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Spark Capital: Blue Star 1QFY14 Results Review - Macro concerns remain, Maintain Reduce




Spark Capital Advisors(India) Private Limited


26 Jul 2013





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Macro concerns remain, Maintain Reduce Blue Star (BLSTR) reported 1QFY14 sales of Rs. 7.7bn, a growth of 5.4% yoy, on the back of muted execution in the EMP segment and sub-par growth in the professional E&I segments. Better than expected EBIT margin in EMP segment (5.9%) was only due to delays in closure of a few old low margin orders during the quarter as execution / market related margin pressures continue to prevail. While sporadic demand was witnessed across a few sectors (hotels, hospitals, etc), pace of order inflow remained weak across most segments resulting in order book contracting by 22% yoy to Rs. 14.4bn. While the management is hopeful of improvement of inflows for FY14 on the back of a low base in FY13, delays in finalization of the limited orders in the market place provides limited visibility of business. Given the bleak inflow scenario and weak order book (0.86x FY15E revenue), we expect the EMP segment to de-grow by 7-8% in FY14E. In the cooling products segment, while room A/Cs sales grew by a robust 27% yoy in 1QFY14, the pace of growth is expected to moderate going forward as price hike (on the back of input price increase due to rupee depreciation) is expected to impact demand. Given the subdued order inflow outlook for the EMP segment, growth and margin pressure across segments, we expect PAT recovery to happen (in FY14E and FY15E) only over a low base. Considering the persistence of near term concerns, we maintain our negative stance on the stock and retain our ‘Reduce’ rating. Highlights of the quarter’s performance and outlook EMP segment’s woes to continue – Execution pace in the EMP segment continued to remain subdued (6.7% yoy de-growth) with EBIT margin (5.9%) surprising positively only due to delays in execution of old zero/low margin orders. While certain sub-segments like VRF systems witnessed relatively better growth (15% yoy), persistent weakness in execution and order inflow in the projects business is expected to keep overall growth outlook hazy. Similarly, EBIT margins (6-8%) are expected to recover only gradually as the company closes old/low margin orders Robust growth in room A/C, but price hike a issue – Revenue in the cooling segment grew by 18.8% driven by strong growth in room A/Cs sales (27% yoy growth vs. market growth of 15% yoy resulting in 100bps increase in market share). But, the recent price hike (due to the depreciating Rupee) could moderate room A/C sales going forward. Working capital to remain at elevated levels – Capital employed in the EMP segment continues to remain high at Rs. 4.6bn due to lackluster execution pace and payment delays. While the management is increasing its focus on improving working capital position and reduce debt, debt levels are expected to remain relatively higher at ~Rs. 3.6bn in FY14E

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