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Muted operating performance; risks increase in FY22

Washout summer season likely in case lockdown is extended in May’21

* As expected, BLSTR posted a weak 4QFY21 revenue, with a flat two-year revenue CAGR. EBITDA came in below our estimate as rising commodity costs, coupled with an increase in competitive intensity, weighed on margin.

* The commentary on RAC industry trends suggests that events like a lockdown in Apr’21 (and the ongoing extension into May’21), rising commodity costs, and higher competitive intensity poses a risk to earnings in FY22. We cut our FY22E/FY23E EPS estimate by 17%/6%. At the CMP, the UCP business of BLSTR is trading at 50x FY23E EPS, thus indicating an unfavorable risk reward. Maintain Sell with a TP of INR700 per share.

Commodity cost inflation weighs in on margin

* 4QFY21 snapshot: Revenue grew 24% YoY (flat two-year CAGR) to INR16.1b and was in line with our estimate. EBITDA came in 11% below our expectation at INR1.02b, indicating weak operating performance. EBITDA margin stood at 6.3% v/s our estimate of 7.2%. Other income jumped to INR398m on account of sale of property worth INR320m. Reported PAT came in at INR680m and was 10% above our expectation.

* FY21 snapshot: Revenue declined 21% YoY to INR42.6b. EBITDA fell 15% to INR2.4b. EBITDA margin stood at 5.6% (down 30bp YoY). Adjusted PAT declined 32% YoY to INR1b.

* Key segmental highlights: a) EMP – Revenue increased 18% YoY to INR7.8b, in line with our expectation. PBIT margin stood at 6.2% v/s our estimate of 4.8%. EMP revenue declined 22% YoY to INR22.2b in FY21. PBIT margin stood at 4.8% v/s 4.3% last year. Order book stood at INR29.5b (flat YoY). b) UCP (Unitary Cooling Products) – Revenue increased 31% YoY to INR7.8b, 10% ahead of our estimate. On account of the poor PBIT margin of just 7.9%, absolute PBT was 12% below our expectation. Revenue declined 19% YoY to INR18.7b in FY21. PBIT margin stood at 5.8% v/s 7.1% last year.

Key takeaways from the management interaction

* Unprecedented increase in raw material and freight costs led to a 5-8% price increase across various Room AC SKUs from Jan-Mar’21. Another 3-5% price rise was taken in Apr’21, which is expected to be rolled out once the market reopens post lifting of COVID-related lockdown restrictions.

* RAC market grew by 27% YoY in 4QFY21, while BLSTR grew by 33% and increased its market share to 13.2% (v/s 13% in 9MFY21).

* State lockdowns impacted demand for Room ACs in Apr’21, with sales for Blue Star down 20% YoY v/s Apr’19 sales. The management said demand in 1QFY22 will be impacted, irrespective of how many states decide on a lockdown in May’21.

* Owing to higher focus on working capital, the company ended FY21 with a net cash of INR1.5b (v/s a net debt of INR1.3b in 9MFY21 and INR1.6b in FY20) – the only silver lining in an otherwise struggling year on account of COVID-19.

Valuation and view

Incorporating existing risks on topline and margin, we cut our FY22E/FY23E EPS estimate by 17%/6%. The commentary on RAC industry trends suggests that events like a lockdown in Apr’21 (and the ongoing extension into May’21), rising commodity costs, and higher competitive intensity poses a risk to earnings in FY22. At the CMP, the UCP business of BLSTR is trading at 50x FY23E EPS, thus indicating an unfavorable risk reward. Maintain Sell with a TP of INR700 per share.

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