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Strong recovery from 2HFY22 already priced in; maintain REDUCE

Valuation and view –

Lockdown‐like restrictions imposed in various states impacted revenue for the Unitary Products segment during the peak selling season and disrupted operations at project sites, for the second year in a row, which led to weaker than expected results. EMPS segment saw improved traction in terms of order inflow from factories and light industrial sector, driven by the Make in India initiatives of the government. Gross margins were maintained on price increase taken to offset commodity inflation. Near‐term growth outlook remains challenging as channel inventory continues to remain high. We believe growth momentum will return for BLSTR from 2HFY22 as it has aggressively invested in brand‐building and its entry into mass premium segment in RAC is well received. 

BLSTR is estimated to deliver double‐digit CAGR revenue growth on back of improved execution of projects, market share gains in RAC, continued growth momentum in packaged air‐conditioners and commercial refrigeration. Profitability is set to improve on cost control initiatives and reduction in working capital requirements. We now pencil in Revenue/EBITDA/PAT CAGR of 18%/29%/49% over FY21‐24E. We roll forward our valuations multiple to FY24E with our SoTP‐based PT of Rs900 assigning 40x to unitary products and maintain REDUCE rating on relatively high valuations. 

Result Highlights

* Quarter summary – Blue star (BLSTR) delivered revenue growth of 68% yoy with Unitary products and EMPS and packaged air‐conditioner segments registering growth of 84% and 62% respectively. Gross margin has expanded 95bps on better product mix.  

* Growth across products – Commercial air‐conditioning registered 108% growth on lower base, while RAC, the key segment registered growth of 58%, marginally higher than market growth of 55%. Commercial refrigeration has been witnessing good traction from Pharma and Healthcare segments.     

* Price hikes – Company has affected 8% cumulative price increase to offset commodity inflation. However entire benefit of price increase will be visible only from Q3 as higher discounts are being offered to clear the inventory.   

* Market share trends – BLSTR has largely grown in line with the market maintaining its market share in RAC at 13%. BLSTR continues to be leader in ducted AC, second in VRF and in top three in chillers.    

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