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Focusing on core competencies

Blue Star, in its recent analyst meet, highlighted the strategic decision to focus on its core competency of room AC, commercial refrigeration, commercial and packaged AC solutions, rather than diversifying into other whitegoods categories. The company will be investing in a plant in Sri-city which will reduce logistics and related-cost to cater to South Indian markets. In the near term, the company targets to attain 15% domestic room AC market share and then focus on exports of these products. It expects the implementation of new energy efficiency norms January 2022 onwards which can lead to ~7% price increase. Given the focus towards margins, cash and core competency, we upgrade the stock to HOLD with a revised target price of Rs813 (previously: Rs765).

* Consolidate on domestic market share, then target exports:

The company has worked on introducing new models in entry-level segments and is prepared to address the requirement of new energy norms. It has a near-term target of 15% domestic market share in room AC and post this it will try to grow in overseas geographies. Some of the key overseas markets that the company is currently targeting are 16 countries spread across SAARC, Middle-East and Africa.

* Likely implementation of new efficiency norms from January 2022:

The management is of the view that given the government push towards climate control, the change in energy efficiency norm is likely to be implemented during January 2022. This may further increase the overall price of room AC by 7%. Blue Star is geared up to address this with future-ready product offerings.

* e-commerce gradually gaining relevance:

The company is witnessing a gradual increase in presence of e-commerce channel along with other channels. As per the company in FY21, ~18% of room AC sales were through e-commerce and Blue Star sold 15% through the same. Under water purifier category, majority of company’s sales are through e-commerce and it plans to increase market share to 5% from 3%.

* Expect no major impact due to second wave, though the overall secondary sales have slowed down and growth may be impacted in April and May 2021. The company expects rebound June/July onwards. However, the industry target of 30% growth in summer sales is likely to come down depending on the opening up of the economy.

* Upgrade to HOLD on increased focus towards margins:

Given the focus towards margins, cashflow and core competencies, we believe, Blue Star will be able to deliver long-term value. Hence, we upgrade the stock to HOLD with a revised target price of Rs813 (previously: Rs765).

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