About the Company

Blue Star is India’s leading air conditioning and commercial refrigeration company, with annual revenue of over ₹5200 crores (over US$ 750 million), a network of 32 offices, 5 modern manufacturing facilities, 2800 employees, and 2900 channel partners. The Company has 5000 stores for room ACs, packaged air conditioners, chillers, cold rooms as well as refrigeration products and systems, along with 765 service associates reaching out to customers in over 800 towns.

The Company fulfills the cooling requirements of a large number of corporate, commercial as well as residential customers. Blue Star has also forayed into the residential water purifiers business with a stylish and differentiated range including India’s first RO+UV Hot & Cold water purifier; as well as the air purifiers and air coolers businesses.

Blue Star’s other businesses include the marketing and maintenance of imported professional electronics and industrial products and systems, which is handled by a wholly-owned subsidiary of the Company called Blue Star Engineering & Electronics Ltd.

 

Q2FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 812 1066 -23.83% 534 52.06% 1345 2560 -47.46%
PBT 12 23 -47.83% -44 127.27% -32 127 -125.20%
PAT 8 13 -38.46% -31 125.81% -23 87 -126.44%

 

Consolidated Financials (In Crs)
  Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 908 1260 -27.94% 635 42.99% 1543 2857 -45.99%
PBT 22 54 -59.26% -29 175.86% -7 162 -104.32%
PAT 15 37 -59.46% -20 175.00% -4 115 -103.48%

 

Detailed Results

  1. The company had a consolidated revenue decline of 28% YoY in Q2. PAT was down 59% YoY at Rs 15 Cr.
  2. H1 performance for the company was dismal due to Q1 performance. Revenues in H1 were down 46% YoY while H1 PAT was at a loss of Rs 4 Cr.
  3. Carry forward order book for the company grew slightly to Rs 3019 Cr as of 30th Sep 2020.
  4. Net borrowings increased to Rs 344 Cr from Rs 189 Cr a year ago. Debt to equity was at 0.44 times. Net borrowings have reduced by Rs 84.47 Cr in Q2FY21.
  5. The company launched a new range of products embedded with ‘Virus Deactivation Technology’.
  6. Segment revenue for the Electro-Mechanical Projects & Packaged Air Conditioning Systems was down 31% YoY in Q2. Order inflow in Q2 was reduced to Rs 685 Cr which was down 13.8% YoY.
  7. The company won an Electrical & Mechanical works (E&M) order valued at Rs 149 Cr for ‘Mumbai Metro Line III, Package UGC-03’ for five underground stations from Mumbai Central to Worli, from Dogus-Soma JV.
  8. The Carried-forward order book of the Electro-Mechanical Projects business was Rs 2070 Cr as of 30th Sep 2020.
  9. Commercial AC business saw a partial recovery in Q2. Major orders bagged in Q2FY21 were from Greenfield Electronic Manufacturing Clusters (Hyderabad), Vijayanagar Institute of Medical Science (Bellary), Grand Hyatt Hotel (Bharuch), INTAS Pharmaceuticals (Ahmedabad), and National Mineral Development Corporation (Chandigarh).
  10. The demand for retrofit and revamp solutions with Virus Deactivation Technology is robust. Major orders for products and solutions such as duct cleaning, UVC emitters, filters, and fresh air augmentation have been received from ICICI Bank, Mercedes Benz India, and Airport Authority of India.
  11. In the unitary products segment, the company saw a revenue decline of 15.5% YoY in Q2. Segment EBIT was flat YoY. The company maintained a market share of 12.75% and is expecting this market to fully recover by December.
  12. Commercial refrigeration business saw good recovery with good traction from pharma and healthcare segments for its Modular Cold Rooms and Medical Refrigeration Products. Demand recovery is expected to accelerate with the opening of restaurants and other unlock measures and order inflows from local and national retail chains in the Supermarket Refrigeration business.
  13. The company bagged major orders in commercial refrigeration from UP Medical Supplies Corporation, Dr. Reddy’s Labs, and Thyrocare in Q2. It also launched Touchless Storage Water Coolers and Bottled Water Dispenser in Q2 which are expected to gain good traction.
  14. The company reached a market share of 3% in water purifiers.
  15. The Professional Electronics and Industrial Systems business saw revenue fall to Rs 43 Cr from Rs 89 Cr last year. The dip in revenue and profits in Q2FY21 was on account of a large, one-time order in the data security business, executed in Q2FY20.
  16. The segment continued to do well on the back of digitization initiatives in the BFSI sector.

