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Growth set to improve with stable margins; upgrade to ADD as some re‐rating looks imminent

Our view

There has been encouraging demand for cooling products during the quarter. Despite extended monsoon, room AC business grew on the back of upgradation of residences and   revival of the light commercial sector coupled with consolidation of e‐com channel. Partial opening of educational institutions and commercial establishments enabled a growth in revenue for the commercial refrigeration business during the quarter EMPS segment saw improved pace of execution with margins recovering to normalized levels. BLSTR’s efforts in the North market to improve its presence is now starting to bear fruits. Considering improved execution in the project business and normalization of margins we now feel company can deliver consistent growth and therefore command a better valuation multiple for that business; we upgrade the stock to ADD from Reduce.

Result Highlights

* Quarter summary –Blue star (BLSTR) delivered revenue growth of 37% yoy with Unitary products and EMPS and packaged air‐conditioner segments registering growth of 43% and 34% respectively. Gross margin has contracted 152bps on high commodity inflation.  

* Growth across products – Cooling and purification products registered 35% growth on improved sentiments. Commercial refrigeration has seen higher growth as it has been witnessing traction from medical and supermarket refrigeration.      

* Price hikes – Company has taken 3% price increase in Q2 (in September). However further price hikes cannot be ruled out as significant commodity headwinds continue to persist.   

* Market share trends – BLSTR has largely grown in line with the market maintaining its market share in RAC at 13%. BLSTR continues to be leader in ducted AC, second in VRF and in top three in chillers. It has leadership position in storage coolers, deep freezers and modular cold storage.

Valuation

BLSTR is estimated to deliver double‐digit CAGR revenue growth on back of improved execution of projects, market share gains in RAC, continued growth momentum in packaged air‐conditioners and commercial refrigeration. Profitability is set to improve on cost control initiatives and reduction in working capital requirements. We now pencil in Revenue/EBITDA/PAT CAGR of 18%/29%/49% over FY21‐24E. We have increased our multiple in EMPS and PEIS to 20x from 15x earlier (on back of consistent delivery and stable margins)  and increased our SoTP‐based PT of Rs1,028; upgrading the stock to ADD from REDUCE.

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