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MOSL: BLUE STAR (Neutral)-Results miss expectation as higher ad-spends dent margins

Blue Star: Results miss expectation as higher ad-spends dent margins

(BLSTR IN, Mkt Cap USD1.1b, CMP INR836, TP INR855, 2% Upside, Neutral)

 

Margin miss leads to earnings cut in FY20; Reduce TP to INR855  

• Blue Star’s 3QFY20 top line performance was in line; however, earnings expectations fell short on account of margin miss, led by higher ad-spends in the UCP segment and lower margins in the EMP segment.
• We cut our FY20E earnings by 11% on account of higher effective tax rate this year and lower margins, but largely maintain our FY21-22E earnings. Our SOTP-based TP is reduced to INR855 from INR870 earlier, due to the change in mix between UCP and EMP segment. Maintain Neutral. We prefer Voltas over Blue Star to play the underpenetrated AC market in India. 

Revenue in line; margins miss estimates

• Revenue increased 12.5% YoY to INR12.4b and was in line with expectation.
• EBITDA grew 35% YoY to INR570m. This was 29% below our expectation as EBITDA margin came in at 4.6% (+70bp YoY) v/s our expectation of 6.5%.
• Miss on EBITDA margin can be largely attributed to (a) lower margins in the EMP segment, and (b) higher ad-spends as the company signed up with cricketer Virat Kohli as the brand ambassador in 2QFY20; related expenses were incurred fully in 3QFY20.
• PAT grew to INR212m from INR62m last year. Owing to the small base, the miss on earnings look optically higher at 53% v/s our expectation.
• Key segment highlights: (a) EMP segment – Revenue increased 15.8% YoY to INR7.6b. EBIT came in at INR390, with margins expanding 50bp YoY to 5.1%. (b) Unitary cooling product – Revenue increased 7.3% YoY to INR4.2b. EBIT came in at INR77m, with margins declining 60bp YoY to 1.8%. Margin decline was due to lower realization and higher ad spends.