Margin delivery surprises positively
* Blue Star once again disappointed on the revenue front in Q2 but surprised positively on the margins. EMP & Packaged Air-Conditioner revenue fell 31% yoy as it was selective in the execution of better margin profile projects, which helped expand margins by 68bps.
* RAC has seen a gradual recovery with sales improving sequentially, while full recovery is expected from Dec’20 and growth in Q4. Channel inventory has been largely liquidated and is now nearing comfortable levels of 45-60 days. * The margin guidance for EMPS and Unitary cooling segments for FY21 implies a healthy margin delivery in H2FY21, backed by revenue recovery and cost optimization. Working capital management and cash generation to remain key focus area.
* A strong margin delivery in Q2 and guidance for FY21 lead to a 14% upgrade in EPS. FY22- 23 estimates remain unchanged as we already factor in a strong recovery in FY22. Retain Sell with a revised SoTP-based TP of Rs537.
Consolidated revenue fell 28% yoy to Rs9.0bn, with all segments registering double-digit declines. EMP & Packaged Air-Conditioner, Unitary Products and PEIS segments declined 31%, 15% and 52%, respectively. EBITDA fell 25% yoy, with EBITDAM improving by 22bps yoy to 6.1%. Gross margin contracted 69bps yoy. Employee expenses declined 24% yoy to Rs0.9bn, while other expenses dropped 38% yoy to Rs0.75bn. PAT stood at Rs153mn, down 60% yoy. Higher ETR, interest expense and lower other income impacted PAT.
We are factoring in a 21% revenue decline for unitary products considering a washout in Q1 and weak Q2 for cooling products. Normalized RAC channel inventory will support inventory re-filling from Dec’20 onwards. Demand recovery, pricing intensity and market share trend are key things to watch out for. As the govt imposed a ban on CBU imports with refrigerants from China, the upcoming summer season in Q4 will decide the competitive intensity from fringe players as they might lose on the cost arbitrage of China imports. For the projects business, we are assuming a full recovery from Q4. Although the company has a healthy order book, selective execution and working capital management would be watched out for. For both the segments, we are factoring in a robust recovery only from FY22. The company has delivered strong margins with surprise cost tightening (other opex flat qoq despite 44% rise in revenues), which is leading to earnings upgrade for FY21. Management has guided for FY21 margins to be similar as that of FY20 despite low revenue due to cost reduction initiatives. Key risks: Lower-than-estimated fall in RAC with recovery in market share, better margin performance, earlier-than-expected improvement in macro conditions.
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