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UBS Investment Research
Blue Star
W eak Q2 FY12 on operations, exceptional
Event: Q2FY12 results disappoint on costs, notional forex loss, poor billing
Blue Star’s Q2 FY12 results disappointed due to: 1) operating loss in the electromechanical
projects (EMP) segment for the second quarter on margin pressure and
weak billing; 2) weak margins in the Cooling Products segment—heavy discounts to
push sales in the festive season, high industry inventory could have dented profitability;
3) slightly weak professional electronics (PE) segment results; and 4) exceptional
loss—unrealised foreign exchange loss of Rs194.2m (details unavailable yet).
Impact: lower FY12 estimates by 9.1%; FY12 expected to be challenging
Given Blue Star’s likely first ever net loss in Q2 FY12, we have further lowered our
FY12 EPS estimate by 9.1% (weak profitability) and broadly maintained our FY13
estimates. In line with management guidance, we think FY12 will be challenging, and
we expect the next one to two quarters to be the trough of negative newsflow on the
stock (assume peaking of rates). Receivables are contained, although debt/equity is
higher.
Action: Buy on weakness; negative newsflow likely to trough in 1-2 quarters
We maintain our Buy rating with a price target of Rs300, given the better risk-reward at
11.8x FY13E PE (near historical trough), considerable underperformance to the Sensex
YTD, presence in an infra focussed Indian market, retail AC opportunity, and high
return profile. We assume rates peaking and capex/investment to improve with a lag in
FY13.
Valuation: maintain Buy with a price target of Rs300
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool (assume a 12.7% WACC).
Key result highlights and our view
Blue Star reported disappointing Q2 FY12 results with a net loss (including
exceptionals) of Rs208m (likely first ever) due to: 1) operating loss in the
EMP segment for the second consecutive quarter on margin pressure and
weak order book execution; 2) cost pressures in the Cooling Products
segment—we believe heavy discounts to push sales in the festive season and
high industry inventory have dented profitability; 3) slightly weak PE
segment results; and 4) exceptional loss—unrealised foreign exchange loss
of Rs194.2m (details unavailable yet). Excluding exceptionals, net loss in Q2
FY12 was Rs14m. For H1 FY12, the net income excluding exceptionals was
Rs92m, down 88% YoY due to weaker profitability.
Overall revenues fell 12.2% YoY due to a decline in sales in the EMP
segment (-18.7% YoY) and the weaker performance of the PE segment.
Profitability in EMP and the Cooling Products segment was weaker than
expected. Consequently, overall EBITDA margins were 1.3% in Q2 FY12 as
compared to 8% in Q2 FY11 and 3.7% in Q1 FY12.
Order book on end-Q2 FY12 is Rs21.6bn, implying an order accretion of
Rs4.46bn in the quarter.
Debt to equity has increased to 1.1x at the end of the quarter. While
receivables have stayed flat (management targets containing this),
inventories have increased. Blue Star has continued to be net debt since
FY11. Management has continued to highlight a very challenging operating
environment.
The Blue Star share price has underperformed the Sensex YTD 60-65%, due
to higher-than-expected deterioration in macro such as rate hikes, slowdown
of the capex/investment cycle, worsening of the global environment,
operating loss in segment 1 in H1 FY12, weak margin guidance, and lower
retail AC industry sales due to pleasant weather. Post the share price
correction, we think the risk-reward of buying Blue Star is better over the
long term. In our view, FY12 will be very challenging and we reiterate our
Buy rating, assuming peaking of rates, improvement in capex in FY13, and
revenue billing improving materially. Given this, we believe the next one to
two quarters are likely to be the trough of negative newsflow on the stock.
We currently have a price target of Rs300 for the stock.
Blue Star
Blue Star is a turnkey electromechanical or MEP (mechanical, electrical,
plumbing, fire fighting) contractor catering to commercial real estate, IT parks,
industries and infra sectors such as airports, ports, power plants and
manufacturing establishments. It also caters to requirements of commercial
refrigeration equipment ranging from water coolers to cold storages. Blue Star
has three business segments: electro-mechanical products and packaged air
conditioning systems, cooling products, and professional electronics and
industrial systems.
