Hold Blue Star Ltd For Target Rs.740 - Emkay Global
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Lockdowns add to the commodity pain
* BLSTR’s topline beat of 9% was driven by the EMPS segment. This was overshadowed by the sharp contraction in gross margins (358bps yoy and 231bps qoq). Continued costcontrol measures led to 6%/21% yoy fall in Employee/Other opex.
* Unitary cooling (UP) revenues grew 31% yoy. However, EBIT margin expansion was restricted to 60bps yoy amid commodity inflation and RAC revenues benefiting only partially from Jan price hike. BLSTR has effected another price hike of 3-5% from April 1.
* RAC demand was strong during March to mid-April while sales after that have been weak. The full-quarter impact will be contingent on the extent of lockdowns. The focus on cash flow management played out well in FY21 and resulted in a net-cash balance sheet.
* The second Covid wave-led disruption in Q1FY22 makes us cut FY22E UP revenues by 8% and EBIT by 18%. Consolidated EBITDA gets cut by 4% for FY22E. FY23 estimates are largely unchanged. Maintain Hold with a revised SoTP-based TP of Rs740.
Commodity inflation plays spoilsport:
Revenues rose 24% yoy and came in 9% ahead of our estimates, with all three segments recording growth. The beat was largely driven by the EMPS segment which witnessed an 18% yoy rise in revenues, along with a 574bps margin expansion as base quarter had provisions towards doubtful receivables. The UP segment, with a 19% miss on the EBIT front, disappointed. This subdued performance was attributed to RM pressure. In fact, overall gross margins contracted 358bps yoy due to the same. EBITDA was below our estimates, while margins expanded 344bps yoy, supported by a dip in other opex and employee expenses. At the bottom line, considerably higher other income which included sale of property worth Rs320mn, helped post a 6% beat on our estimates.
Outlook:
In FY21, the company delivered on its guidance of strict cost control and focus on cash flow management, restricting EBITDA decline and turning the balance sheet into net cash, respectively. The company has implemented a second round of price hike of 3-5% in RACs, effective April 1, to mitigate commodity inflation. Management also said that high competitive intensity is prevailing in the market.
We have cut UP segment revenues and EBIT margin for FY22 due to the second Covid wave-led disruption and commodity price inflation, while our FY23 estimates remain unchanged. Regarding the projects segment, order execution will remain selective with control over working capital while commodity inflation could impact margins. We have not made any changes to our revenues estimates as government has not stopped construction activities. Key risks: market share loss in RACs; slower-than-expected recovery in RACs; deterioration in working capital; weaker than expected margin delivery; and speedy recovery in projects business and order inflows.
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