Investor Conference Call Highlights

  1. As of September end, more than 2/3 of the job sites are available for execution.
  2. The inventory pressure in the RAC division has been largely eased. The management expects the recovery momentum of Q2 FY ’21 to continue in the upcoming festive season as well.
  3. In water purifiers, the alkaline water purifier for the immunity-boosting campaign was well accepted by the target customers.
  4. The management has admitted that some projects in the existing project’s book have been slow but they do not expect any cancellations. The priority of the company in this space is to get the jobs restarted so that there is the visibility of cash flows emerging from these projects.
  5. There wasn’t any movement in prices in the RAC space.
  6. Channel inventory for Blue Star is at 45-60 days currently.
  7. In VRF, the company is #2 in the country with a market share of 19-20%. In chillers space, it has a market share of 25-30%.
  8. The rise in inventory in Q1 was mainly due to business disruption and it has eased off in Q2.
  9. Margin profile expectation in the Segment I space is 4-4.5% while in the Segment II space, it is at 7-7.5%.
  10. In RACs, the market is gravitating towards a mass premium range of products. Blue Star is aiming to align to market requirements, specifically in Tier 2, 3, and 4 towns, and deliver products while retaining a range of differentiators around quality and brand image.
  11. The split in North & South sales is even at 30-35% of sales and the company is aiming to capture more of the North zone while maintaining leadership in the South zone.
  12. The company is aiming to increase the share of e-commerce in overall sales to 16-17% from the current 12-12.5%.
  13. It will take at least 3-4 months for the impact of the prohibition on the import of completely-built air conditioning units without refrigerants to be fully absorbed in the market.
  14. The company now makes almost 100% of its indoor units in-house.
  15. The management maintains its earlier guidance of reaching breakeven in the water purifiers business in FY21.
  16. The company has tapered down Capex plans for FY21 and will keep it at normal levels of Rs 90-100 Cr for F21.
  17. The management doesn’t see any reason for inventory management to deteriorate going forward specifically heading into the festive season.
  18. The company is yet to decide on marketing positioning and extending contracts of brand ambassadors and will take the decision in the coming quarters.
  19. The management has stated that the increase in margins in Segment I is not due to the reversal of ECL provision and is sustainable due to the management of operating cost structure.
  20. The company has seen a reduction in borrowings of near Rs 100 Cr in Q2 and expects to continue to reduce debt in Q3 as well.

Analyst’s View

Blue Star is one of the largest cooling solutions providers in the country. It is one of the biggest branded players in the RAC market. The company has seen a decent recovery in revenues and profits for Q2FY21. The major reason for this performance was the bounce back in the unitary products division and the restarting of EMP projects. The company has done well to rationalize inventory and remain prepared for the festive season. It has also seen good growth in the water purifier segment where it has already captured a 3% market share. It remains to be seen whether the estimations of industry revival remain on track as mentioned by the management and whether there are further disruptions in store from the evolving COVID-19 situation. It will be interesting to see how the company will achieve its target of breakeven in the water purifier segment. Nonetheless, given the company’s strong market presence, its history of successfully completing EMP projects, and its robust presence in semi-urban and rural India, Blue Star is a pivotal white goods stock to watch out for.

