Blue Star reported an in-line set of numbers for 2QFY2016, posting an 11.6% yoy
increase in top-line to Rs717cr. On the operational front, net raw material cost as
a percentage of sales increased by 330bp yoy to 70.2%. However, this was offset
by a 102bp yoy and 199bp yoy decline in Employee and Other expenses to 8.9%
and 17.1% of sales, respectively. The EBITDA margin for the quarter declined by
28bp yoy to 3.8%. On account of higher depreciation and after adjusting for
exceptional items (VRS related expenses of Rs13cr), the net profit declined by
24.3% yoy to Rs7cr.
Improvement in macro scenario to support growth: The Cooling
Products division has been the key performer for the company and is expected to
carry the baton till the Electro Mechanical Projects and Packaged Air-conditioning
Systems (EMPPAC) division recovers on the back of an expected improvement in
the macro scenario. Slow order finalization and execution has impacted the
EMPPAC division’s performance, which however is likely to rebound as the market
condition improves. The company has been brisk in adding orders after clearing
out legacy orders. As for the Cooling Products business, the company has been
growing at a rapid pace in the room air conditioners (RAC) segment and thereby
enhancing its market share. The company expects its market share to increase to
10.5% from the current 10.0%, in the near term.
Outlook and valuation: We expect Blue Star to report a CAGR of 14.3% in
its revenue over FY2015-17E to Rs4,157cr. The EBITDA margin is expected to
expand by 256bp over FY2015-17E to 6.0% due to better margin orders.
Consequently, the net profit is expected to be at Rs130cr in FY2017E as compared
to an adjusted net profit of Rs42cr in FY2015. At the current market price, the stock
is trading at EV/sales of 0.9x for FY2017E and 26.3x its FY2017 earnings. We
have not accounted for the merger of Blue Star Infotech into the company as the
same is subject to respective shareholders’ and High Court’s approval and as we
await more information about the deal from the company. Currently we have a
Neutral rating on the stock.

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