Blue Star- Margins spoil show; ACCUMULATE : Emkay

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Blue Star

Margins spoil show; Maintain ACCUMULATE

ACCUMULATE

CMP: Rs456                                        Target Price: Rs543

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n     Blue Star reported better than expected revenues of Rs6.9bn in Q2FY11 driven by higher revenues in PEIS division. However, lower margins in other businesses spoil the show

n     EBIT margins in EMP and Cooling Products decline190bps yoy each – along with high interest cost and taxation, PAT decline by 12.6% yoy to Rs386 mn

n     Order inflows up 8.4% yoy to Rs7.2 bn and order book up 10.1% yoy to Rs20.0 bn - expect order inflows to grow at 20% in H2FY11

n     Maintain earnings estimates of Rs25.0/Share and Rs29.6/Share for FY11E and FY12E – Maintain positive bias with ACCUMULATE rating and target price Rs543/Share

Revenue growth better than expected

Blue Star (BLSR) reported healthy revenue growth at 23.3% yoy to Rs6.9bn (better than

estimates) led by continued traction in all business segments – (1) EMP&PAC segment

grew 12.6% yoy to Rs4.7bn, (2) Cooling Products division grew by 28.3% yoy to

Rs1.4bn and (3) doubling of revenues in PEIS division to Rs674mn.

But margins spoil the show…

However, continued pressure on raw material costs, execution of FY10 orders and rise

in Cenvat rate spoiled the show as the EBIDTA margins shrank by 190bps yoy to 9.7%.

The pressure on margins was visible across the segments as (1) EBIT margins in

EMP&PAC shrank by 190 bps yoy to 9.4% due to booking of old orders and (2) EBIT

margins in cooling products also shrank by similar proportion due to raw material cost

pressures and increase in Cenvat rate.

… Along with higher interest costs and taxation, APAT declines 12.6%

BLSR’ borrowings have gone up 3x over H1FY11 driven by the acquisition (Rs1bn for

DS Construction) and stretching of the working capital cycle (Rs1.2bn) resulting in

almost 4x jump in interest expenses. This along with higher effective tax (31%

compared with 24% in Q2FY10) led to 12.6% yoy decline in APAT to Rs386 mn.

Order inflows grow 8.4% yoy to Rs7.2 bn in the quarter

Order backlog grew 10.1% yoy to Rs20bn, led by order inflows across sectors. Order

inflows grew 8.4% yoy to Rs7.2bn – in line with our estimates. BLSR made good

inroads in the power sector (for electrical orders) and industrial sector (for mechanical &

instrumentation orders). BLSR received Rs1.3 bn order inflow from MIAL.

Maintain our FY11E & FY12E estimates, Reiterate 'BUY'

We continue to hold positive bias on BLSR in view of (1) +95% exposure to domestic

markets (2) leveraging mechanical skill-set to get industrial projects – erection or piping

work in Steel & Hydrocarbons and (3) buoyancy in room air-conditioners and

commercial refrigeration. We maintain our earnings estimates for FY11E and FY12E at

Rs25.0/Share and Rs29.6/Share respectively. We reiterate ‘BUY’ rating with price target

of Rs543/Share