 


 

Q1 FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 534 1494 -64.26% 1231 -56.62%
PBT -44 105 -141.90% 35 -225.71%
PAT -31 74 -141.89% 33 -193.94%

 

Consolidated Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
635 1598 -60.26% 1306 -51.38%
-30 108 -127.78% 12 -350.00%
-20 75 -126.67% 8 -350.00%


Detailed Results

    1. The company had a consolidated revenue decline of 60% YoY in Q1. PAT was at a loss of Rs 20 Cr.
    2. Carry forward order book for the company grew slightly to Rs 2923 Cr as of 30th June 2020.
    3. Net borrowings increased to Rs 429 Cr from 0 a year ago. Debt to equity was at 0.6 times.
    4. The company raised Rs 350 Cr during the quarter through the issuance of non-convertible debentures to fund working capital and to build sufficient liquidity on the Balance Sheet.
    5. Segment revenue for the Electro-Mechanical Projects & Packaged Air Conditioning Systems declined 50% YoY in Q1. Order inflow in Q1 was reduced to Rs 267 Cr due to the lockdown. Only 10% of sites were operational in Q1.
    6. The Carried-forward order book of the Electro-Mechanical Projects business was Rs 2040 Cr as on 30th June 2020.
    7. Commercial AC business saw a fall in billings of 66%. Major orders bagged in Q1FY21 were from Patna Medical College, ThyssenKrupp (Nagpur), and MMRCL COVID Hospital (Mumbai).
    8. In the unitary products segment, the company saw a revenue decline of 69.7% YoY in Q1. Revenue and profits in this segment were heavily affected by the lockdown in the peak selling summer season. RAC business shrank 65% YoY while the e-commerce channel gained traction with sales growth of 12% YoY.
    9. The company bagged major orders in commercial refrigeration from Odisha State Medical Services Corporation, Royal Cold Chain (Azadpur Mandi), and Indian Immunologicals Limited in Q1.
    10. The Professional Electronics and Industrial Systems business saw revenue fall to Rs 39 Cr from Rs 45 Cr last year. The segment continued to do well on the back of digitization initiatives in the BFSI sector.
    11. The company expects demand for RACs and commercial refrigeration to normalize by Q4FY21.

