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Blue Star – 2QFY2011 Result Update
Angel Broking upgrades Blue Star to Buy with a Target Price of Rs596.
For 2QFY2011, Blue Star (BSL) reported top-line growth of 25.2% yoy to `695cr
(`555cr), which was in line with our estimates. The company continued to witness
pressure in margins, with OPM dropping by 220bp yoy to 9.7% (11.9%).
Consequently, net profit fell by 21.9% yoy to `38.6cr (`49.4cr). We have revised
downwards our OPM estimates for FY2011 and FY2012 by 40bp and 10bp
respectively, given the lower-than-expected margins clocked in the first half. In
2QFY2011, BSL completed acquisition of the plumbing and fire-fighting
company, DS Gupta Construction, which reflects in our estimates. We have
upgraded our Target P/E to 19.0x owing to improvement in the business outlook.
Thus, we upgrade the stock to a Buy.
Margins continue to remain weak: The company reported strong sales growth,
backed by the robust 29.2% yoy growth in the cooling products segment and
99.9% growth in the professional electronics and industrial systems (PEIS) division.
However, margins remained under pressure due to the high input costs and
change in business mix. On the back of lower margins PAT declined by 21.9%
yoy to `38.6cr.
Outlook and Valuation: We remain bullish on the company’s business prospects
given its strong order book position, impending uptick in the IT and real estate
segments and successful acquisition of DS Gupta Constructions Pvt. Ltd. However,
owing to the lower-than-expected margins posted in 2QFY2011, we have pruned
our OPM estimate for FY2011 and FY2012. At current levels the stock is trading
at 19.2x and 14.6x FY2011E and FY2012E EPS, respectively. We have upgraded
our target P/E multiple to 19.0x based on BSL’s strong growth prospects, backed
by an uptick in demand and robust order book position. We upgrade the stock to
a Buy with a Target Price of `596.
Management Call - Key Takeaways
BSL completed acquisition of the plumbing and fire-fighting major, DS Gupta
Construction. The company expects to book around `100cr in sales from this
acquisition in FY2011. The acquired company’s current order book stands at
`250cr, with an execution period of 14-18 months.
The current order book, excluding DS Gupta Construction, is `1,998cr, with
an execution period of around 15 months. Order inflow during the quarter
was `715cr vis-à-vis `642cr in 2QFY2010.
The company has seen strong activity in the healthcare, education, hospitality,
power, steel and transportation segments. It also witnessed some revival in the
real estate and IT segments.
The company expects revival in the IT segment to happen only from
2QFY2012.
Management expects margins to increase from current levels, as they are near
their bottom levels.
Investment Arguments
Substantial demand for centralised air-conditioning, cold storage to drive future
growth: The surge in demand for commercial space and increasing corporate and
government thrust for setting up an efficient cold chain infrastructure in the country
is set to trigger demand for centralised air-conditioning and cold storage system in
India. BSL's cold storage division too has high growth potential with the aggregate
cost of providing a nation-wide cold chain infrastructure estimated to cost more
than `15,000cr.
To maintain leadership position owing to superior execution skills: BSL's strength
lies in its superior execution skills compared to competition. The company, with
30% market share in the central air-conditioning system segment, is a preferred
vendor with the institutional clients. The company's list of national account
customers provides repetitive business.
Present in high-margin segments: BSL is a diversified player in the air-conditioning
industry and is focused on high-margin segments including commercial
refrigeration, cold storage and central air-conditioning. The company has
improved its margins following an increase in the average ticket size of orders. The
easing of pricing pressures is also expected to improve the company's margins
going ahead.
Outlook and Valuation
We maintain our positive view on the company, given the strong growth indicators
across its three segments and a healthy order book of `1,998cr. The acquisition of
DS Gupta Construction will complement the company’s service bouquet, as it will
now have strong presence in the plumbing and fire-fighting space. The company
will also be able to cross-sell its existing services to DS Gupta’s customers. We
have factored in sales from this acquisition in our numbers. Overall, we expect the
company to post a CAGR of 25.7% in sales over FY2010-12. Owing to the
lower-than-expected margins posted in 2QFY2011, we have revised our OPM
estimates downwards for FY2011 and FY2012 by 40bp and 10bp to 10.1% and
10.6%, respectively.
At current levels the stock is trading at 19.2x and 14.6x FY2011E and FY2012E
EPS, respectively. We have upgraded our target P/E multiple to 19.0x based on the
company’s strong growth prospects, backed by an uptick in demand and robust
order book position. We upgrade the stock to a Buy, with a Target Price of `596.
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