Blue Star’s standalone numbers for 3QFY2016 have come in in-line with our
estimates. The top-line for the quarter reported an impressive 15.1% yoy increase
to Rs686cr. Raw material cost as a percentage of sales increased by 175bp yoy to
68.9% but the same got offset by a 94bp yoy and 341bp yoy decline in Employee
and Other expenses as a percentage of sales to 9.7% and 17.4%, respectively.
The EBITDA margin expanded by 259bp yoy to 4.1%. There was an exceptional
loss of Rs2cr during the quarter due to bonus expenses for earlier years. Adjusting
for the exceptional item, the net profit came in at Rs7cr.
Improvement in macro scenario to support growth: The Cooling
Products Division (CPD) 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 fully 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 market conditions improve. The company has been brisk in
adding orders after clearing out a large chunk of legacy orders. The company’s
room air conditioning (RAC) business has been outgrowing the industry by ~10%
points over the last few quarters, resulting in the company consistently increasing its
market share (from ~7% in FY2014 to 10.5% at present). With strong brand equity
and higher share in split ACs, we expect the CPD to continue to drive growth.
Outlook and valuation: We expect Blue Star to report a CAGR of 11.2% in
its revenue over FY2015-18E to Rs4,375cr. The EBITDA margin is expected to
expand by 188bp over FY2015-18E to 7.1% due to better margin orders.
Consequently, the net profit is expected to be at Rs182cr in FY2018E. Moreover,
the proposed merger with Blue Star Infotech will provide cash influx and thus
strengthen the balance sheet. At the current market price, the stock trades at 20.6x and
18.5x its FY2017E and FY2018E earnings respectively and at 0.8x and 0.7x FY2017E
and FY2018E EV/sales (while its close peer Voltas trades at 1.5x its FY2017E EV/sales).
At a target P/E multiple of 23.0x, the implied FY2018E EV/sales multiple works out to
1.0x, which is comforting. Hence we recommend a Buy on the stock.

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