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Blue Star reported 10%/22% revenue growth in the EMPS and UP segments, with 20% growth in the RAC segment, in Q4. PBIT margin also improved in both the segments. Investment in plant, R&D and channel over time has worked out well for Blue Star. Company intends to increase its current market share in RAC, from 13.5% to 15% by FY25. As part of its medium-term strategic direction, the company intends to grow faster than the market and increase profitability. Within ACs, it plans launching an affordable range of RACs, chillers, etc. In commercial refrigeration, a new range of deep freezers & cold rooms and moving into adjacencies like retail, healthcare and kitchen refrigeration are on the anvil. Profitability improvement is planned through scale and operating cost leverage. We maintain HOLD on the stock, with Mar-24E TP of Rs1,370/share.

Strong show in EMPS, across the margin and order book

The company saw 10%/25% YoY sales growth for 4QFY23/FY23 in the segment, on the back of enhanced product portfolio and channel expansion. Within the commercial AC segment, demand from Tier 3, 4 & 5 cities remained strong. EBIT margin in the segment stood at 6.9% in 4QFY23 vs 6.1% YoY. The order book at the end of the year stood at Rs47.9bn – up 58%YoY, on the back of inflow across segments.

Continues to gain market share without sacrificing margins

BLSTR, owing to its backward integration, has been able to maintain margins in the Unitary Products (UP) segment, in addition to gaining market share. The segment saw 22%/39% YoY sales growth during 4QFY23/FY23. Over the quarter, the RAC segment saw 20% growth; the company expects akin growth for FY24. The commercial refrigeration vertical saw uptick in demand from the food and healthcare sectors. UP segment’s PBIT margins during the quarter improved by ~150bps YoY to 8.4%, while coming in at 7.8% for FY23 (up ~180bps vs FY22). The company has additional margin levers, given commissioning of its Sri City plant, which will help lower inward & outward logistics costs owing to proximity to southern ports as well as to key customer markets. The company intends to increase its market share to 15% by FY25 from 13.5% presently.

Valuation and outlook

Over the years, the company has been able to maintain its margin levels despite increased market share in the RAC segment, indicating prudent investment in plants and channels. The RAC segment is expected to grow at a steady pace over the medium term, given that penetration levels are at ~7% in India. We roll-forward our valuation to Mar25E EPS and arrive at a TP of Rs1,370/share (TP at Rs1,303 earlier, for Dec-24E EPS). We maintain our HOLD recommendation on the stock. Blue Star has provided strategic direction – to build scale and improve profitability through scale and operating-cost leverage. The company intends to strengthen product innovation with continued investment in R&D. Focus on indigenization and backward integration will continue.

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