Blue Star's Q1FY20 results (Neutral) - Mixed quarter

1QFY20 result highlights

• Adj. PAT at Rs770mn (flat yoy): Revenue +4.5% yoy to Rs15.75bn. Margins contracted 177bps yoy to 7.3% resulting in 16% yoy decline in EBITDA to Rs1.15bn. However, higher other income (5x yoy to Rs217mn on receipt of incentives) and lower finance cost (-32% yoy to Rs82mn; effective working capital management) supported PAT.
• EMP revenues muted on cautious billing: Revenues were +0.7% yoy growth to Rs6.2bn led by cautiousness in billing in view of ongoing liquidity issues. Margins contracted by 104bps yoy to 5.4% on execution of low margin orders and negative operating leverage (Rs84m or 140bp Wada incentives).
• Decline in commercial refrigeration impacts UCPL revenues: Revenues +9.2% yoy to Rs7bn as 25% yoy growth in RAC (strong summer) was offset by decline in commercial refrigeration (-25-30%; 30% of segment revenues). Margins contracted 53bps yoy to 10.4% led by adverse pdt mix (higher 2/3 star AC sales), higher ad spend, lack of price hikes, etc. Wada incentives of Rs56mn boosted margins by 60bps.

Conf call highlights: (1) RAC revs +25% yoy in 1Q20 (vs industry growth of 22% yoy) driving 12.5% mkt share (11.7% in 1Q19) (2) Mkt size estimated at Rs110-120bn (5.5-6mn in volume), expected to grow at ~15% in FY20E (3) Price hikes unlikely in 2Q/3Q due to high competitive intensity and lean season. Mgmt will evaluate price hikes in Dec-19 for 4QFY20; (4) Bluestar is focussed on localisation of IDUs and plans on increasing the proportion of in-house mfg from 60% to 75% over next 8 quarters to lower the impact of higher custom duty; (5) EMP segment won largest order ever of Rs2.53bn for tunnel air conditioning for Mumbai Metro; (6) Improved working capital during 1Q20, which led to net cash position of Rs7mn (Rs2.5bn net debt in 4Q19) (7) FY20E Guidance: EMP:  Revenue growth at 12% with 5-5.5% EBIT margins; UCPL EBIT margins at 9.5-10%.

Impact on financials: FY20/21 EPS cut by 2%/1% to Rs24/30

Valuations & view

Blue Star’s decline in commercial refrigeration and cautiousness in EMP billing has taken the shine off the decent RAC performance and strong working capital management. Bluestar’s wide product portfolio, premium brand image and growing reach has enabled it to expand market share. Concurrently, Blue Star is leveraging its brand to penetrate into other segments. Moreover, EMP business has stabilised led by focus on profitable orders. These measures should drive 24% earnings CAGR over FY19-21E, in our view. However, we believe valuations factor in all the positives at 24x FY21E earnings. Neutral.