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Wednesday, July 30, 2008

Blue Star Ltd. (BSL) - Investment research report

Report Date: July 29, 2008
Company Name: Blue Star Ltd. (BSL)
Recommendation: BUY
CMP – Rs. 368/-
Target Price – Rs. 500/-
Mkt. Cap. - Rs. 3,310.2 crore

Investment Rationale
Ø BSL, air-conditioning and commercial refrigeration major, has reported remarkable performance for Q1 FY 2009. It should be noted that BSL acquired Naseer Electricals (had turnover of Rs. 107 crore in FY 2007) w.e.f. January 24, 2008. Q1 FY 2009 result includes performance of Naseer and hence, figures are not strictly comparable. Net Sales grew @ 36.5% to Rs. 630.89 crore on back of excellent growth in main business segments. Central Air-
Conditioning Systems (CAC) sales grew @ 37.2% to Rs. 380.01 crore and Cooling Products business turnover grew @ 36.4% to Rs. 215.93 crore; while Professional Electronic sales rose @ 29.8% to Rs. 34.95 crore. OPM% enhanced to 9%, mainly due to decline in RM cost. PBIT% of CAC improved to 11.3% (10.2%), while PBIT% of Cooling Products business grew to 12.8% (10.4%). However, PBIT% of Professional Electronics declined to 15.2% (18.2%). Strong sales growth, improved margin coupled with substantially higher other income of Rs. 1.65 crore,
led to 65.9% spurt in PBT (before extra ordinary income) of Rs. 51.04 crore. PAT shot up by 63.2% to Rs. 36.42 crore. Pending order book as on June 30, 2008 grew @ 43% to Rs. 1410 crore (Rs. 983 crore on June 30, 2007).

Ø BSL is market leader in India in institutional and commercial users for refrigeration and CAC solutions. CAC segment is expected to be the biggest growth driver for BSL over next few years. Company is expected to be benefited immensely on account of growing investments in commercial construction and real estate market. It also enjoys preferred vendor status (owing to its end-to-end solutions offering as manufacturer, contractor and aftersales service provider) and this could lead to good repeat business. Key growth drivers for this segment would be
growing presence of organised retail chains, branded eateries, malls, multiplexes, IT & ITeS setups, telecom, power generation, healthcare and hospitality.

Ø Blue Star is India's first and only manufacturer of VRF systems and company is confident of gaining substantial market share in this high technology product category. Its foray into electrical contracting business also provides it with good opportunity to cross-sell electrical services to its existing HVAC customers.

Ø In cooling product business, focus will be on corporate, commercial and light commercial segments where BSL’s market share is now in double digits. Market shift in preference for split air-conditioners vis-a-vis window airconditioners has provided tremendous boost for this business. Company also made inroads into eateries segment with its new range of gelato dispensing machines and vertical showcases from ISA, Italy. In addition to agricultural
& horticultural, BSL offers cold storage solutions for hospitality, healthcare, pharma and dairy segments as well.

Ø Outlook for Professional Electronics and Industrial Systems business continues to be attractive. Its growth pattern in the last few years has been solid and its strong reputation as a value added reseller and system integrator will help it to further enhance market share.

Ø Installed population of air-conditioning and refrigeration equipment has been growing rapidly in recent times creating faster growth opportunities for after-sales service. BSL, being the largest after-sales service provider in the country, is well placed to grab the maximum share of this growing pie.

Valuation
Ø At CMP, share (Rs. 2/- paid up) is trading 14.9 times FY 2009 expected EPS of Rs. 24.7 and 10.4 times FY 2010 expected EPS of Rs. 35.3.

Ø In view of excellent future prospects in all business segments, topline is expected to grow @ ~ 25-30%. Cost control initiatives, value engineering and value added services would improve the profitability. As a result, bottomline would grow at higher rate than that of topline. Hence, we recommend to “BUY” the share from long term perspective.

Source: Geojit Members Research Desk

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