Investor Conference Call Highlights

  1. The management reiterates the aim of the water purifier business to reach a market share of 2.5% in FY21. This business is expected to breakeven in the year ahead.
  2. Inventory in RACs is at 30 days. The company expects the RAC market to have recovered 70-80% in July. Q2 revenues are expected to be at 80% of normal levels with Q3 at 90% of last year’s levels.
  3. The company has raised debt only to maintain sufficient liquidity in current uncertain times and to have sufficient working capital financing at hand.
  4. Commercial real estate is seeing postponement or sale of projects due to liquidity constraints. Thus the company is being cautious and evaluating each customer’s individual credit risk profile before accepting any new projects.
  5. The company had a target to reduce dependence on China for RM including components to 15% by 2023 even before the Amtanirbhar movement which it is expediting.
  6. Currently, India doesn’t have a scale for compressors or motors or drives. This is an issue that affects the whole industry.
  7. The management expects 5-10% market growth in RACs even under current uncertain conditions in FY21.
  8. In the overall recovery of 70% in RACs, the North has seen revenue recovery of up to 85% in June.
  9. The management has stated that the RAC industry has seen prices drop as inventory levels were high.
  10. Before lockdown, the company had 150 sites running in the EMP division. Currently, only 50 sites are operational with 50% manpower to maintain safety standards.
  11. The company is only dependent on China doe IDUs and it expects to complete indigenization of IDUs by the end of the year. The management is stating that just raising custom duty for imported goods from China is not the best way to go and the govt should instead support local production with incentives and subsidies.
  12. The management has mentioned that it is not looking to get into making all components. It is not looking to get into compressors or motors.
  13. The current market share in water purifiers is 0.
  14. The provisions taken by the company in the EMP division is around Rs 15 Cr.
  15. The company is seeing a 34% market share in water coolers. The company expected god traction in air purifiers but it failed to take off. The company expects this product to come back in vogue once air pollution comes back to previous levels. The market size for this product is estimated to be Rs 50 Cr.
  16. RAC production started from the 2nd week of June. The management has stated that the prices have dropped despite comfortable levels of inventory for the industry mainly as most of the peak season of summer didn’t see sales and everyone is looking to get some sales done before the end of the peak season.
  17. The management is optimistic that the commercial refrigeration business will see good recovery from July. Demand for deep freezers is expected to come back from Q3 onwards. Water coolers also should see demand coming back at the same time.
  18. The management expects cost savings in FY21 to be around 40%. Around 50% of this cost reduction is expected to be sustainable.
  19. The management has stated that the company will aim to keep net borrowings at below Rs 400 Cr for FY21.
  20. The energy level was expected to come in Jan 2021. This is expected to get postponed to July 2021.
  21. The management has stated that it is hard to match Chinese manufacturing costs for components anywhere in the world. Thus the best compromise may be to invite a Chinese manufacturer to set up operations in India where it is possible to reach the goal of increasing local employment and keep prices in check.
  22. The company is currently executing projects in 3 airports in Bangalore, Chennai, and Delhi.
  23. The company continues to focus on projects with good cash flows and the focus is mainly on infra projects where the funding is assured through JICA or Asian Development Bank or any other big authority.
  24. The company had plans to move around 60% of its RAC portfolio into an affordable premium segment. Now it is looking to put 80% of its portfolio in this category. This is because 65% of sales are coming from Tier 3,4,5 cities and rural areas which the management expects to rise to 75%. Another reason for this move is that the management believes that growth in the RAC industry will be led by the middle class and Tier 3, 4, 5 towns.
  25. The management has stated that it is still too early to comment on the growth of e-commerce for the company.

Analyst’s View

Blue Star is one of the largest cooling solutions providers in the country. It is one of the biggest branded players in the RAC market. The company has seen a massive decline in revenues and profits for Q1FY21. The major reason for this performance was the disruption in sales across all divisions from COVID-19 and lockdown especially in the unitary business where sales didn’t happen in the majority of the peak season. The company has done well to keep enough inventory to meet demand after the lockdown opened. It remains to be seen whether the estimations of industry revival remain on track as mentioned by the management and whether there are further disruptions in store from the evolving COVID-19 situation. It will be interesting to see how the company will achieve its ambitious target of expansion and capture of 2.5-3% market share in the nascent water purifier segment which currently stands at n0 market share. Nonetheless, given the company’s strong market presence, its history of successfully completing EMP projects, and its robust presence in semi-urban and rural India, Blue Star is a pivotal white goods stock to watch out for.


 

 

Q4 FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 1096.83 1481.32 -25.96% 1062.76 3.21% 4786.5 4783.7 0.06%
PBT 35.45 58.83 -39.74% 4.81 637.01% 167.67 179.85 -6.77%
PAT 33.26 41.44 -19.74% 0.6 5443.33% 120.87 121.8 -0.76%

 

Consolidated Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 1305.7 1601.9 -18.49% 1242 5.13% 5404.9 5259.53 2.76%
PBT 12.33 78.21 -84.23% 31.67 -61.07% 206 251.14 -17.97%
PAT 8.38 77.55 -89.19% 19.7 -57.46% 140.67 209.15 -32.74%


