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In-line quarter

* BLSTR’s topline/EBITDA came in line with our estimates. Margins were impacted by commodity inflation. It reversed the employee cost rationalization done in FY21 while continuing the control over other costs. GM contracted by 152bps yoy and 139bps qoq.

* The Unitary Products (UP) segment grew by 10% (2-year CAGR). EBIT margins improved yoy and qoq to 5.1%. Growth in commercial refrigeration was slightly better than RACs yoy. EBIT margins are expected to bounce back to normalized levels of 8-9% by Q4FY22.

* RAC revenue grew by 35%, in line with industry growth. Price hikes of up to 3-4%/12-14% have been implemented since Sept/Jan, 2021. BLSTR maintained its market share at 13% in Q2. RAC inventory has now normalized.

* We have largely maintained our FY22-24 Revenue/EBITDA estimates, but we cut FY22 EPS estimate on account of the ETR alignment with management guidance. Maintain Hold with a revised SoTP-based Dec’22 TP of Rs900 (rolling forward to Dec’23E).

Broadly in-line performance:

Revenue grew by 37% yoy, driven by strong growth across segments, albeit on a low base. The UP segment’s revenues were in line with estimates and grew by 10% on a 2-yr CAGR basis. The EMP segment, however, disappointed with a 4% revenue miss, while declining 4% on a 2-yr CAGR basis as well. Although gross margins witnessed an erosion due to commodity inflation, EBITDA margins improved sequentially on the back of a reduction in other opex. Other opex grew by 23% yoy, indicating some cost normalization after the steep cuts made last year. Margins improved sequentially for all three segments. PAT margins improved both yoy and qoq, but were below estimates. NWC days improved to 22 days from 33 in the year-ago quarter due to significantly lower payables.

Outlook:

As per our channel checks, RAC inventory has now normalized, which we believe will aid primary sales in H2FY22. According to management, price hikes effected since Jan’21 are largely covering for commodity inflation. In our view, a sustained inflationary scenario will lead to further hikes, which could potentially affect demand. The competitive intensity remains high, with aggressive efforts from Samsung to gain market share.

We are penciling in 11% revenue CAGR for FY20-24E for the UP segment, with 9% EBIT margins in FY23-FY24. BLSTR’s leadership position in VRF and Chillers should provide healthy revenue growth opportunities from robust Data Centre expansion in India, management is expected to outline the potential benefits of this in Q4. Management’s focus on tight control over working capital should continue to strengthen the balance sheet.

Key upside/downside risks:

market share gains in RACs; slower-than-expected recovery in RACs; deterioration in working capital; weaker-than-expected margin delivery; and speedy recovery in the projects business and order inflows.

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