Stock to buy for long term - Blue Star Limited

Compounded Annual Growth Rate (EPS) of more than 30% and Price to Earnings Growth (PEG) of less than 1 certainly makes Blue Star limited a bluechip stock to buy.

Here is a stock analysis of bluechip stock Blue star in my series of “Stocks to buy in 2011”. Being bluechip stock, Blue star provides stability to your stock portfolio and resistance in times of stock market correction as bluechips tend to correct lesser than mid cap and small cap stocks.

Blue Star Limited (Blue Star) is a central air conditioning and commercial refrigeration company. Blue Star has three business segments: electro-mechanical products and packaged air conditioning systems, cooling products, and professional electronics and industrial systems.

Air conditioning sector
The market size for air conditioning in India growing constantly. Home air conditioning and commercial, both have tremendous demand and growth due to rising incomes and huge rise in high end realty constructions like shopping malls, high end offices, hospitals, schools and commercial buildings. Estimated size of this market was more than Rs. 10500 crores in 2009-10. Out of this, commercial and central air conditioning market was in tune of 5000 crores.

cold storage, water cooler, bottled water dispensers, deep freezer, milk coolers, ice-cubers are another commercial cooling business opportunity in India that is growing rapidly due to huge growth in organized retail sector. Latest Angel stock broking reports says that Blue star has 30% market share in central air conditioning market in India with lots of repeat business from institutional clients.

Governments decision on setting up country wide cold storage chains poses a great opportunity for company’s growth. Blue Star Electromechanical Limited, completed the acquisition of the plumbing and fire-fighting businesses of D.S. Gupta Construction, the largest independent plumbing and fire fighting contracting company in India. With this acquisition, the company will not only be in a position to aggressively pursue an integrated MEP (Mechanical, Electrical and Plumbing). It will add a vertical of new services and get benefitted from existing set of clientele.

Company’s financial numbers show Five year compounded annual growth rate (CAGR) of 22.6 per cent in sales and 40.1 per cent in profit after tax. Average return on net worth over the last five years was pretty high at 43.9 per cent.

In next 1–2 years, although company’s profit after tax levels may remain flat due to high debt of acquisition cost of D.S.Gupta constructions, revival in commercial estate demand and cold storage opportunity (both private retail and government) provides high growth potential for company.

Stock Valuation
At present, the stock trades at a twelve-month trailing price-to-earnings (PE) ratio of 17.6 (February 16th), which is fairly below its five year median PE of 21.86. Stock dividend yield stands at 2.3%. It has posted a five-year earnings per share (EPS) CAGR of 34 per cent. This translates into a price-earnings to growth (PEG) ratio of 0.60.

Should you buy stocks of Blue star?
Looking at company’s market share and position, order book of Rs.1990 crores, growth prospects due to demand in commercial real estate sector and cold storage chains, one may buy stocks of Blue star at current price or below it for long term investment horizon (3-4 years).