Detailed Results

    1. The company had a revenue decline of 18.5% in Q4. PAT also declined by 84% YoY.
    2. FY20 revenues for the company grew a modest 2.76% YoY while PAT declined 33% YoY.
    3. Carry forward order book for the company grew 21.2% YoY to Rs 2946.6 Cr.
    4. Net borrowings were reduced to Rs 155 Cr from Rs 243 Cr a year ago.
    5. Segment revenue for the Electro-Mechanical Projects & Packaged Air Conditioning Systems grew 2.76% YoY in FY20 with a shortfall in March revenues leading to reduced profitability for the division.
    6. In the unitary products segment, the company saw revenue growth of 1.4% YoY in FY20. Revenue and profits in this segment were heavily affected by the loss of sale from COVID-19 disruption in the peak selling month of March.
    7. The Professional Electronics and Industrial Systems business saw revenue growth of 7% YoY in FY20. The company received major orders in the Data Security Solutions business. The division saw growth in the NDT systems, destructive testing, and NDT product business during FY20.
    8. Demand has taken a hit due to lockdown and should gradually recover as the lockdown eases.

Investor Conference Call Highlights

  1. The order inflows for the EMP business had slowed down since Q3 and was further weakened by the industry sentiments arising from COVID-19.
  2. The company saw newly launched products, such as the next-generation inverter ducted, water-cooled VRF, air-cooled VFD screw chillers, and the configured oil-free chiller gain good traction and market acceptance.
  3. The company bagged major orders from the Airport Authority of India in Chennai and Avenue Supermarts across multiple locations.
  4. The RAC business saw revenue contraction mainly due to supply chain and demand disruptions in March due to COVID-19.
  5. The company gained market share in bottled water dispensers. Their new business lines of the commercial kitchen, medical refrigeration, and supermarket refrigeration also gained good traction.
  6. Major orders bagged in Q4 FY ’20 were from Reliance Retail, Amul, Vadilal, Dinshaw, Top N Town, and Hatsun Agro Products Limited.
  7. The company currently has a market share of 2% in the water purifiers segment. It aims to increase this to 14% by the end of FY21.
  8. The company has an inventory of up to 60 days including warehouse and dealer inventory.
  9. Out of 6000 outlets for the company around 2900 are working right now at the time of the call.
  10. The management expects lockdown to come back in the near future and thus is looking to have its dealers enable virtual demonstrations and appointment times for visiting showrooms.
  11. Commercial refrigeration is a good opportunity for the company with an expected rise in food delivery and pharma distribution.
  12. The company saw a growth of 10% in January and 19% in February in the RAC division. The company expects a drop in the current summer season to be around 30-50%.
  13. The company expects projects from malls, hotels, other non-essential places to get postponed. The company also expects this division to contract by 10%.
  14. The company has 65% sales from Tier 3,4,5 towns and it will continue to expand its presence in these areas.
  15. The company also expects the demand for water purifiers and RACs with air purifiers rising for the company.
  16. The company is looking for an ECL provision of Rs 15 Cr.
  17. The company is now 2nd in the market in the VRF space and 3rd in the chiller space.
  18. The company ended Q4 with surplus cash of more than Rs 200 Cr.
  19. The management expects festival season sales to go up mainly due to lack of sales in the summer from COVID-19.
  20. The company had taken the decision to go for the affordable premium segment in the RAC business this year on the back of consumer sentiment and broad economic situation earlier this year. The management expects around 60-75% of RAC sales to come from this category especially with so many people starting to adapt to working from home.
  21. As mentioned earlier, the management expects Q1 sales to be 30-50% lower as compared to last year.

Analyst’s View

Blue Star is one of the largest cooling solutions providers in the country. It is one of the biggest branded players in the RAC market. The company has seen flat revenues and declined profits for FY20. The major reason for this performance was the disruption in sales across all divisions from COVID-19 especially in the unitary business where March lies in peak season. The company had done well to stock enough inventory to be able to stay on despite lack of manufacturing activity during the lockdown period. It remains to be seen whether the estimations of good festival season sales come true and whether there are further disruptions in store from the evolving COVID-19 situation. It will be interesting to see how the company will achieve its ambitious target of expansion and capture of market share in the nascent water purifier segment. Nonetheless, given the company’s strong market presence, its history of successfully completing EMP projects, and its robust presence in semi-urban and rural India, Blue Star is a pivotal white goods stock to watch out for.


