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Weak operating performance; UCP disappoints

Inventory levels to normalize over next two months

* Blue Star (BLSTR) posted weak revenue in 1QFY22, in line with expectations, with the two-year revenue CAGR in the Unitary Cooling Products (UCP) segment at -25%. EBITDA came in below our estimate as rising commodity costs, the lower off-take of RACs, and higher operating costs sequentially weighed on margins. Adj. PAT came in 19% below our estimates.

* While inventory levels are marginally elevated, this does not pose a threat at present, as the demand outlook is expected to improve with the arrival of the festive season. However, elevated commodity costs and higher competitive intensity pose a risk to margins in FY22, especially if a potential third COVID wave causes further disruption. We cut our FY22E/FY23E/FY24E EPS estimate by 10%/7%/4%. We roll forward our valuation methodology on a Sep’23 basis, with TP of INR730/share. At CMP, the UCP business of BLSTR is trading at a PE multiple of 55x/43x FY23E/FY24E, indicating an unfavorable risk-reward. Maintain Sell.

Lockdown impacts RAC sales in key season

* 1QFY22 snapshot: Revenue grew 68% YoY to INR10.5b, but missed our estimate by 15%. EBITDA came in at INR422m, missing our estimate of 15%, with the EBITDA margin at 4%. Depreciation was lower sequentially at INR201m (v/s INR249m in 4QFY21). Adjusted PAT came in at INR127m v/s our expectation of INR157m.

* Key segmental highlights (1QFY22): a) Electromechanical Projects (EMP) – Revenue grew 62% YoY to INR5b, in line with our expectation. The PBIT margin stood at 4%. The order book stood at INR31.5b, up 8% YoY. b) Unitary Cooling Products (UCP) – Revenue came in at INR5b (two-year CAGR of -25%), 28% below our expectation; the PBIT margin stood at 4.3%.

Key takeaways from management interaction

* Order inflows stood at INR6.5b in 1QFY22 (INR2.7b in 1QFY21). Major orders were received from Ola Electric and Netmagic IT services.

* The Room Air Conditioner (RAC) market grew 55% YoY in 1QFY22, while BLSTR grew by 58%. For the overall industry, it expects the market to be flat in FY22 (v/s FY20) provided there is no disruption from a third COVID wave. Blue Star aims to grow ~10% v/s FY20 levels.

* Overall in 1HCY21, Blue Star has taken an 8% price hike (3% in 1QFY22 and 5% in 4QFY21). It would evaluate whether to take any further price hikes post the festive season.

Valuation and view

Incorporating existing risks on the topline and margin, we cut our FY22E/FY23E/FY24E EPS estimate by 10%/7%/4%. Elevated commodity costs and higher competitive intensity pose a risk to margins in FY22, especially if a potential third COVID wave causes further disruption. At CMP, the UCP business of BLSTR is trading at 55x/43x FY23E/FY24E, indicating an unfavorable riskreward. Maintain Sell, with TP of INR730.

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