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Spark Capital: Blue Star – Management Interaction – EMP segment’s woes continue, Maintain Sell




Spark Capital Advisors(India) Private Limited


05 Jun 2013





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Blue Star – Management Interaction – EMP segment’s woes continue, Maintain Sell We met Blue star’s management recently and the following are the key takeaways: Large order opportunities remain elusive – Lack of order conversion, especially large sized orders, have continued to hamper the order inflow visibility for the company. While orders from DMRC Phase – III (EMP contracts on the anvil after HVAC orders awarded earlier) and a few high-end commercial orders are a silver lining, overall outlook continues to remain bleak. The management has maintained that it would continue to avoid executing smaller projects (Rs. 200-250mn) Packaged air-conditioners relatively better placed – While growth in the EMP segment is expected to remain subdued, relatively better demand for packaged air-conditioners from commercial spaces (showrooms, boutiques, etc) is expected to lead to ~15-20% yoy growth in this segment. Also, increased contribution from services is also expected to support revenue growth and margin and partially compensate for weakness in the EMP segment Room A/Cs to drive growth in UCP segment – Driven by a warm summer and healthy demand from residential segments, room A/C sales has grown by 50% yoy over the past two months and the management expects room air-conditioners (~70% of UCP segmental sales) to maintain a strong growth momentum during the rest of year also (FY14E). Deep freezers and water dispensers are expected to register a relatively lower pace of growth (15-20% yoy) New BEE standards to increase A/C prices – Energy efficiency standards come into effect from Jan, 2014 and this is expected to lead to an increase in prices of air-conditioners by 8-10%. While BLSTR has not taken any significant price increases currently, it is confident of maintaining EBIT margin at 8.5-9% through a combination of pass-through of increase in input prices and by substituting with lesser expensive raw material/input (aluminum instead of copper) Efforts taken to reduce debt and WC position – BLSTR expects to reduce its current debt position by ~Rs. 750mn (current debt is Rs. 4.2bn) and aims at capping capital employed in the EMP segment at currently levels (Rs. 4bn). Working capital position is expected to remain relatively stretched at 71 – 72 days. Outlook remains subdued, Maintain Sell – Persistence of tepid growth, muted order inflow outlook and weak margins expected in the EMP segment (>55% of overall revenue) remains a concern for BLSTR. While pick up room A/C sales provides some solace, it is unlikely to significantly impact the overall muted outlook in the near term. We continue to maintain our ‘Sell’ rating on the stock with a TP of Rs. 149.

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