Blue Star: BUY :: Business Line

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Refrigeration major Blue Star stands to benefit from the improving fortunes of the IT sector, which usually signals an expansion in office space, and the likely demand for room air-conditioners from small towns after a good monsoon.

Investors with a two-year time horizon can buy the stock of Blue Star. At Rs 132, the stock is down 22 per cent in one year.

The current price discounts the company’s expected earnings for 2013-14 by 14 times. Effective cost management has helped the company record a net profit of Rs 51.7 crore in 2012-13 against a loss of Rs 89 crore in 2011-12.

The June 2013 quarter has seen Blue Star further cementing its position. Net profit increased 11 per cent on improved profit margins and lower interest costs. A six per cent increase in room air-conditioner prices and the execution of high-margin orders in electro mechanical projects helped improve its profit margins. Interest costs dropped seven per cent on reduced debt.

The cooling products business recorded a growth of 19 per cent in the June quarter thanks to the company expanding its product range in room air-conditioners and bagging orders for freezers from the food processors. Blue Star’s strong position in Tier-2 markets for room air-conditioners should aid it in a year when rural incomes are set to benefit from good monsoons.

The electro-mechanical projects segment (central air-conditioning plants and contract servicing in plumbing), which contributed over half of the company’s revenue in 2012-13, saw its revenues drop 6.7 per cent in the June quarter. But this was anticipated after its decision to turn down low-margin business.

Operating profit margins in this business rose to 5.8 per cent from 3.3 per cent in the same period last year.

Blue Star recorded an order inflow of Rs 791 crore during the June quarter and its carry-forward order book stood at Rs 1,438 crore. This is 0.52 times 2012-13 sales. But a pick-up can be expected in the next year or so, with the improved outlook for the IT and ITeS sectors likely to translate into demand for office space. Higher margins on current orders could also deliver a lift to Blue Star’s profits in 2013-14. The company’s outstanding debt fell by Rs 25 crore in the quarter ended June 30, resulting in an interest cover of three times in the recent quarter.