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Stronger performance than peers in-spite of tough macro conditions

Blue Star has delivered a strong revenue growth of 27.1% YoY in Q2FY23 (vs Voltas: 4.1%, Lloyd: 21.2%). The company has maintained its market share in RAC category at 13.25%. While the gross margin of the company increased 23bps YoY led by input material inflation, higher other expenses resulted in EBITDA margin dipping by 27bps YoY. The company has started production at its Wada facility (in Maharashtra). The company plans to invest in distribution expansion as well as new products to focus on gaining market shares in regions where it has lower market shares. We model Bluestar to report revenue and PAT CAGRs of 19.8% and 25.8% over FY22-FY24E. However, we believe, at current valuations (44x FY24E EPS), the stock price upside is capped. Hence, we maintain HOLD rating on the stock with a revised DCF-based target price of Rs1,270 (implied P/E 46x FY24E EPS; prior TP: Rs1,028).

* Q2FY23 performance: Blue Star reported strong YoY revenue, EBITDA and adj. PAT growth of 27.1%, 21.1% and 36.7%, respectively (3-year revenue CAGR is 8.1%). While gross margin increased 23bps YoY, EBITDA margin dipped 27bps YoY due to higher other expenditure. Its PAT margin improved 19bps YoY on lower effective income tax rate.

* Healthy growth across segments: Projects business witnessed a strong 32.6% growth YoY. Unitary cooling and professional electronics grew 15.4% and 49.9% YoY, respectively, in Q2FY23. Blue Star reported 10bps and 101bps lower PBIT margin in EMP projects and professional electronics, respectively. UCP segment reported EBIT margin expansion of 110bps YoY.

* Market share gains: Blue Star now commands a market share of 13.25% in RAC. It plans to invest in repositioning and distribution reach to gain market share in geographies where its share is low. We believe this will likely drive volume growth for the company’s B2C business.

* Strong recovery in project business: Blue Star’s carry-forward order-book is healthy at Rs41.6bn (up 30.1% YoY) as of Sept’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 19.8% and 25.8% 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 DCF-based TP of Rs1,270 (implied P/E 46x FY24E).

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