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Blue Star: Order book declines - Views on News from Equitymaster

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Blue Star: Order book declines
Oct 25, 2012

Blue Star has announced second quarter results for financial year 2012-2013 (2QFY13). The company reported a 3.4% YoY decline in sales and a net profit of Rs 73 m in the quarter compared to a loss of Rs 208 m in 2QFY12. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by around 3.4% YoY during 2QFY13. This was mainly due to a 1.7% YoY fall in the electro-mechanical projects & packaged air-conditioning systems (EMPS) segment and 42.6% YoY fall in the Professional Electronics and Industrial Systems (PEIS) segment.
  • The operating profits grew 151.2% YoY during the quarter due to low base effect.
  • The company reported a net profit of Rs 73 m compared to a loss of Rs 208 m in 2QFY12. Fall in interest expenses and growth in operating profits turned the bottom line into green.
  • 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 September 2012 stood at Rs 16.7 bn, representing a 22.4% YoY decline. Order cancellation and slowdown in the market led to a fall in the order book.

Standalone performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 5,992 5,786 -3.4% 13,032 13,100 0.5%
Expenditure 5,912 5,585 -5.5% 12,675 12,563 -0.9%
Operating profit (EBDITA) 80 202 151.2% 357 537 50.4%
Operating profit margin (%) 1.3% 3.5%   2.7% 4.1%  
Other income 66 65 -1.7% 72 135 88.5%
Interest 306 112 -63.4% 387 237 -38.7%
Depreciation 80 82 1.7% 151 156 3.2%
Profit before tax (240) 73   (110) 278  
Tax (32) -   - -  
Exceptional items - -   - -  
Profit after tax/(loss) (208) 73   (110) 278  
Net profit margin (%) -3.5% 1.3%   -0.8% 2.1%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)         3.1  
P/E ratio (x)*         NM  
*On a trailing twelve month basis. TTM EPS is negative, so PE is not meaningful

What has driven performance in 2QFY13?
  • Blue Star's net sales declined 3.4% YoY during 2QFY13. This was mainly due to a 1.7% YoY fall in the EMPS segment and 42.6% YoY fall in the PEIS segment. However, revenues from the Cooling Products (CP) segment increased 7.2% YoY.

  • Revenues from the PEIS business declined due to unfavorable business climate, declining demand and delay in finalization of orders. However, revenues from the CP segment increased due to better operating environment. Margins from the CP segment declined on a YoY basis due to pricing pressures, appreciating dollar and rising competitive intensity. However, margins from the EMPS segment showed considerable improvement as cost escalation was under control.

    Segment-wise performance
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 3,824 3,759 -1.7% 7,252 7,429 2.4%
    % share 63.8% 65.0%   55.6% 56.7%  
    PBIT margin -0.9% 7.0%   -1.7% 5.2%  
    Cooling Products (CP)
    Revenue 1,574 1,686 7.2% 4,853 5,023 3.5%
    % share 26.3% 29.1%   37.2% 38.3%  
    PBIT margin 5.4% 4.7%   10.8% 9.1%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 594 341 -42.6% 928 649 -30.1%
    % share 9.9% 5.9%   7.1% 5.0%  
    PBIT margin 29.2% 7.7%   27.3% 15.1%  
    Total
    Revenue 5,992 5,786 -3.4% 13,032 13,100 0.5%
    PBIT margin 3.7% 6.4%   5.0% 7.2%  

  • The operating profits increased 151.2% YoY due to a fall in operating expenditure and low base effect.

  • The company reported a net profit of Rs 73 m as compared to a loss in 2QFY12. Fall in interest expenses, zero taxation and strong operating performance helped the company turn green at the bottom line level. It may be noted that 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?
This was the second consecutive quarter where the EMPS margins turned green. Thus, it seems that the company has consolidated its position as far as the delinquencies in projects are concerned and is on the profitable path now. While the external environment was not conducive which led to de-growth in order booking, management expects the second half to be much better. Management is also eliminating dud orders from its order book and is on a clean-up exercise. There is also a change in strategy whereby the company is focusing on margins and not volumes. Also, the company intends to lower its capital employed to FY12 levels by the end of this fiscal. This implies that the working capital cycle is expected to improve.

Thus, overall, while there are still some concerns emanating from the core EMPS business, with respect to order inflows, margins and execution, the performance in the current quarter signifies that the company is on track. Based on these factors, we maintain our hold view on the stock.

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