Published on 22/09/2020 10:15:45 AM | Source: Motilal Oswal Financial Services Ltd

Neutral Blue Star Ltd For Target Rs.460 - Motilal Oswal

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Focus on working capital management remains key

Blue Star’s (BLSTR) FY20 Annual Report highlights the company’s focus on improving working capital, enhancing manufacturing facilities, deepening its reach, consolidating global presence in key markets like the Middle East, and increasing R&D/ad-spends. Key insights highlighted below:

* Focus on working capital reduction leads to healthy FCF: BLSTR was successful in reducing its working capital (WC) cycle in FY20. As % of sales, WC stood at 6.2% in F20 (v/s 10.6% in FY19) due to debtor days declining to 57 days in FY20 (v/s 78 days in FY19). Free cash flow (FCF) generated stood at INR3.7b in FY20, implying FCF/EBITDA of 131% and FCF/Adj. PAT of 252%. Over FY14-20, FCF generation stood strong at INR8.9b, implying 100% FCF/Adj. PAT.


* Consolidating global presence: BLSTR’s products are exported to 18 countries across the Middle East, Africa, SAARC and ASEAN regions. Revenues from abroad doubled to INR5.2b in FY20 (v/s INR2.6b in FY15). Also, share of revenue from abroad now constitutes ~10% of the company’s total revenue (v/s 8.4% in FY14). Due to temperatures in the Middle East going up to 60°C, BLSTR with its range of cooling solutions has a plethora of opportunities in the region. Hence, the company has expanded its operations by starting a new office and inaugurating its first state-of-the-art flagship showroom in Dubai.


* Enhancing manufacturing capabilities: To reduce dependence on imports from China, BLSTR has invested to expand its range of plastic-molding tools and hard-formed tools. This would enable backward integration for the company. Also, BLSTR has made significant upgrades to its Wada facility (it has added heater-less vaporizer machine and a Fanuc robot), which has led to cost savings and improvement in productivity.


* Focus on Research and Development (R&D): In FY20, BLSTR continued to enhance its R&D activities with 35% YoY increase in spends to INR685m. R&D spends now form 1.3% of sales, up from 1% in FY19. BLSTR has already developed a 3-star inverter split AC complying to the 2021 BEE energyefficiency norms, with an ISEER of 3.90.


* Increasing ad-spends: Despite the muted 2.4% YoY revenue growth in FY20, advertisement expenses increased by 52% YoY as BLSTR signed on cricketer Mr. Virat Kohli as a brand ambassador for its range of Air conditioners (ACs). Ad-spends, sales incentives and promotions together formed 2.8% of FY20 sales, up from 2.3% in FY19.


* Rising distribution reach: BLSTR has added ~720 channel partners in FY20, one of its highest additions since FY15. Total channel partners stood at ~3,880 at end-FY20 (v/s ~2,000 in FY14). This indicates the company’s deeper presence across various markets. BLSTR has expanded its retail distribution reach for room air conditioners (RAC) and added ~508 retailers and distributors across India, thereby increasing its presence in Tier 2/3 markets by 10% YoY.


* FY20 performance highlights: FY20 revenue grew 2.4% YoY while Adj. PAT declined 21.4% YoY. The company reported 18.4% decline at EBITDA level. The company is maintaining high liquidity due to the disruption in operations during Mar’20. While gross debt has increased by INR1b to INR4.5b, Net debt has reduced to INR1.6b in FY20 (v/s INR2.4b YoY).


* Key segment highlights (FY20): (a) EMP & CAS segment – Revenue stood at INR28.3b, up ~3% YoY. EBIT margin stood at 4.3% (down 120bp YoY). (b) Unitary Product segment – Revenue stood at INR23b (+1.4% YoY), while EBIT margins declined 110bp YoY to 7.1%.


* Valuation and view: Over FY20-22E, we expect revenue/EBITDA/PAT to grow 3.6%/10.3%/10.7%. FY21E is expected to be a washout year. However, we note that margin volatility in the case of BLSTR poses a challenge to our earnings forecast, thereby leading to sharp earnings downgrade. Our SOTP-based TP stands at INR460/share and we maintain Neutral. We prefer Voltas over BLSTR to play the underpenetrated AC market in India.


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