 

 

Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1068.45 1006.56 6.15% 1065.72 0.26% 3628.45 3320.37 9.28%
PBT 4.81 -19 125.32% 22.56 -78.68% 132.22 121.02 9.25%
PAT 0.59 -19.86 102.97% 12.79 -95.39% 87.61 80.35 9.04%

 

Consolidated Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1242 1109.34 11.96% 1260.07 -1.43% 4099.18 3657.64 12.07%
PBT 31.67 14.22 122.71% 54.04 -41.40% 193.67 173.93 11.35%
PAT 19.7 13.23 48.90% 37.16 -46.99% 132.3 131.6 0.53%


Detailed Results

    1. The company had good revenue growth of 12% in Q3. Pat also grew by 49% YoY.
    2. EBITDA for the company grew 34.6% YoY to Rs 57 Cr in Q3.
    3. Carry forward order book for the company grew 23.5% YoY to Rs 2812 Cr.
    4. Capital employed was reduced to Rs 1020 Cr from Rs 1173 Cr last year.
    5. Net borrowings were reduced to Rs 127 Cr from Rs 376 Cr a year ago.
    6. Segment revenue for the Electro-Mechanical Projects & Commercial Air Conditioning Systems grew 15.8% YoY with order inflows of Rs 550 Cr in the quarter.
    7. The company maintained its leadership position in MEP projects space in India.
    8. The company bagged major orders from Phoenix Market City (Indore), Chalet Hotels (Bangalore) and Manyata Promoters (Bangalore) for its Electro-Mechanical Projects business.
    9. The company bagged major orders from Ambuja Cement (Jaipur), Telangana State Industrial Infrastructure Corporation (Hyderabad), ISRO (Sriharikota) and Police Headquarters (Mumbai) for its Commercial Air Conditioning Systems business.
    10. In the unitary products segment, the company saw revenue growth of 7.3% YoY. Margins contracted to 1.8% in Q3 from 2.4% last year. This was mainly on account of higher advertisement expenses during the festive season.
    11. In RAC business, the company grew 10% YoY vs industry growth of 5% in the quarter. Close to 36% of the sales were through consumer finance schemes.
    12. The company saw good growth in the Commercial Refrigeration business with major orders bagged from Reliance Retail, Top and Town, Dairy Fun, Rebel Foods, and Jubilant Foodworks.
    13. The Professional Electronics and Industrial Systems business saw revenue growth of 9.4% YoY. The segment margins were at 31.6% in Q3 vs 12.2% last year.
    14. Revenue growth was driven by certain high-value orders from Data Security solutions, Healthcare, and Non-Destructive Testing business.
    15. The management stated that regulatory requirements on data localization and increased thrust on digital payment solutions created good short opportunities for Data Security Solutions business.

