We met the Blue Star (BSL) management to get an update on business environment. The overhang of tough macros continues to plague the company as its order intake is likely to plunge a sharp ~25% during the current fiscal. Air conditioner margins continue to bear the brunt of high competitive intensity and increased input costs. We believe there is more pain in store before gain, and expect turnaround to yield results in FY15.
Order intake may decline 25% in FY13E; cost cutting focus to stay
The company expects the sluggish market to exert pressure on new orders. It expects order intake to decline ~25% in FY13E, in turn lowering the order backlog at end FY13. Execution is getting deferred due to client-specific issues. In case of significant delays, BSL is renegotiating with clients to protect margins. The company is likely to speed up its cost cutting drive, as it plans to reduce ~10% of workforce and cut fixed overheads besides trimming total capital employed in the business by ~INR2bn during FY13.
AC demand facing the heat; competitive intensity to remain high
BSL indicated that demand for air conditioners (AC) is under pressure. Interestingly, it stated that demand from smaller cities / town in recent months has shrunk faster. The AC industry continues to face margin pressure due to: (i) currency depreciation (INR/USD), and (ii) high competitive intensity (especially from Japanese players in residential AC). The company is not able to pass on high input cost to consumers. In commercial AC business, BSL is facing delays/deferrals in spending from clients.
Outlook and valuations: Challenging; Not Rated
With BSL facing challenges across business segments, we believe revival is likely to be a time consuming affair with positive results expected only FY15 onwards. The stock is trading at 17.0x and 11.8x consensus earnings for FY13E and FY14E, respectively. We do not have a recommendation on the stock as it is currently not under our coverage.
Regards,
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