Blue Star

Blue Star shareholders can stay invested in the stock, as the company’s strong order book and leadership in the packaged air-conditioning segment promise further upside to stock returns. Sales that have slipped for two quarters in a row may pick up once orders from IT and ITeS space are back in the reckoning. Besides, the company’s central air-conditioning segment is seeing increasing order flows from telecom players and government spends (metro rail and airports).

Also, the company has several big corporate clients which place repeated orders. At Rs 1,815 crore, the company’s order book stands at 17 per cent higher than the previous year.

The stock trades (Rs 328) at 16 times its trailing one-year earnings. This is at a discount to Voltas which trades at 22 times on a trailing basis. The latter has, however, withstood the slowdown better than Blue Star and therefore commands a premium.
The business

The company, which began its business as a service agent for air-conditioners and refrigerators, has expanded its revenues substantially over the years.

With five manufacturing facilities and a network of 700 dealers, the company’s revenues have grown at 29 per cent in the last five years. A business model focussed on corporate and commercial market has helped the company establish a strong foothold in the segment with a 35-40 per cent market share now.

The company has three segments — central air-conditioning and electrical contracting; room air-conditioners and refrigeration products; and professional electronics and industrial system. These segments have reported close to 30 per cent growth in sales in the last five years.

The company’s major competitor is Voltas, which, however, showcases a more diversified profile as it manufactures mining and construction equipment as well with a chunk of its revenues coming from overseas business.

However, Blue Star has managed a higher margin both at the operating and net profit levels when compared with Voltas in FY-09. Blue Star’s operating margin was 10.8 per cent (9.3 per cent for Voltas) and PAT margin 7 per cent ( 6.2 per cent for Voltas).

HCL Technologies, DLF, Reliance Industries, IBM, ICICI Bank, Wipro, and Infosys are some of Blue Star’s clients which place repeated orders.

The company’s client base is diverse (with customers in telecom, hospital, hotel, education and airline industry); strong order flows from government infrastructure projects such as the airports, metro projects and sports stadium in recent times have helped offset tepid order flows from the private sector to an extent.
Strong order book

Recession in its user industries saw Blue Star reporting a 14 per cent decline in sales for the half year ending September’09. The company could not fully capitalise on the recent revival in consumer spending as it has a relatively small presence in the household room air-conditioner segment. Poor order in-flow from the IT, ITeS and commercial office space segment had further hit the company’s top line. We however, expect some improvement on this front as the market for commercial space has shown signs of picking up in key cities such as Mumbai and Bangalore.

The company’s order book stands at an all-time high of Rs 1,815 crore (17 per cent higher over the previous year). Of this, the company expects to bill around Rs 1,500 crore in the next six months (the half-year sales for FY-10 stood at Rs 740.7 crore in September; full year FY-09 sales were Rs 1,778.8 crore).

Going forward, orders from data centre projects of telecom players are expected to be among the major revenue drivers for the company. Blue Star is a leading supplier in the telecom segment with its customised array of telepace air-conditioners having many takers. It also has large orders for packaged air-conditioners from Sify and IBM for maintaining their high-end electronic servers (booked in FY-09).

Blue Star is also eyeing further off-take from government-related infra spends (such as the stadiums for Common Wealth Games) to boost its sales in the coming quarters. The company already has the Delhi Metro Rail Corporation and Tamil Nadu State Assembly’s orders on hand. The company’s electrical projects (electrical contracting) division, which was acquired from Naseer Electricals in 2008, may also see more MEP (mechanical, electrical and plumbing) order flows, having made a good start. The company’s VRF (variable refrigerant flow) systems that were introduced last year have also been well received by the premium segments of the hospital and hotel industry. This segment will catch up as the user industries move out of recession and start spending again.
Margins protected

Blue Star’s operating profit margin has always been on the industry’s high side. Over the last five years, the company’s OPM improved from 7 per cent to 11 per cent. Even in the last two quarters when sales fell, margins expanded by 2 percentage points, thanks to cost-efficiencies and price correction in key inputs such as copper and aluminium.

The company’s score-card appears encouraging on the PAT front too with earnings recording a compounded annual growth rate of 46 per cent over the last five years. Having repaid significant amount of loans, the company’s debt-to-equity ratio stands at a negligible 0.1.

via BL