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MOSL: BLUE STAR (Neutral)-Results ahead of expectation-UCP margins surprise

Blue Star: Results ahead of expectation; UCP margins surprise

(BLSTR IN, Mkt Cap USD1b, CMP INR698, TP INR770, 10% Upside, Neutral)

• 4QFY19 sales at INR16b grew 19% YoY (v/s our est. of INR15.2b) on strong pick-up in UCP segment sales (+19% YoY) and timely execution of projects in the EMP segment (+21% YoY). EBITDA of INR1.1b (+81% YoY) was ahead of our estimate of INR839m, supported by better-than-estimated margins in the UCP segment (+350bp YoY; 10.4%). Adj. Net Profit increased 212% YoY to INR824m (v/s our est. of INR482m) on lower-than-estimated tax during the quarter (1% v/s our est. of 30%). For FY19, YoY revenue/EBITDA/ adj. PAT grew 13% (INR52.3b)/ 30% (INR3.5b)/35% (INR1.9b).
• Commercial Refrigeration segment drives UCP growth: The UCP segment sales were up 19% YoY at INR7.0b, on better performance in the commercial refrigeration segment (+34% YoY) and growth in the air cooler and water purifier business. Room AC sales grew 6% YoY, ramping up its market share by 80bp to 12.3%. EBIT margin improved 350bp YoY to 10.4%, supported by (a) price hikes, (b) better revenue mix, and (c) cost rationalization measures (ad spends). Management guided for 9% EBIT margin on sustainable basis in the medium term. Blue Star expects the RAC market to register 10-12% value growth in FY20 and hopes to garner better than industry growth.
• Electro Mechanical Project (EMP) registers robust execution: EMP segment sales stood at INR8.4b (up 21% YoY), supported by smooth execution of projects. EBIT margins declined 30bp YoY to 4.3%, impacted by higher material and input cost. Blue Star expects EMP division’s margins at around 5.5-6% for FY20.