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Blue Star delivered strong revenue growth of 87.3% YoY in Q1FY23 (3-year CAGR 7.7%). Pent-up demand and revival across segments have driven strong revenue growth. The company has maintained its market share in RAC category (13.25%). While the gross margin of the company declined 333bps YoY due to input material inflation, operating leverage resulted in EBITDA margin expansion of 224bps YoY. The company has started production of water cooler at its Wada facility. We model the company to report revenue and PAT CAGRs of 18.1% and 15.6% over FY22- FY24E. However, we believe, at current valuations (43x FY24E EPS), the stock price upside is capped; hence we maintain HOLD rating on the stock with a revised DCF-based target price of Rs1,028 (implied P/E 44x FY24E EPS; prior TP: Rs1,047).

* Q1FY23 performance: Blue Star reported strong YoY revenue, EBITDA and adj. PAT growth of 87.3%, 192% and 480.9% respectively. (3-year revenue CAGR is 7.7%). While gross margin contracted 333bps YoY due to input inflation, EBITDA margin was up 224bps YoY led by operating leverage.

* Healthy growth across segments: Projects business witnessed a strong 57% YoY growth to Rs79.3bn. Unitary cooling and professional electronics grew 122.5% and 27.2% YoY respectively, in Q1FY23. Blue Star reported 173bps and 380bps higher PBIT margin in EMP projects and unitary cooling, respectively.

* Market share gains: While Blue Star maintained its market share in the RAC business in Q1FY23, it gained market share in Projects business across categories. We note economic recovery resulted in strong growth in commercial refrigeration too.

* Strong recovery in Project business: Blue Star’s carry-forward order-book is healthy at Rs39bn (up 23.8% YoY) as of Jun’22. We note improvement in construction cycle and higher orders from infrastructure sector have resulted in higher demand. We believe this will likely result in strong growth ahead.

* Maintain HOLD: We model Blue Star to report revenue and PAT CAGRs of 18.1% and 15.6% over FY22-FY24E and return ratios to be in excess of cost of capital. We remain positive on the company’s business model due to its established competitive advantages and strong brand equity. However, owing to rich valuations, we maintain HOLD rating on the stock, with a DCF-based TP of Rs1,028 (implied P/E 44x FY24E).

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