Blue Star's Q2FY19 results (Neutral) - Market share gains
Q2FY19 result highlights
- Adj. PAT at Rs223 mn (-2% yoy): Revenue +21.5% yoy to Rs10.3bn led by EMP and PE segments. Margins declined 20bps yoy to 5.6%, with EBITDA +18.7% yoy to Rs581mn. However, higher interest cost and loss in Oman subsidiary impacted PAT.
- EMP +27%yoy growth in revenues: led by uptick in execution. Margins were flat yoy at 7.1%, albeit expanded 70bps qoq led by cost efficiency and execution of high margin orders.
- Cooling revenue +9% to Rs3.43bn: RAC industry saw moderate growth of 8.5%, but Blue Star grew 14% yoy growth (flat volumes), enhancing its market share to 12.5%. Also, commercial refrigeration (+22% yoy) and water purifiers saw sustained traction. However, margins fell 280bps yoy to 2.4% due to higher RM, rupee depreciation, discounting schemes and warehousing costs related to higher inventory.
- Professional electronics saw strong performance: Revenue +55% yoy to Rs375mn and margins +1420bp yoy to 21.6% led by supply of CT scanners and sales of non-destructive testing & data security solution products.
Conf call highlights: (1) Mgmt expects inventory to be liquidated in 3Q19 considering the festive season and summers in west. (2) Bluestar has taken 5% price increase to offset impact of depreciating rupee, higher custom duty and rising input costs. (3) RAC industry to see 5% growth in FY19, Bluestar at ~10% with 9-9.5% margins. (4) Sales via consumer financing accounts for ~40% of the industry, but recent liquidity crunch has not impacted financing or demand (5) Central AC systems is seeing strong traction with 25% growth vs 11% industry growth, Bluestar is the 3rd largest player in VRF (6) Oman EMP is facing headwinds (Rs50mn loss) on cost overruns on execution delays (7) Rs350mn water purifier sales in 1H19 (35k units) and on track for Rs900mn revenues for FY19.
Impact on financials: FY19/20 EPS raised by 9% to Rs17.8/23.5
Valuations & view
Blue Star has been focussing on turning around the EMP segment by executing profitable orders, while improving market share in the RAC segment through improved reach and a strong product portfolio. These measures should drive 25% earnings CAGR over FY18-21E, in our view. A healthy balance sheet, led by FCF generation and strong dividend payouts should help post strong return ratios. We believe valuations factor in all the positives at 24x FY20E earnings. Neutral.
Blue Star is an air-conditioning and commercial refrigeration company. Co. is engaged in the provision of cooling solutions as well as import distribution and maintenance of professional electronic and industrial equipment and systems, including turnkey engineered solutions in the areas of banking, telecom, healthcare, defense, pharmaceuticals, manufacturing and research and development. Co.'s business segments are Central Air-conditioning Systems, Cooling Products and Professional Electronics and Industrial Equipment.
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