Published on 10/06/2021 11:16:49 AM | Source: Motilal Oswal Financial Services Ltd

Sell Blue Star Ltd For Target Rs.700 - Motilal Oswal

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Re-strategizing to combat competition

We attended the analyst meet organized by the management of BLSTR. The key takeaways are as follows:

* Expect growth in the RAC industry to slow down:

While the ongoing commodity cost inflation has led to price increases across products, the upcoming BEE rating change in Jan’22 is expected to result in further increase prices by 7-8%. Hence, the BLSTR management views this to be a headwind for growth of the RAC industry. The government does have an option to reduce GST rates, but the management believes it won’t happen in the next two years looking at government finances. It expects growth to moderate to 10% CAGR v/s its earlier expectation of 15%. This implies that penetration levels may remain lower going forward. Price inflation could lead to lower-end products like two-star and three-star RACs gaining market share, while the offtake of five-star ACs could be limited.


* Opportunity healthy in Commercial Refrigeration:

With BLSTR being the market leader in this segment, it sees further growth opportunities in Hospitals and the Food Delivery market. Competition is lower in the Commercial Refrigeration segment.


* Evaluating international markets, need to address business seasonality:

BLSTR is looking to explore the international market in the room AC as well as Commercial Refrigeration segment. The aim is to mitigate any slowdown in the Indian AC industry due to continuous price increases and to address business seasonality. The other option is to enter the wider White Goods space. The industry has a higher competitive intensity and may not be a viable option. In the international market, the management will like to explore the Middle East and African nations.


* Summer sales expected to be bleak as the lockdowns get extended:

Room ACs saw robust sales until 15th Apr’21, before the statewide lockdowns started coming into force. Most of the key consumption states like Maharashtra, Delhi, Rajasthan, Madhya Pradesh, and Karnataka have extended lockdowns until the end of May’21, while some like Uttar Pradesh are also mulling an extension. States like Punjab and Haryana have classified ACs as an essential category, which has led to sales across these regions. The RAC industry is expected to have declined by ~20% in Apr’21 as compared to Apr’19. Like last year, there is some expectation of an extension of the summer season in Jun-Jul’21, which could prove to be a respite for RACs.


* Cautious approach towards the Projects business:

The competitive intensity in this segment is not intense at present, with current bids having an attractive margin. The strategy in this segment for BLSTR is to execute Projects, which provide cash flow visibility rather than only topline growth. The management expects to clock ~6.5% margin in this segment. Within sectors, the Healthcare segment is offering a healthy opportunity. Going forward, the management will be extremely cautious in the Projects business and focus more on cash flows rather than chasing growth.


* Expect to defend margin in the UCP segment with a focus on cost:

With the ongoing lockdown and subdued demand, the company has paused ad spends and will resume the same once demand picks up. BLSTR has undertaken a 3-5% price increase across various SKU categories in Apr’21. This is expected to cover up for commodity price inflation in recent months. The management will review decision for further price hikes in Sep’21 as the current price hike will adequately shield existing inventory until then. It believes that the RAC industry will have to look into the value engineering process to mitigate effects of price hikes. BLSTR is targeting 8-8.5% margin in the UCP segment in FY22 (v/s 7.9% in 4QFY21).


* Valuation and view: The commentary on RAC industry trends suggest that events like a lockdown in Apr’21 (and the ongoing extension into May’21), rising commodity costs, and higher competitive intensity poses a risk to FY22 earnings. At the CMP, the UCP business of BLSTR is trading at 50x FY23E EPS, thus indicating an unfavorable risk reward. Maintain Sell with a TP of INR700 per share.


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