Investor Conference Call Highlights

  1. The un-allocable expenses for the company were higher in the quarter due to some onetime expenses like office renovation. The management maintains that broadly un-allocable expenses have a run rate of Rs 22-24 Cr per quarter.
  2. The margins for the products business has been down for the quarter mainly due to the higher ad expenses arising from the acquisition of Virat Kohli as the brand ambassador. This quarter was the first one with the additional brand expenses and overall, the management expects annualized margins for this segment to be around 8.5-9%.
  3. The management maintains that the inherent demand for the RAC industry is strong across all segments and although the company provides products for all categories in this industry, its focus remains on the mid-premium segment. The penetration levels are low signifying significant room for growth and market capture.
  4. The management maintains that the biggest driver for the RAC industry remains the intensity of the summer season.
  5. The company expects to receive all the raw material shipments from China by early March at the latest. It has already received part of the procurements and the management does not expect major disruptions arising from the Coronavirus situation.
  6. The major concern for the company in the electromechanical projects and commercial AC segments remains the slowdown in the real estate and infrastructure sectors. The current order book from the government remains healthy with major orders secured from Mumbai Metro in Q1.
  7. The management maintains that once the real estate and infra sectors revive, the company can accelerate growth in these business segments easily with its current capability.
  8. The revenue from the water purifier segment is expected to be around Rs 60 Cr for FY20 with a market share of 2%. The company expects to break even in this product segment in FY20.
  9. The growth expectation for the EMP and commercial AC segments is guided to be 10-12% for FY20 while the growth in unitary products is guided to be 10-12% by the management.
  10. Margin profiles for MEP and CAC are expected to be around 4.5-5.5% while for unitary products it is expected to be 8.5-9%.
  11. The management is expecting pricing competitiveness from other players in the market like newcomer Samsung but it is not expecting any let-down in pricing pressures at all.
  12. The management maintains that the company does not have any inventory hangover like a few quarters ago and thus it will not be forced to take corrective price actions which may drive realizations down.
  13. The management has stated that it will definitely aim to expand the market for the water purifier product and chase its earlier guidance of a 10% market share in FY21. But the management is confident that this business will breakeven at a 3-3.5% market share. The company will also be prioritizing profitability milestones ahead of scaling up for this business.
  14. The management is comfortable with the overall component pricing levels and does not see much reason for worry in this area for RAC business.
  15. The management has admitted that the difference in margins and realizations between H1 and H2 for the company’s products is mainly driven by scale and nothing else.
  16. The management admits that the RAC business is indeed dependent on imports although the company has somewhat reduced this dependence by starting to manufacture its own indoor units rather than import these units. But it is still dependent on China for importing the raw materials to make these units.
  17. The management does not expect the price premium for inverter ACs to reduce further and has mentioned that mostly the reason for pricing pressures is mostly inventory levels or push to gain market share. The company will continue to moderate its pricing and discounting on a monthly basis to stay on top of such developments in the industry.
  18. 60% of the company’s products are made in house by the company and the management is always on the lookout for opportunities to increase cost conversion efficiencies and mitigate industry pricing pressures.
  19. The management expects that going forward around 50% of the products will be made by the company itself. The management also expects around 70-75% of IDUs to be manufactured in-house by the company.
  20. The company will continue to maintain the old tax rate until it exhausts its MAT reserves. After that only will it switch to the new tax regime. The pending MAT credit is at Rs 70 Cr at the end of Q3.
  21. The company does not intend to manufacture all of its water purifiers in house and the management will be looking to pursue the best ratio of in-house vs outsourced that would be best for the company.
  22. The management explains that there is a lag between project announcement and commencement in the MEP and commercial AC divisions and thus there is a lag in order growth in comparison to the real estate and infra projects announcement. There may also be additional lags in between like time taken to achieve financial closure for the said project which is out of the hand of the company.

Analyst’s View

Blue Star is one of the largest cooling solutions providers in the country. It is one of the biggest branded players in the RAC market. The company has also done well to establish itself as one of the leading commercial cooling and electromechanical project solutions providers in India. Furthermore, the company has also expanded into the still underpenetrated water purifier segment where the vast majority of the addressable market remains untapped. The current quarter results were decent considering that it is an off-season for a cooling solutions provider like Blue Star. Although the margins for the quarter were low due to higher advertising expenses from signing Virat Kohli as the brand ambassador, the management seems to think that this is a temporary blip and margins should normalize going forward. It remains to be seen how long the current slowdown in the real estate and infra sectors will continue as this has restricted growth in the commercial cooling solutions business. The heightened ad expenses from investing in Virat Kohli a brand ambassador are also yet to be justified as it will take some time for these ad efforts to solidify the brand image. Nonetheless, given its robust market positioning and the big potential for all forms of cooling solutions and products in a tropical country like India, Blue Star is a good cooling solution stock to watch out for.

 

Disclaimer

This is not a piece of investment advice. Please read our terms and conditions.