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Investment Rationale
• Past strong fundamentals form the base for the future
• Increasing demand for company’s products & services gives
revenue visibility for the future
• Strategic acquisitions to enhance service offerings in the
MEP (mechanical, electrical & plumbing) segment
• Innovative Products to meet customer requirement
• Diversification into newer areas
• User-industries well-poised for growth
Company Description
Blue Star is India’s largest central air-conditioning company
and a leader in commercial refrigeration, fulfilling the
requirements of a large number of corporate and commercial
customers. Its business is divided into 3 segments namely
Electro Mechanical Projects and Packaged Air conditioning
systems, Cooling Products and Professional Electronics &
Industrial Systems. The company was founded in 1943 and is
headquartered in Mumbai, India
Valuation
At CMP Rs. 347 the company is trading at 22x and 17.84X for
FY11E & FY12E EPS respectively. Historically Company’s fair
PE is 20.50 for which the fair price is Rs. 400. Blue star has
upside potential of 15%.
•Past strong fundamentals form the base for the future
Net Sales have clocked an impressive 19.6% CAGR over 10
years showing consistent growth in demand. The company
has improved its margins over the years from an average of
8% till 2007, to 12% over the last 3 years. This efficiency along
with a good re-investment of almost 20% into the business has
helped the company register a robust EPS CAGR of almost
30% over the last 10 years.
The company has an excellent management of funds, evident
from its 42.5% ROIC average over the last 6 years. It is an
almost zero debt company.
Business segments include
Electro Mechanical Projects and Packaged Air
conditioning systems (EMP & PAC): It comprises
central & packaged air conditioning as well as
electrical projects, plumbing & fire fighting projects.
This segment contributes 71% to the company's
revenues.
Cooling Products: offers a wide range of
contemporary window & split air conditioners as well
as commercial refrigeration products like cold
storages, deep freezers etc. This segment contributes
23% to the company's revenues.
Professional Electronics & Industrial Systems:
exclusive distributor in India for internationally
renowned manufacturers of hi-tech professional
electronic equipment and services. This contributes
6% to the company's revenues.
“Clients and reach”
Its clients include institutional, industrial and
government organizations as well as commercial
establishments such as showrooms, restaurants,
banks, hospitals, theatres, shopping malls and
boutiques. The company has a network of 29 offices,
5 modern manufacturing facilities (Thane, Dadra,
Bharuch, Himachal & Wada) and business from both
commercial and residential segment.
•Increasing demand for company’s products & services
gives revenue visibility for the future
The 2 main segments of the company are expected to drive its
revenue growth in future:
EMP & PAC: The demand for central and packaged air
conditioning is expected to grow by robust growth rates in
future. Seeing some recovery in the retail sector. Further,
recruitment figures of IT companies are encouraging and
several metro rail projects to get finalized in the coming six
months.
Cooling product segment also shows a robust outlook mainly
driven from room air conditioner business from both
commercial and residential segment.
Order intake – orders in power sector from Indu projects for
their 500MW thermal plant, integrated MEP order from the
Godrej group, repeat orders from Infosys, DLF, HCL,
Volkswagon and Hindalco. Ohers orders include highway
order from UP, residential order from Logic Housing Noida.
•Strategic acquisitions to enhance service offerings in the
MEP (mechanical, electrical & plumbing) segment
In the last few years, Blue Star has acquired a few companies
with the main aim to enhance its product and services
portfolio. For example:
a) Naseer Electricals: In 2008, Blue Star took over Naseer
Electricals, a Bangalore-based electrical contracting firm with a
strong presence in South India. This company was taken over
to foray into electrical contracting work for commercial
buildings and infrastructure segments.
b) D S Gupta Constructions: As mentioned before D S Gupta
Constructions is one of the largest independent plumbing firms
in India.
These acquisitions have been done with the company’s aim to
become an integrated MEP player and offer its customers a
single window turnkey MEP solution. Also, in order to be able
to build a strong presence in the new areas that it is planning
to foray into (power, water etc), the company intends to
acquire 2-3 more entities. These strategic acquisitions are
expected to drive the company’s orders in the MEP segment,
hence giving more revenue visibility. It appears that the
company is moving from being only an air conditioning &
refrigeration company to offer other engineering services.
