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Growth driven by EMP + CAC; outlook remain strong for UP

In Q2FY25, Blue Star revenue was at INR 22.7bn, up 20% YoY, down 21% QoQ (In line JMFe), 5 year CAGR of +13%. Growth was primarily driven by the EMP & Commercial AC. EBITDA was at INR 1.5bn up 21% YoY and down 37% QoQ. OPM was at 6.6% vs 6.5%YoY and 8.3% QoQ (JMFe OPM at 6.8%). Reported PAT was at INR 964mn up 36% YoY and down 43% QoQ.

* In UP- strong RAC performance while commercial Ref capped growth: In Q2, RAC grew c. 27% in volumes and 25% in value on the back of strong stocking by the channel ahead of festive. In Oct’24 Blue star RAC grew c.30% in volume and 28% value and continue to maintain market share of c.13.75%. In the commercial Ref segment; due to regulatory changes pertaining to BIS and Quality Control Order (QCO), production and sale of water coolers (high margin segment) impacted and liquidation of old inventory at lower realisations capped margins. Also; delay in ramping up the facility of deep freezer impacted the overall revenue. In Q2FY24 there was large export of RAC to Middle East but the same was not there in Q2FY25. All this resulted in Unitary Product revenue to be up by 5% YoY to INR 7.6bn. Management expect commercial ref has normalised and expect strong demand. Guided revenue growth of c.25-30% and margin of 8.5-9%.

* Q2 growth was driven by EMP & Commercial AC: EMP growth was driven by strong momentum in the manufacturing and data center. Infrastructure is now started gaining traction along with the commercial real estate. Carried forward order book in EMP was INR 50bn up 9% YoY. Strong demand in data centres, education, and commercial real estate led to better margins and revenue growth of CAC. Margins were up by 223bps YoY to 8.3% mainly due to better mix and cost optimisation. Guided margin of 7-7.5%.

* Delay in order finalisation impacted PEIS: Revenue of PEIS was at INR 805mn down 4% YoY because of supply chain constraint like delay in import of hi-tech capital equipment. Expect demand to revive from Q4FY25 onwards.

* Outlook & Valuation: We expect Blue Star’s Unitary Products (UP) business revenue to grow at a CAGR at 22% over FY24-27 (vs Management expect c.25-30% in FY25), along with margin expansion of 120 bps, mainly because of Blue Star’s increased focus on its sourcing and in-house manufacturing, distribution and marketing, improved product mix, affordable price brand, logistics cost advantage, PLI, and scale along with strong industry tailwinds in the Commercial AC business. We expect EMP and PEIS segment revenue CAGR of c.18%/16% over FY24-27 mainly backed by private capex and data center. All the above will result in revenue/earnings CAGR of 20%/33% over the next 3 years with RoCE/RoE of 28%/23% in FY27 and OCF/FCF of INR 20.8bn/10.8bn. we value BS on Sept’26 SOTP, UP at INR 1,161 PE of 52x (earlier50x) due to Profitable market share gain, MEP & Commercial ACs at INR 733 PE of 40x (earlier 35x) due to strong growth backed by private capex + data center and PEIS at INR 76 PE of 30x (because of strong RoCE). Our SOTP target is INR 1,971, up 11% from CMP and hence maintains a BUY.

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