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Blue Star: Pressure on operating profitability

Oct 27, 2008

Performance summary
  • Topline grows by 18% YoY during 2QFY09, 27% YoY during the half year period. Growth led by the electro-mechanical projects & packaged air-conditioning systems (EMPS) where sales grew 19% YoY during the quarter.

  • Operating margins contract by 1.8% YoY during the quarter owing to higher purchase cost of traded goods.

  • Net profits decline 2% YoY during the quarter, grow 19% YoY during 1HFY09.

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 5,478 6,465 18.0% 10,100 12,774 26.5%
Expenditure 4,794 5,776 20.5% 9,037 11,514 27.4%
Operating profit (EBDITA) 684 690 0.8% 1,064 1,260 18.5%
Operating profit margin (%) 12.5% 10.7% 10.5% 9.9%
Other income 8 12 41.5% 9 28 215.7%
Interest 16 44 177.7% 38 64 66.9%
Depreciation 52 61 17.0% 103 118 15.0%
Profit before tax 624 596 -4.5% 932 1,107 18.8%
Tax 164 147 -10.7% 249 293 17.7%
Profit after tax/(loss) 459.7 449.5 -2.2% 683 814 19.1%
Net profit margin (%) 8.4% 7.0% 6.8% 6.4%
No. of shares 89.9 89.9
Diluted earnings per share (Rs)* 20.8
P/E ratio (x)* 9.2
* On a trailing 12 months earnings

What has driven performance in 2QFY09?
  • The 18% YoY growth in Blue Starís net sales during 2QFY09 was a result of a decent performance from its EMPS and cooling products business divisions. The EMPS business (74% of total sales) remained the lead growth driver with a 19% YoY growth in sales during the quarter. The demand for air-conditioning services from sectors like IT and SEZs (special economic zones) continues to remain robust. The companyís second largest business line of Cooling Products (20% of total sales) recorded a 25% YoY growth during the quarter, while the third business segment of PEIS recorded a decline in sales of 4% YoY during the quarter.

    Segment-wise performance

    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 4,011 4,754 18.5% 6,781 8,554 26.1%
    % share 73.2% 73.5% 67.1% 67.0%
    PBIT margin 14.2% 11.5% 12.6% 11.4%
    Cooling Products (CP)
    Revenue 1,034 1,296 25.3% 2,617 3,455 32.0%
    % share 18.9% 20.0% 25.9% 27.0%
    PBIT margin 10.4% 11.1% 10.4% 12.2%
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 432 416 -3.8% 702 765 9.1%
    % share 7.9% 6.4% 6.9% 6.0%
    PBIT margin 18.8% 24.5% 18.6% 20.3%
    Revenue 5,478 6,465 18.0% 10,100 12,774 26.5%
    PBIT margin 13.9% 12.3% 4.9% 6.0%

  • Higher raw material costs, along with an increase in the costs of purchased goods (as percentage of sales) were the causes for Blue Starís 1.8% YoY drop in operating margins. Segment wise, while the CP and PEIS segments recorded higher profitability during 2QFY09 (see above table), the EMPS division witnessed a margin contraction.

  • Blue Star saw its interest costs balloon by 178%, which turned out to be another profit damper. Thus the overall dip in operating margins along with high interest costs for the quarter led to a 2.2% YoY decline in the bottom line of the company.

What to expect?
At the current price of Rs 192, the stock is trading at a multiple of 5.6 times our estimated FY11 earnings. Since the company is a net importer of raw materials, the depreciation in the rupee has been one of the weak points contributing to its poor performance. The managementís focus in the short term is going to be on managing cash flows well and efficiency in its working capital, which has seen an increase in 2QFY09. It has raised some caution on the receivables front. The company has seen no cancellation of orders booked from customers in the quarter. But at the same time it is booking new orders with caution and paying due attention to the paying capacity of new customers, especially builders.

Going ahead, the uncertainty with respect to new order booking would prevail due to Blue Starís dependence on the real estate sector. It is already seeing enquiries for new orders slowing down and order finalisation getting delayed.

The management has expressed its expectations of maintaining at least the same margins for FY09 as last year. We maintain our positive view on Blue Star from a 2 to 3 years perspective. We shall soon update our research report on the company.

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