Blue Star : In full bloom

Blue Star is India’s largest central air-conditioning and commercial refrigeration company, with over six decades of experience in providing expert cooling solutions. Its business also includes import, distribution and maintenance of professional electronic and industrial equipment and systems. These include turnkey engineered solutions in the areas of banking, telecom, healthcare, defence, pharmaceuticals, manufacturing and R&D.

Blue Star primarily focuses on the corporate and commercial markets. These include institutional, industrial and government organizations as well as commercial establishments such as showrooms, restaurants, banks, hospitals, theatres, shopping malls and boutiques.

The central air-conditioning business saw 26% growth in FY 2006 and continues to be the key growth driver for Blue Star’s revenue as it contributes nearly 70% of its revenues. Blue Star remains the undisputed market leader in this segment with a market share of 30%. The demand for centralised air-conditioning business is set to grow at healthy pace of more than 25% considering the pace of growth of its user industry, which includes the retail, IT/ITES, healthcare, hospitality, entertainment, telecom, banking and other service sectors. In the June 2006 quarter, the segment grew 36% to Rs 186.37 crore, and profit before interest and tax (PBIT) 46% to Rs 15.07 crore.

The cooling segment represents 23% of Blue Star’s revenue and grew 29% in FY 2006. The cold chain business is expected to register a dramatic increase in the next few years. The Central government’s intention to enhance production and export of vegetables and fruits to raise agricultural income has resulted in large industrial houses announcing plans for contract farming and branded exports. This will necessitate precoolers, bulk cold storages, transport refrigeration and perishable cargo complexes.
Further, retailing of agricultural produce — both raw and processed — is expected to undergo a massive transformation in the big cities with the emergence of supermarket chains. Multinational supermarket chains are also waiting in the wings. These high quality supermarkets, regardless of size, will require a lot of refrigeration equipment for storing and showcasing food produce. The supermarkets will also drive growth of bulk cold storages.

In the June 2006 quarter, the segment’s net sales advanced 36% to Rs 111.76 crore, and PBIT 32% to Rs 7.82 crore.

For over five decades, Blue Star’s professional electronics and industrial equipment
division has been the exclusive distributor in India for many internationally renowned manufacturers of hi-tech professional electronic equipment and services as well as industrial products and systems. The company has carved out profitable niches for itself in most of the specialised markets it operates such as analytical instruments, medical electronics, data communication products, material testing, and test and measuring instruments. In the June 2006 quarter, net sales of this division moved up 5% to Rs 14.16 crore, and PBIT 6% to Rs 1.36 crore.

Blue Star has four modern, state-of-the-art manufacturing facilities at Thane in Maharashtra, Bharuch in Gujarat; Dadra, a Union territory near Gujarat; and Kala Amb in Himachal Pradesh. The expansion at Uttranchal is going on according to plan. The first phase was operational in June 2005; the second phase was supposed to be operational from August 2006, while the third by end of Q4 (March ending) of FY 2007. The overall capacity of refrigeration at Uttranchal is more than 1.25 lakh units. However, the actual production will depend on product mix and the number of shift that the company will operate.

The outstanding order book position on 30 June 2006 was up 25% to Rs 688 crore as against Rs 550 crore on 30 June 2005. Furthermore, the company received Rs 75-crore orders in July 2006.

In FY 2007, we expect Blue Star to register net sales and net profit of Rs 1582 crore and Rs 65.51 crore. This gives an EPS of Rs 7.3 on a face value of Rs 2 per share. At the current market price of Rs 138, the scrip is available at a PE of 19, leaving scope for decent returns.