MOSL: BLUE STAR (Neutral)-Unseasonal rain hurts 1QFY19 room AC sales; Industry likely to grow 15% in FY19

BLUE STAR: Unseasonal rain hurts 1QFY19 room AC sales; Industry likely to grow 15% in FY19

(BLSTR IN, Mkt Cap USD1.0b, CMP INR701, TP INR790, 13% Upside, Neutral)

We met Mr B Thiagarajan, Blue Star’s Joint Managing Director. Our key takeaways from the meeting:

 Unseasonal rain, weak summer to hurt 1QFY19 sales

• Sales in April were weak and demand was subdued on rain/hailstorms across the country. This continued into May, but finally, the weather has turned warm in Telangana, Maharashtra, Goa, Gujarat and North India over the past week. Rains continue in Kerala, West Bengal, Tamil Nadu, and the North East.
• Yet, industry sales are unlikely to decline in 1QFY19. The base quarter (1QFY18) was weak due to GST – primary sales had slowed down, as dealers did not want to stock and primary sales had nosedived in May-June 2017. Year-on-year, sales are likely to be flat in 1QFY19.
• In FY19, Blue Star now expects the room AC industry to grow 15%, despite the muted 1Q summer sales; it had earlier estimated 15-20% growth.
• Key drivers of demand for room ACs are: (a) low penetration (4-5%) – industry sales expected to grow at a CAGR of 15-20% over the next few years, (b) consumer financing via EMIs, and (c) rising income levels. These would continue to drive demand for ACs, despite seasonal variations.
• Blue Star is looking at a price increase from July 1, 2018 to pass on the impact of higher raw material prices and INR depreciation.
• Though there is an excess of 400k-500k, inventory in the channel is not a problem currently.