Blue Star Ltd : RoE to expand in FY23 unlike the market leader`s; maintaining a Buy - Anand Rathi Shares and Stock Brokers
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RoE to expand in FY23 unlike the market leader’s; maintaining a Buy
Blue Star’s return ratios are expected to expand in FY23 (H1 FY23 net income Rs1.17bn, FY22 net income Rs1.67), unlike its peers in durables and FMEG. Its project business’ bright outlook for H2 FY23 and FY24 is supported by its strong order book as H1 FY23 order inflows shot up 89% y/y. The commissioning of the Sri City plant by Jan’23 could aid the CY23 summer volume growth.
Growth supported by all verticals. Q2 FY23 revenue rose 27% y/y, backed by robust growth across all verticals. Revenue booking at projects rose 33% y/y to Rs9.6bn. Growth in UCPs was 15% y/y, as Q2 is a lean quarter for this category. Professional electronics’ revenue rose 50% y/y to Rs924m as demand for medical diagnostic equipment and for non-destructive testing was strong. The EBITDA margin dipped 30bps y/y despite a 20bp y/y gross margin expansion as staff cost/other expenses rose 17%/49% y/y. PAT jumped 36% y/y as the Q2 FY23 tax rate was 26% (34% a year ago).
Sri City plant to be commissioned by Jan’23. Gross debt at end-Q2 FY23 rose to Rs7.2bn (Rs4bn a year ago, Rs4.8bn six months back) as capex for Sri City, expected to be commissioned by Jan’23 was funded via debt. Capital across the UCP category increased to Rs7.2bn by end-Q2 FY23 (vs average of Rs4.3bn for the last eight quarters) considering supply-chain volatility.
Outlook & Valuation: Post-Q2 FY23, our FY23e/FY24e revenues have risen 6%/5%. However, our net income estimates are largely intact considering the competitive market context, which can constrain the pace of margin expansion. At the CMP, the stock trades at 34x/26x the FY24e/FY25e EPS of Rs36/Rs47. We maintain our Buy rating with a TP of Rs1,517, 32x FY25e EPS of Rs47 (earlier Rs1,352, 38x FY24e EPS of Rs35.6).Risks: Inability to gain market share and reduce capital employed in UCP is a risk to our earnings. Significant delays in project execution could impact project margins.
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