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MOSL: BLUE STAR (Sell)-Weak operating performance; UCP disappoints

BLUE STAR: Weak operating performance; UCP disappoints

(BLSTR IN, Mkt Cap USD1.1b, CMP INR857, TP INR730, 15% Downside, Sell)

 

Inventory levels to normalize over next two months

• Blue Star (BLSTR) posted weak revenue in 1QFY22, in line with expectations, with the two-year revenue CAGR in the Unitary Cooling Products (UCP) segment at -25%. EBITDA came in below our estimate as rising commodity costs, the lower off-take of RACs, and higher operating costs sequentially weighed on margins. Adj. PAT came in 19% below our estimates.
• While inventory levels are marginally elevated, this does not pose a threat at present, as the demand outlook is expected to improve with the arrival of the festive season. However, elevated commodity costs and higher competitive intensity pose a risk to margins in FY22, especially if a potential third COVID wave causes further disruption. We cut our FY22E/FY23E/FY24E EPS estimate by 10%/7%/4%. We roll forward our valuation methodology on a Sep'23 basis, with TP of INR730/share. At CMP, the UCP business of BLSTR is trading at a PE multiple of 55x/43x FY23E/FY24E, indicating an unfavorable risk-reward. Maintain Sell.