Buy Blue Star Ltd For Target Rs. 1,900 By JM Financial Services
In-line quarter, but a hazy outlook
Blue Star’s consolidated revenue grew ~21% YoY, largely in line, led by robust growth in electro-mechanical projects (strong demand across factories and data centres) and unitary cooling products (channel filling in anticipation of a harsh summer). Professional electronics continued to disappoint with revenue declining in Data Security and Med-Tech businesses. An unfavourable revenue mix resulted in ~60bps/30bps YoY contraction in gross/EBITDA margin. The management highlighted a weak start to the summer with sales in April growing only 5% YoY vs. initial expectations of 20-25%.This coupled with high channel inventory at the distributor level is expected to result in lower primary sales in 1Q. Order book for the EMP business remains strong but global uncertainty remains a key risk. We cut our EPS by ~12%9% for FY26-27 as we see near-term margin pressure and uncertainty over RAC growth. We maintain BUY rating, with a revised target price of INR 1,900 (earlier 2,015).
* Overall performance resilient: Revenue increased 20.8% YoY to INR 40.2bn (in line with JMFe), supported by strong growth in EMP and Residential AC business. EBITDA for the quarter was INR 27.9bn, up by 15.5% YoY. Gross margin was 23.1% vs. 23.7% while EBITDA margin was 7.0% vs. 7.3% YoY (JMFe EBITDAM at 7.6%); contraction in both GM and EBITDAM was primarily led by change in revenue mix. Reduction in employee cost as a percentage of sales (6.6% vs. 6.9%) supported EBITDA margin slightly. PAT increased by 22% YoY to INR 19.4bn.
* Strong demand in EMP and RAC business: EMP and Commercial AC rev rose 31% YoY (7% above JMFe) to INR 19.7bn. EMP business delivered a strong performance driven by robust demand across factories and data centre although commercial real estate and infrastructure sector saw muted demand. CAC business also performed well, driven by steady demand from the healthcare, hospitality, and education sectors. Unitary products (UP) revenue grew by 14.7% to INR 19.6bn led by strong momentum in the RAC business as channel partners stocked up in anticipation of a harsh summer and uncertain supply chain risks. Commercial refrigeration business also rebounded from early regulatory challenges and delivered good growth. PEIS segment revenue stood at INR 0.9bn down 19% YoY as the Data Security and Med-Tech businesses are navigating through challenging environment, resulting in decline in both revenue and profitability.
* Outlook and Valuation: We expect Blue Star’s UP business/ EMP business/ PIES business revenue to grow at a CAGR of 21%/14%/9% respectively over FY25-27. Overall, this will result in revenue/earnings CAGR of 23%/15%/31% over FY25-27. We now value BS on FY27 SOTP, UP PE of 50x due to market share gain, EMP and Commercial ACs’ PE of 42x due to strong growth backed by private capex + data centre and PEIS PE of 25x. Our SOTP target is INR 1,900, up 19% from CMP; hence, we maintain BUY.
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SEBI Registration Number is INM000010361
