenue 3,759 5,478 45.7% 6,882 10,100 46.8%
PBIT margin 9.9% 13.9%   9.5% 12.4%  

Blue Star’s second largest business line of Cooling Products (CP) also recorded a strong 48% YoY growth during 2QFY08. As has been the case in previous quarters, growth in this segment was driven by robust performance of split air-conditioners as well as refrigeration products and cold chain equipments. As for the third business of Professional Electronics & Industrial Systems (PEIS), sales grew 37% YoY during the second quarter.

The company’s order backlog at the end of September 2007 stood at Rs 10.3 bn, a growth of 31% YoY over 2QFY07 backlog. It won some large orders during the quarter, including the ones from Ahmedabad and Thiruvananthapuram airports (Rs 120 m and Rs 60 m respectively). The management has indicated of some slowdown in orders from the organized retail and BPO segments considering the problems that these sectors are facing due to public backlash and rupee appreciation respectively. However, this is not expected to impact Blue Star’s growth in a major way as central air-conditioning orders from other sectors like power, healthcare and airports are picking up pace.

Lower staff and material costs aid margins: Blue Star recorded a strong 3.8% expansion in its operating margins during 2QFY08. This was largely on account of lower (as percentage of sales) staff and raw material costs. Based on segments, while CPAS and CP businesses recorded strong surge in profitability, that for the PEIS business witnessed a decline (see above table). The management has indicated that the expansion in profitability has been due to a host of factors like the rupee’s appreciation against the US dollar (as Blue Star is a net importer), reduction in customs duty on certain components and increase in the average size of contracts. Considering this 1HFY08 performance, we shall be revising upwards our estimates for margins for FY08 and onwards.

Margin expansion, lower tax rate powers bottomline: Blue Star’s net profits grew by 150% YoY during 2QFY08. Apart from expansion in operating margins, a lower effective tax rate (26.3% in 2QFY08 against 30.9% in 2QFY07) also helped this strong bottomline performance.

What to expect?
At the current price of Rs 385, the stock is trading at a multiple of 15.3 times our estimated FY10 earnings. The company continues to perform strongly across all its segments. The management has indicated that its fifth manufacturing facility, at Wada in Maharashtra, will begin partial production (of air-conditioning and refrigeration equipments) in the fourth quarter of this fiscal. It has also indicated of maintaining a growth of 35% per annum in terms of topline, which we believe is achievable. We maintain our view on the stock.

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