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Blue Star: Growth momentum cooling down? - Views on News from Equitymaster

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Blue Star: Growth momentum cooling down?

Oct 26, 2009

Performance summary
  • Topline falls 13% YoY during 2QFY10, 14% YoY during the half year period. Fall led by the electro-mechanical projects & packaged air-conditioning systems (EMPS) where sales fell 12% YoY during the quarter.
  • Operating margins expand by 1% YoY during the quarter owing to lower raw material costs and lower other expenditure.
  • Net profits excluding extraordinary items falls 2% YoY during the quarter owing to higher depreciation costs, grows 5% YoY during 1HFY10.

Financial performance snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 6,456 5,630 -12.8% 12,754 11,016 -13.6%
Expenditure 5,776 4,986 -13.7% 11,464 9,809 -14.4%
Operating profit (EBDITA) 681 645 -5.2% 1,291 1,207 -6.5%
Operating profit margin (%) 10.5% 11.5%   10.1% 11.0%  
Other income 21 38 83.1% 48 55 14.0%
Interest 44 13 -70.6% 64 17 -73.1%
Depreciation 61 87 41.4% 169 118 -30.1%
Profit before tax 596 583 -2.2% 1,107 1,126 1.8%
Tax 147 141 -3.8% 293 273 -7.0%
Extraordinary gain/(loss) - 52   - 52  
Profit after tax/(loss) 450 494 10.0% 814 906 11.4%
Net profit margin (%) 7.0% 8.8%   6.4% 8.2%  
No. of shares       89.9 89.9  
Diluted earnings per share (Rs)*         20.5  
P/E ratio (x)*         17.6  
* On a trailing 12 months earnings

What has driven performance in 1QFY10?
  • The 13% YoY fall in Blue Starís net sales during 2QFY10 was a result of a weak performance from all its three business divisions. The EMPS business (74% of total sales) led the fall in the companyís topline with a 12% YoY fall in sales during the quarter.

    Segment-wise performance
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)            
    Revenue 4,751 4,178 -12.1% 8,544 7,407 -13.3%
    % share 73.6% 74.2%   67.0% 67.2%  
    PBIT margin 11.3% 11.3%   11.3% 11.0%  
    Cooling Products (CP)            
    Revenue 1,290 1,116 -13.5% 3,450 3,025 -12.3%
    % share 20.0% 19.8%   27.0% 27.5%  
    PBIT margin 10.7% 13.4%   12.1% 15.9%  
    Professional Electronics & Industrial Systems (PEIS)            
    Revenue 415 337 -18.8% 761 584 -23.2%
    % share 6.4% 6.0%   6.0% 5.3%  
    PBIT margin 23.4% 29.2%   19.8% 28.8%  
    Revenue 6,456 5,630 -12.8% 12,754 11,016 -13.6%
    PBIT margin 12.0% 12.8%   12.0% 13.3%  

  • The companyís second largest business line of CP (20% of total sales) recorded a 14% YoY fall during the quarter. The third business segment of PEIS recorded fall in sales of 19% YoY during the quarter.

  • On the positive side, lower raw material costs (as percentage of sales) helped Blue Star improve its operating margins to 11.5% in 2QFY10 as against 10.5% in 2QFY09. These costs declined from 74% of sales in 2QFY09 to 69.9% in 2QFY10. Based on segments, while EMPS segment saw no change in margins, the CP and PEIS segments recorded a good growth in their margins.

  • On the back of a fall in the topline, Blue Starís net profits fall by 2% YoY during 2QFY10. This is excluding the extraordinary gain that the company saw on a profit on the sale of its share in Rolastar Pvt. Ltd. The growth would have been even higher but for an increase in depreciation expenses which increased by 41% during the quarter.

What to expect?
At the current price of Rs 360, the stock is trading at a multiple of 10.7 times our estimated FY12 earnings. Blue Starís management has opined that the worst of the economic slowdown is over. But at the same time it is too early to predict the speed of the recovery. The companyís order backlog as at the end of September 2009 increased to Rs 18 bn compared to about Rs 15 bn in September 2008 (a growth of 17% YoY). However, fresh order inflows during the latest quarter declined from Rs 8 bn in Q2FY09 to Rs 6.5 bn during the current quarter.

For the central air-conditioning segment, the company saw good business come from the government/PSUs, infrastructure, healthcare, education and hospitality sectors. The slowdown continued to adversely affect the IT/ITES and commercial segments, which continued to be a drag on Blue Starís topline. In packaged air-conditioning part of this business, small chillers for offices continued to be a major driver for growth. The company continued to maintain its leadership position in the telecom segment with its customised air-conditioners. The newly formed electrical projects business has also performed well. Apart from cross-selling its services to existing HVAC customers and booking integrated MEP orders, the company also booked several stand-alone electrical contracting orders.

As investments in the economy regain their full momentum once again, Blue Star too should regain its full vigour. We maintain our view on the stock from a 2-3 year perspective.

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