MOSL: BLUE STAR (Neutral)-GST, higher RM prices to impact 1QFY18 performance-Rating change in January 2018 to be potential market disruptor

​Blue Star: GST, higher RM prices to impact 1QFY18 performance; Rating change in January 2018 to be potential market disruptor

(BLSTR IN, Mkt Cap USD0.9b, CMP INR639, TP INR610, 4% Downside, Neutral)

We met the senior management team of Blue Star. Our key takeaways:

GST, higher RM prices to impact 1QFY18 performance; industry sales down 20% in May

• ​The month of May witnessed dealer destocking, primarily by multi-brand outlets (MBOs) that get 40% excise credit (raised to 60% in the last GST Council meeting), which works out to 5.5%, while they pay 8.5% (12.5% excise less input credit). As a result, room air conditioner manufacturers' sales declined 20% YoY; their June sales could also be subdued.
  
• In 1QFY18, Blue Star expected to grow 25%, but given the uncertainty around GST implementation, it now expects 15% growth. For May 2017, Blue Star has witnessed flattish growth.
  
• GST would have negligible impact on air conditioner prices. The GST rate of 28% on dealer price is largely neutral; earlier, the 26% tax was on MRP.
  

Blue Star scales down FY18 room aircon growth guidance to 17-18%

• ​For FY18, Blue Star was earlier expecting 15% industry growth, which it has cut to 10%, and 25% growth for itself, which it has cut to 17-18%.
  
• 4QFY16 sales had inventory from before November, while RM prices went up between November 2016 and March 2017. Though Blue Star took 2-3% price hike, it expects margins to remain under pressure in 1QFY18.
  
• Over February-March 2017, raw material prices have stabilized, while the US dollar has appreciated. Blue Star expects the margin to revert to normal from 2QFY18; it expects 10.5% margin for FY18.