Blue Star's Q3FY20 results (Neutral) - Weak quarter

3QFY20 result highlights

• Adj. PAT at Rs212mn (+239% yoy): on low base (3Q19 Rs140mn Oman JV loss). Revenues +12.5% yoy to Rs12.4bn, while margins +76bps yoy to 4.6% resulting in 34% yoy EBITDA growth to Rs570mn. Lower other income (-41% yoy to Rs61m), higher depreciation (+22% yoy to Rs223mn) and higher tax (36%) restricted PAT.
• RAC – weak performance: UCPL revenues +7.3% yoy to Rs4.2bn led by 10% yoy growth in RAC, while commercial refrigeration was stable (30% of segment revenues). Margins contracted 58bps yoy to 1.8% on lack of price hikes (high competitive intensity), spend on ‘Virat Kohli’ as brand ambassador & sustained loss from water purifier (80bps impact).
• EMP – stable performance: Revenues grew 15.8% yoy to Rs7.54bn led by faster execution in EMP project execution while commercial air conditioning segment slowed down during the quarter. However, management remains cautious in billing in view of ongoing liquidity issues. Margins expanded 55bps yoy to 5.1% on led by execution of profitable orders and cost optimization.

Conf call highlights: (1) RAC volumes grew 10% yoy in 3Q20 ahead of market growth of 5% yoy indicating mkt share gains (2) Pricing pressure to continue with high competitive intensity (3) Water purifier continues to scale with 2-2.5% margin, albeit gaining scale at lower pace than expected. Impact of loss to reduce from 160bps in FY19 to 80bps in FY20 (4) UCPL guidance: revenues +15%, industry 10%; Margin guidance cut from 9-9.5% to 8.5-9%; (5) EMP segment won orders worth Rs5.5bn with backlog of Rs19.4bn; (6) EMP guidance: Revenues +12-15% yoy, margins at ~5% (7) Cornavirus risk on RAC supply chain is limited if resolved in next fortnight as have stock till Mar-20

Impact on financials: FY20/21 EPS cut by 6% each to Rs23.8/29.2

Valuations & view

Blue Star witnessed a weak performance in RAC segment with not only weak revenues but also a steep decline in margins. The ask rate for 4Q20 has risen steeply and could be at risk considering the Cornavirus related supply chain delays. Further, rising competitive intensity is likely to exert pressure on margins. On the other hand, EMP performance is steady with mgmt. focus on ensuring working capital and debt is under check. Bluestar’s wide product portfolio, premium brand image and growing reach has enabled it to expand mkt share. This should drive 22% earnings CAGR over FY19-21E. However, we believe valuations factor in all the positives at 29x FY21E earnings. Neutral.