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Blue Star |
Passing blues |
ACCUMULATE
CMP: Rs430 Target Price: Rs513
n Management upbeat on - execution in EMP&PAC, demand in Cooling Products. But, concerned over operating margins
n Higher working capital and debt resulted in 82% jump in capital employed – to adversely impact return ratios, going forward
n Lower earnings for FY11E (-11% to Rs22.1) and FY12E (-4% to Rs28.5) to factor (1) DS Gupta Constructions acquisition (2) pressure on EBITDA margins (3) deteriorating working capital
n Reiterate positive bias on BLSR. Retain Accumulate rating with revised target price of Rs513 (18X FY12E earnings)
Highlights of our meeting with Mr. Vir Advani, Executive Director, Blue Star (BLSR) are
summarized hereunder:
Electro Mechanical Project & Packaged Air-conditioner (EMP & PAC)
segment: Improving demand, but near term concerns on EBIT margins
§ Demand outlook remains firm from sectors such as hotels, hospitals, educational
institutions, etc. with further strengthening of spending.
§ IT sector demand yet to recover- but level of enquiries have improved. Large IT
companies have resumed spending, reinforcing management’s belief of a broadbased
recovery in near to medium term.
§ Execution picks up in previously stalled projects – reinforcing improvement in
execution. We retain implied revenue growth of 27% yoy in H2FY11E against a
subdued 15% yoy growth in H1FY11.
§ Reiterated focus on non-commercial sectors such as infrastructure, power and
industrials. Expect contribution to increase from 20% to 40% over the next 3-4 years.
§ Pressure on operating margins to remain until FY12E - attributed to (1) high raw
material costs,(2) low margin orders in current order book
§ Company has raised the margin threshold on new orders - to counter current
margin pressures. Benefits of same will be visible from H2FY12E.
Cooling Products segment – Robust growth to continue albeit at lower
margins
§ Room air-conditioners (RAC) market to grow at a robust 30% CAGR over the
next 3-4 years - led by residential market (40-50% CAGR). Commercial market to
grow at a lower 20-25% CAGR.
§ Company to increase presence in high growth residential market – but will
continue to be a small player (about 5% market share).
§ Company indicated satisfactory progress in commercial refrigeration segment.
§ Segment EBIT margins under pressure due to (1) high raw material prices and
(2) adverse forex movements. BLSR had undertaken price hikes of 3-5% in Oct’10
to partially mitigate impact of high raw material prices.
Sharp increase in capital employed – to negatively impact return ratios
§ Deterioration of working capital cycle – down from 34 days in FY10 to +70 days due
to delays in collections. No significant provisions on debtors expected in the ensuing
quarters. Further, working capital cycle unlikely to improve significantly in the immediate
term.
§ Net DER increased from -0.1 in FY10 to 0.5 in Q2FY11 – due to (1) sharp rise in
working capital requirement (2) leveraged buy-out of DS Gupta Constructions (Rs0.8 bn)
§ Led by above, capital employed increased 82% from Rs5.0 bn as on Mar’10 to Rs9.1
bn as on Sep’10.
§ This will negatively impact BLSR’s return ratios. We expect ROCE to decline from
46.6% in FY10 to 37.8% in FY12E.
Average tax rate to increase from 25% in FY10 to 30%
Going forward, average tax rate for BLSR expected to increase from 25% in FY10 to 30%.
This is due to expiry of taxation incentives received by one manufacturing unit and 50%
reduction in incentives received by the other unit in Himachal Pradesh.
Despite above, H2FY11E performance to be better than H1FY11 performance
Despite above niggling issues, BLSR is expected to post improved performance in
H2FY11E over H1FY11. This is on the back of, interalia, (1) improved revenue booking
from previously stalled projects (2) positive impact of upward price revisions (to the tune of
3-5% – effected since Oct’10) (3) robust demand from RAC market. Further, Management
reiterated its revenue and order inflow growth guidance for FY11E at 20% and 10%
respectively (given during Q2FY11 concall). Hence, the implied revenue growth for
H2FY11E is 17% yoy and that for order inflows is 16% yoy.
Lower our earnings for FY11E (11%) and FY12E (4%), Retain Accumulate
We have lowered our FY11E and FY12E earnings estimates by 11.0% to Rs22.1 and by
3.8% to Rs28.5 per share for FY12E. We continue to maintain a positive bias on Blue Star.
We believe that post the recent price correction (stock has corrected +20% since 20 Sep’10
peak of Rs554/-), stock is attractively valued at 20.5X FY11E and 15.9X FY12E earnings.
We retain ‘Accumulate’ rating with revised target price of Rs513 per share (18X FY12E
earnings).
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