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Weak Q1 already built in; demand deferred, not lost

We met with the management of Blue Star (BLSTR) to understand recent trends in the AC industry and mgmt outlook for FY26. KTAs:1) BLSTR expects ~20- 25% YoY revenue drop in RAC in Q1FY26 due to a high base and unseasonal rains, partly offset by steady growth in CACs (~10-12%, led by data centers) and Commercial Refrigeration (~15-20%, led by visi coolers/freezers). 2) Q2 is likely to see a slower offtake due to elevated channel inventory owing to muted AC demand/weak secondary sales in Q1. 3) RAC demand could rebound in H2FY26, aided by festive season momentum and BEE star-rating change-led pre-buying. 4) The mgmt has guided to RAC growth of ~10-15% for FY26 with UP EBITM at ~8-8.5% (skewed toward the lower end) led by cost discipline and operational efficiency measures. 5) BEE rating change in Jan-26 could lead to an expected cost hike of ~7–8% across players. Our 15Y trend analysis shows weather-led demand volatility is cyclical, with weak summers typically followed by sharp rebound in both, volume and stock prices (refer to our note: Untimely rain: Killjoy for AC demand, apt time to BUY AC stocks). We keep our estimates largely unchanged and introduce FY28 estimates; retain BUY with unchanged TP of Rs1,850, based on UP/EMP&CAC/PEIS Jun-27E PER of ~60/45/15x.

Demand deferred to H2; hope of revival not yet lost

BLSTR stated that Q1FY26 has been a washout for the RAC business, with revenue expected to fall ~20–25% YoY, mainly on a high base effect and unseasonal rains that disrupted demand across regions (the South saw early showers in Apr, followed by rainfall in the North/West during May). However, this would be partially offset by momentum in CACs (~10–12% growth in FY26, led by data center projects) and Commercial Refrigeration (~15–20% growth led by demand for visi coolers/deep freezers).

FY26 guidance intact; all hopes now on strong festive season/pre-buy

Despite a softer start to FY26, BLSTR has retained its RAC growth guidance of ~10-15% for FY26, citing stable structural tailwinds and potential for recovery in H2. On the margin front, the company maintained its EBIT margin guidance of ~8-8.5% for the UP segment (likely skewed toward the lower end). While no major discounts have been observed among players yet, the mgmt noted that if current monsoon conditions persist in Q2 and lead to continued weakness in secondary sales, players might revisit their pricing. A strong rebound is anticipated in Q3, aided by festive demand and dealer pre-buying ahead of the BEE star-rating change wef Jan-26, potentially causing a ~7–8% cost hike.

Q1 weakness already factored in; TP unchanged at Rs1,850

Given the transitory nature of the Q1 weakness, we have already built in a weaker outlook and our 15-year trend analysis shows that weather-led demand volatility is cyclical rather than structural, with weak summers typically followed by sharp rebound in both—volume and stock prices. We also introduce FY28 estimates. We maintain BUY with unchanged TP of Rs1,850, while rolling forward our estimates to June-27 (UP/EMP&CAC/PEIS Jun27E PER of ~60/45/15x).

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