Statement of Risk
Key risks are macro slowdown and sharp deterioration in EMP capex,
investment cycle in India; margin pressure; escalating commodity prices and
high working capital.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Blue Star
W eak Q2 FY12 on operations, exceptional
Event: Q2FY12 results disappoint on costs, notional forex loss, poor billing
Blue Star’s Q2 FY12 results disappointed due to: 1) operating loss in the electromechanical
projects (EMP) segment for the second quarter on margin pressure and
weak billing; 2) weak margins in the Cooling Products segment—heavy discounts to
push sales in the festive season, high industry inventory could have dented profitability;
3) slightly weak professional electronics (PE) segment results; and 4) exceptional
loss—unrealised foreign exchange loss of Rs194.2m (details unavailable yet).
Impact: lower FY12 estimates by 9.1%; FY12 expected to be challenging
Given Blue Star’s likely first ever net loss in Q2 FY12, we have further lowered our
FY12 EPS estimate by 9.1% (weak profitability) and broadly maintained our FY13
estimates. In line with management guidance, we think FY12 will be challenging, and
we expect the next one to two quarters to be the trough of negative newsflow on the
stock (assume peaking of rates). Receivables are contained, although debt/equity is
higher.
Action: Buy on weakness; negative newsflow likely to trough in 1-2 quarters
We maintain our Buy rating with a price target of Rs300, given the better risk-reward at
11.8x FY13E PE (near historical trough), considerable underperformance to the Sensex
YTD, presence in an infra focussed Indian market, retail AC opportunity, and high
return profile. We assume rates peaking and capex/investment to improve with a lag in
FY13.
Valuation: maintain Buy with a price target of Rs300
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool (assume a 12.7% WACC).
Key result highlights and our view
Blue Star reported disappointing Q2 FY12 results with a net loss (including
exceptionals) of Rs208m (likely first ever) due to: 1) operating loss in the
EMP segment for the second consecutive quarter on margin pressure and
weak order book execution; 2) cost pressures in the Cooling Products
segment—we believe heavy discounts to push sales in the festive season and
high industry inventory have dented profitability; 3) slightly weak PE
segment results; and 4) exceptional loss—unrealised foreign exchange loss
of Rs194.2m (details unavailable yet). Excluding exceptionals, net loss in Q2
FY12 was Rs14m. For H1 FY12, the net income excluding exceptionals was
Rs92m, down 88% YoY due to weaker profitability.
Overall revenues fell 12.2% YoY due to a decline in sales in the EMP
segment (-18.7% YoY) and the weaker performance of the PE segment.
Profitability in EMP and the Cooling Products segment was weaker than
expected. Consequently, overall EBITDA margins were 1.3% in Q2 FY12 as
compared to 8% in Q2 FY11 and 3.7% in Q1 FY12.
Order book on end-Q2 FY12 is Rs21.6bn, implying an order accretion of
Rs4.46bn in the quarter.
Debt to equity has increased to 1.1x at the end of the quarter. While
receivables have stayed flat (management targets containing this),
inventories have increased. Blue Star has continued to be net debt since
FY11. Management has continued to highlight a very challenging operating
environment.
The Blue Star share price has underperformed the Sensex YTD 60-65%, due
to higher-than-expected deterioration in macro such as rate hikes, slowdown
of the capex/investment cycle, worsening of the global environment,
operating loss in segment 1 in H1 FY12, weak margin guidance, and lower
retail AC industry sales due to pleasant weather. Post the share price
correction, we think the risk-reward of buying Blue Star is better over the
long term. In our view, FY12 will be very challenging and we reiterate our
Buy rating, assuming peaking of rates, improvement in capex in FY13, and
revenue billing improving materially. Given this, we believe the next one to
two quarters are likely to be the trough of negative newsflow on the stock.
We currently have a price target of Rs300 for the stock.
Blue Star
Blue Star is a turnkey electromechanical or MEP (mechanical, electrical,
plumbing, fire fighting) contractor catering to commercial real estate, IT parks,
industries and infra sectors such as airports, ports, power plants and
manufacturing establishments. It also caters to requirements of commercial
refrigeration equipment ranging from water coolers to cold storages. Blue Star
has three business segments: electro-mechanical products and packaged air
conditioning systems, cooling products, and professional electronics and
industrial systems.
Statement of Risk
Key risks are macro slowdown and sharp deterioration in EMP capex,
investment cycle in India; margin pressure; escalating commodity prices and
high working capital.
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