• Innovative Products to meet customer requirement
Blue Star has always been the first to come up with new
products so as to meet customer requirements: For e.g.:
a) Precision-control packaged air conditioners for applications
where accurate control of temperature is necessary
b) Its portfolio of telepac air conditioners specially designed
and customized for the telecom industry; in the last year it
went further ahead and introduced emergency free cooling
telepacs to save the operating cost of the user
These innovative launches have always helped the company
meet its customer requirements in time, and hence increase
customer satisfaction in turn enhancing sales growth.
• Diversification into newer areas
Blue Star has identified Infrastructure (airport and metro),
power (electrification and T&D) as the new growth drivers over
the next 5 years. It is also eyeing diversification into water and
water treatment systems and oil & gas (mechanical services)
for carrying out its electro -mechanical projects. In the last year
the company saw 10% of its project revenues coming from
these new areas and hopes to increase it to 40% in the next
few years.
• User-industries well-poised for growth
For air-conditioning the company has a diverse user-industry
base of banks, hotels, malls, infrastructure, IT/ITES,
Cinemas/Multiplexes, Telecom, PSUs, Pharma etc. For
commercial refrigeration its user-industries include hospitality,
dairy & ice-cream parlors, super markets ,pharma, research
institutes, horticulture etc. All these industries are well-poised
for growth in the future. Also, the effect of a slowdown in any
of these industries is off-set by the uptrend in the others.
• Valuations
Carry Forward Order Book as on December 31, 2010
increased to Rs. 2073 crore compared to Rs. 1890 crore as at
December 31, 2009, representing a growth of 10%. At CMP
Rs. 347 the company is trading at 22x and 17.84X for FY11E
& FY12E EPS respectively. Historically Company’s fair band
PE is 20.50 for which the fair price is Rs. 400. Blue star has
upside potential of 15%.
• Concern
Higher raw material cost (copper and steel) pressurizing the
operating level margins.
Slow down in infrastructure business like telecom and power
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Rationale
• Past strong fundamentals form the base for the future
• Increasing demand for company’s products & services gives
revenue visibility for the future
• Strategic acquisitions to enhance service offerings in the
MEP (mechanical, electrical & plumbing) segment
• Innovative Products to meet customer requirement
• Diversification into newer areas
• User-industries well-poised for growth
Company Description
Blue Star is India’s largest central air-conditioning company
and a leader in commercial refrigeration, fulfilling the
requirements of a large number of corporate and commercial
customers. Its business is divided into 3 segments namely
Electro Mechanical Projects and Packaged Air conditioning
systems, Cooling Products and Professional Electronics &
Industrial Systems. The company was founded in 1943 and is
headquartered in Mumbai, India
Valuation
At CMP Rs. 347 the company is trading at 22x and 17.84X for
FY11E & FY12E EPS respectively. Historically Company’s fair
PE is 20.50 for which the fair price is Rs. 400. Blue star has
upside potential of 15%.
•Past strong fundamentals form the base for the future
Net Sales have clocked an impressive 19.6% CAGR over 10
years showing consistent growth in demand. The company
has improved its margins over the years from an average of
8% till 2007, to 12% over the last 3 years. This efficiency along
with a good re-investment of almost 20% into the business has
helped the company register a robust EPS CAGR of almost
30% over the last 10 years.
The company has an excellent management of funds, evident
from its 42.5% ROIC average over the last 6 years. It is an
almost zero debt company.
Business segments include
Electro Mechanical Projects and Packaged Air
conditioning systems (EMP & PAC): It comprises
central & packaged air conditioning as well as
electrical projects, plumbing & fire fighting projects.
This segment contributes 71% to the company's
revenues.
Cooling Products: offers a wide range of
contemporary window & split air conditioners as well
as commercial refrigeration products like cold
storages, deep freezers etc. This segment contributes
23% to the company's revenues.
Professional Electronics & Industrial Systems:
exclusive distributor in India for internationally
renowned manufacturers of hi-tech professional
electronic equipment and services. This contributes
6% to the company's revenues.
