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Blue Star: De-growth all over - Views on News from Equitymaster
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Blue Star: De-growth all over
Nov 10, 2011

Blue Star has announced second quarter results for financial year 2011-2012 (2QFY12). The company reported a 13.0% YoY decline in sales with a net loss of Rs 208 m during the quarter. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by around 13.0% YoY during 2QFY12. Disappointing performance from the electro-mechanical projects & packaged air-conditioning systems (EMPS) and professional electronics and industrial systems (PEIS) impacted topline growth.
  • Operating profits declined 79.3% YoY during 2QFY12 due to continuing inflationary pressures.
  • The company reported a net loss of Rs 208 m in 2QFY12 compared to a profit of Rs 387 m in 2QFY11. Muted performance at the operating level, cost overruns, delayed execution and sharp rise in the interest costs led to a decline in net profits.
  • Order book as on September 30, 2011 stood at Rs 21.6 bn, representing an 8% YoY growth.

Standalone performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 6,948 6,047 -13.0% 13,596 13,093 -3.7%
Expenditure 6,291 5,910 -6.1% 12,335 12,675 2.8%
Operating profit (EBDITA) 657 136 -79.3% 1,261 418 -66.8%
Operating profit margin (%) 9.4% 2.3%   9.3% 3.2%  
Other income 16 10 -39.4% 17 10 -39.4%
Interest 33 306 831.7% 45 387 755.0%
Depreciation 79 80 1.4% 154 151 -2.0%
Profit before tax 561 (240)   1,078 (110)  
Tax 174 (32)   324    
Exceptional items       4    
Profit after tax/(loss) 387 (208)   758 (110)  
Net profit margin (%) 5.6% -3.4%   5.6% -0.8%  
No. of shares         89.9  
Basic & diluted earnings per share (Rs)         (1.2)  
P/E ratio (x)*         25.9  
(*On a trailing 12-month basis)

What has driven performance in 2QFY12?
  • Blue Star's net sales declined 13.0% YoY during 2QFY12. Decline in revenues from the EMPS & PEIS business segments impacted the overall performance. Revenues from the EMPS business segment declined 19.1% YoY due to execution delays amidst uncertain macro environment. Revenues from the PEIS business segment also declined 11.9% YoY during the quarter. However, cooling products (CP) business displayed a strong performance by registering a growth of 10.9% YoY. Focus to expand presence in the residential air conditioning market boosted revenue growth in the CP segment.

  • The EMPS segment reported a loss at the EBIT level in the current quarter. Continuing inflationary trends (majority of the contracts are of fixed price in nature) and cost over-runs impacted the profitability of the EMPS segment. The capital employed of the segment has also increased considerably due to slower collection cycle.

  • Margins from the CP segment declined to 5.4% in 2QFY12 compared to 11.0% in 2QFY11. This was on account of increase in operating expenses as well as higher supply chain cost. However, margins from the PEIS segment increased to 29.2% in 2QFY12 from 25.3% in 2QFY11 due to change in business mix. Nonetheless, segmental margins are expected to revert to long term average by the end of the year.

    Segment-wise performance
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)
    Revenue 4,729 3,825 -19.1% 8,471 7,242 -14.5%
    % share 69.4% 63.9%   63.1% 55.6%  
    PBIT margin 9.2% -0.9%   9.1% -1.7%  
    Cooling Products (CP)
    Revenue 1,414 1,569 10.9% 3,948 4,850 22.8%
    % share 20.7% 26.2%   29.4% 37.3%  
    PBIT margin 11.0% 5.4%   13.0% 10.8%  
    Professional Electronics & Industrial Systems PEIS)
    Revenue 674 594 -11.9% 997 928 -7.0%
    % share 9.9% 9.9%   7.4% 7.1%  
    PBIT margin 25.3% 29.2%   22.6% 27.3%  
    Total
    Revenue 6,818 5,988 -12.2% 13,416 13,019 -3.0%
    PBIT margin 11.1% 3.7%   11.2% 5.0%  

  • Operating profits of the company declined 79.3% YoY to due to cost overruns and slow execution pace across key projects. Increase in advertising and logistic expenses also impacted the overall profitability growth.

  • The company reported a net loss of Rs 208 m during the quarter. Muted performance at the operating level and increase in financial expenses impacted profits. Financial expenses increased due to increase in working capital requirements, general rise in borrowing cost and occurrence of an exchange loss to the tune of Rs 194 m. It may be noted that exchange loss was clubbed under the financial expenses head during the quarter.

What to expect?
Management categorically stated that revenue momentum in the EMPS segment would remain weak over the next 4-5 quarters. Even margins are likely to remain under pressure due to rising commodity prices resulting in subsequent cost overruns. However, company is taking calibrated steps to manage the working capital cycle and is also negotiating with its customers to recover the margin erosion witnessed through escalation claims. Nonetheless, considering the recent slowdown in commercial real estate, we expect the 2HFY12 to be challenging for the company.

As far the CP segment is concerned management is confident that it would be able to maintain its growth momentum witnessed in 1HFY12 through channel expansion and increasing focus on high growth markets and products.

While the near term prospects appear bleak we believe that most of the negatives have already been priced in. As a result, we maintain our positive view on the stock.

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