Accumulate Blue Star Ltd For Target Rs.1,653 by Prabhudas Liladhar Capital Ltd
Input cost pressures weigh on margins
UCP margins remained under pressure in Q1FY27 due to unprecedented commodity cost inflation, INR depreciation, delayed onset of summer, inventory overhang in the channel and higher spending on advertising, trade schemes and consumer finance to support tertiary sales. Management reiterated that the strategy in Q1 was to protect market share despite margin pressure. While the company intended to pass on ~13% cumulative cost inflation, only ~5% price hikes could be implemented due to prevailing market prices. Going ahead, management expects gradual margin recovery through product portfolio optimization, value engineering, cost reduction initiatives and improved market operating prices, while reiterating unitary products EBIT margin guidance of above 6.5% for FY27. Commercial refrigeration remained weak with ~15% degrowth in deep freezers owing to muted demand from ice cream OEMs, although demand is expected to improve during the festive season. In the B2B business, strong momentum in data centre projects continued, with INR15bn order inflow in Q1FY27 and management guiding for INR30bn order inflow and INR14bn revenue from data centre MEP projects in FY27. Management reiterated that data centre MEP is expected to contribute around 20% of revenue (INR40bn) by FY29, while the overall MEP business could grow at around 12% for the next couple of years, supported by robust demand from data centres
We have downward revised our FY27E/FY28E earnings by 10.1%/4.8%, factoring in lower UCP margins amid elevated input costs, higher competitive intensity. We estimate FY26-28E revenue/EBITDA/PAT CAGR of 17.8%/19.4%/26.3%. we revise our SOTP-based TP to INR1,653 (earlier INR1,873), implying PE of 40x FY28E. Downgrade to ‘Accumulate’ from ‘BUY
Q1FY27 financial performance:
Revenues grew by 13.3% YoY to INR33.8bn (PLe: INR35.8bn). Gross margins contracted by 170bps YoY to 21.7% (PLe: 22%). EBITDA declined by 12.5% YoY to INR1.8bn (PLe: INR2.2bn). EBITDA margin contracted by 150bps YoY to 5.2% (PLe: 6.1%). Unitary Products revenues grew by 12.7% YoY to INR16.9bn and EBIT margin contracted by 290bps YoY to 2.9%. EMP and Commercial AC Systems revenues grew by 15.1% YoY to INR16.3bn and EBIT margin contracted by 110bps YoY to 6.8%. PEIS revenues declined by 9.7% YoY to INR636mn and EBIT margin expanded by 420bps YoY to 15.1%. PAT declined by 15% YoY to INR1.02bn (PLe: INR1.2bn).
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