* Blue Star (BLSTR) reported lower than expected operational performance. While revenues declined by ~1% yoy, EBITDAM increased by 70bps yoy and PAT increased by 4% yoy.
* GST led migration impacted revenues across all segments. Revenues in the electromechanical projects and packaged air conditioning systems (EMP & PAC) and professional electronics and industrial systems (PEIS) declined by 7% and 15% yoy respectively. Unitary products (UP) grew by 12% yoy.
* BLSTR’s market share in room air conditioners (RAC) was maintained at ~11% in 1HFY18. Management expects the RAC industry to grow at ~10% in FY18 and BLSTR is also likely to grow in line with the industry.
* Downgrade FY18E/19 EPS estimates by 20% and 10% respectively on lower revenue and margin assumption. RECOMMEND SELL with target price of Rs552 (SoTP).
* Subdued performance: Revenues declined by 1% yoy to Rs8.3bn largely impacted by GST related disruptions. However EBIDTAM increased by 70bps yoy to 5.5% and PAT increased by 4% yoy to Rs208mn – much lower than street expectations. Revenues in the EMP & PAC and PEIS segments declined by 7% yoy to Rs5bn and 15% yoy to Rs395mn, respectively. While revenues in the UP segment grew by 12% yoy to Rs2.9bn, the RAC segment posted meagre growth of 5% in line with industry. Though the market for VRF grew by only 12% yoy in 1HFY18, BLSTR reported 30% growth during the same period. EBITM in the EMP & PAC increased by 230bps yoy to 7.6% aided by accelerated execution in few projects with better margin profiles. Order inflows increased by 4% yoy to Rs5.8bn, largely attributable to government funded infrastructure projects and metros. EBITM in the UP segment declined by 220bps to 5.3% mainly impacted by rise in commodity prices (8- 10% over the last 3 quarters) and continued investments in scaling up the water and air purifiers business. EBITM in the PEIS segment declined by 1020bps to 7.2%.
* Recommend SELL: BLSTR’s strategy on selective bidding of large ticket size orders with focus on profitability and cash flows is now bearing results - margins in the EMP & PAC segment are expected to settle in the 5-6% range. Management expects the GST related disruptions to impact revenues in 3QFY18 also. BLSTR’s helplessness to pass on the recent hike in commodity prices in the current scenario is also likely to impact margins in the near term. Moreover, the incremental expenses related to the marketing and promotion of water and air purifiers would impact BLSTR margins by 120-150 bps during FY18. We have downgraded our FY18/19 EPS estimates by 20% and 10% respectively on lower revenue and margin assumption. Recommend SELL with revised target price of Rs552 (SoTP).
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