“Clients and reach”
Its clients include institutional, industrial and
government organizations as well as commercial
establishments such as showrooms, restaurants,
banks, hospitals, theatres, shopping malls and
boutiques. The company has a network of 29 offices,
5 modern manufacturing facilities (Thane, Dadra,
Bharuch, Himachal & Wada) and business from both
commercial and residential segment.
•Increasing demand for company’s products & services
gives revenue visibility for the future
The 2 main segments of the company are expected to drive its
revenue growth in future:
EMP & PAC: The demand for central and packaged air
conditioning is expected to grow by robust growth rates in
future. Seeing some recovery in the retail sector. Further,
recruitment figures of IT companies are encouraging and
several metro rail projects to get finalized in the coming six
months.
Cooling product segment also shows a robust outlook mainly
driven from room air conditioner business from both
commercial and residential segment.
Order intake – orders in power sector from Indu projects for
their 500MW thermal plant, integrated MEP order from the
Godrej group, repeat orders from Infosys, DLF, HCL,
Volkswagon and Hindalco. Ohers orders include highway
order from UP, residential order from Logic Housing Noida.
•Strategic acquisitions to enhance service offerings in the
MEP (mechanical, electrical & plumbing) segment
In the last few years, Blue Star has acquired a few companies
with the main aim to enhance its product and services
portfolio. For example:
a) Naseer Electricals: In 2008, Blue Star took over Naseer
Electricals, a Bangalore-based electrical contracting firm with a
strong presence in South India. This company was taken over
to foray into electrical contracting work for commercial
buildings and infrastructure segments.
b) D S Gupta Constructions: As mentioned before D S Gupta
Constructions is one of the largest independent plumbing firms
in India.
These acquisitions have been done with the company’s aim to
become an integrated MEP player and offer its customers a
single window turnkey MEP solution. Also, in order to be able
to build a strong presence in the new areas that it is planning
to foray into (power, water etc), the company intends to
acquire 2-3 more entities. These strategic acquisitions are
expected to drive the company’s orders in the MEP segment,
hence giving more revenue visibility. It appears that the
company is moving from being only an air conditioning &
refrigeration company to offer other engineering services.
• Innovative Products to meet customer requirement
Blue Star has always been the first to come up with new
products so as to meet customer requirements: For e.g.:
a) Precision-control packaged air conditioners for applications
where accurate control of temperature is necessary
b) Its portfolio of telepac air conditioners specially designed
and customized for the telecom industry; in the last year it
went further ahead and introduced emergency free cooling
telepacs to save the operating cost of the user
These innovative launches have always helped the company
meet its customer requirements in time, and hence increase
customer satisfaction in turn enhancing sales growth.
• Diversification into newer areas
Blue Star has identified Infrastructure (airport and metro),
power (electrification and T&D) as the new growth drivers over
the next 5 years. It is also eyeing diversification into water and
water treatment systems and oil & gas (mechanical services)
for carrying out its electro -mechanical projects. In the last year
the company saw 10% of its project revenues coming from
these new areas and hopes to increase it to 40% in the next
few years.
• User-industries well-poised for growth
For air-conditioning the company has a diverse user-industry
base of banks, hotels, malls, infrastructure, IT/ITES,
Cinemas/Multiplexes, Telecom, PSUs, Pharma etc. For
commercial refrigeration its user-industries include hospitality,
dairy & ice-cream parlors, super markets ,pharma, research
institutes, horticulture etc. All these industries are well-poised
for growth in the future. Also, the effect of a slowdown in any
of these industries is off-set by the uptrend in the others.
• Valuations
Carry Forward Order Book as on December 31, 2010
increased to Rs. 2073 crore compared to Rs. 1890 crore as at
December 31, 2009, representing a growth of 10%. At CMP
Rs. 347 the company is trading at 22x and 17.84X for FY11E
& FY12E EPS respectively. Historically Company’s fair band
PE is 20.50 for which the fair price is Rs. 400. Blue star has
upside potential of 15%.
• Concern
Higher raw material cost (copper and steel) pressurizing the
operating level margins.
Slow down in infrastructure business like telecom and power
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