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Blue Star: Lower margins bring down profits - Views on News from Equitymaster
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Blue Star: Lower margins bring down profits
Nov 1, 2010

Blue Star has announced its 2QFY11 results. The company has reported 23% YoY rise in sales, and a 22% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows 23% YoY during 2QFY11. Growth is led by the cooling products and the professional electronics and industrial systems (PEIS) businesses where sales grow by 29% YoY and 100% YoY respectively during the quarter.
  • Operating margins contract by 3.8% YoY during the quarter, on the back of a big spike in cost of traded goods as well as higher other expenditure (both as a percentage of sales).
  • Net profits fall 22% YoY during the quarter owing to the contraction in operating margins and a higher effective tax rate. Excluding extraordinary items, the fall in net profits stands at 13% YoY.
  • Order book as on September 30, 2010 stands at Rs 20 bn compared to Rs 18.2 bn as at September 30, 2009, a growth of 10% YoY.

Financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales        5,545           6,818 23.0%         10,842          13,416 23.7%
Expenditure        4,891          6,275 28.3%            9,565          12,315 28.7%
Operating profit (EBDITA)            654              542 -17.1%            1,277             1,101 -13.8%
Operating profit margin (%) 11.8% 8.0%   11.8% 8.2%  
Other income               38               146 285.0%                   55                200 265.3%
Interest               22                 49 117.4%                  37                   69 86.2%
Depreciation              87                 79 -8.9%                169                 154 -8.4%
Profit before tax            583               561 -3.9%             1,126            1,078 -4.3%
Tax             141              174 23.5%                273                324 19.0%
Extraordinary gain/(loss)               52                   -                       52                      4  
Profit after tax/(loss)            495              386 -21.9%                906                758 -16.4%
Net profit margin (%) 8.9% 5.7%   8.4% 5.6%  
No. of shares                     89.9               89.9  
Diluted earnings per share (Rs)*                       21.9  
P/E ratio (x)*         20.8  
* On a trailing 12 months earnings

What has driven performance in 2QFY11?
  • The 23% YoY growth in Blue Star's net sales during 2QFY11 was a result of a good performance from its cooling products business division as well as the PIES division. The cooling products business (21% of total sales) led the growth in the company's topline with a 29% YoY growth in sales during the quarter.

    Segment-wise performance
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue    4,096 4,705 14.9% 7,243 8,446 16.6%
    % share  74% 69%   67% 63%  
    PBIT margin 11.4% 9.4%   10.9% 9.2%  
    Cooling Products (CP)
    Revenue     1,112   1,439 29.4% 3,015 3,973 31.8%
    % share  20% 21%   28% 30%  
    PBIT margin 14.5% 11.5%   17.1% 13.1%  
    Professional Electronics & Industrial Systems (PEIS)
    Revenue 337   674 99.9% 584 997 70.8%
    % share  6% 10%   5% 7%  
    PBIT margin 29.6% 24.1%   29.2% 21.8%  
    Total
    Revenue    5,545   6,818 23.0%     10,842 13,416 23.7%
    PBIT margin 13.2% 11.3%   13.6% 11.3%  

    The PEIS division, which is lumpy in nature, recorded a robust 100% YoY growth in sales during the quarter. The company's largest business of electro mechanical projects (69% of total sales) also recorded a good performance during the quarter with its sales clocking in a growth of 15% YoY.

  • The operating margins of the company contracted during the quarter due to a big spike in cost of goods purchased for trading (as a percentage of sales). Staff costs and cost of raw materials on the other hand saw a fall. All the company's individual business segments witnessed a fall in margins during the quarter.

  • On the back of the contraction in operating margins and a higher effective tax rate, Blue Star's net profits saw a fall in net profits to the tune of 22% YoY. However, excluding extraordinary items on account of a profit on the sale of investments recorded in the same quarter during the previous financial year, the bottomline saw a fall of 13% YoY.

What to expect?
At the current price of Rs 454, the stock is trading at a multiple of 14 times our FY13 earnings estimates. The management has mentioned that it is already taking steps to mitigate the rise in input costs and is thus hopeful of better profitability during the latter part of FY11. At current levels though, we hold a cautious view on the stock (ResearchPro subscribers, kindly click here).

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