Buy Blue Star Ltd for the Target Rs 1,900 by Emkay Global Financial Services Ltd
Blue Star (BLSTR) posted a weak 1Q, with a softer-than-expected Unitary Products (UP) topline growth (up 13% yoy), despite ~21% RAC value growth (mainly impacted by a 15% decline in commercial refrigerators). UP margins slumped to 2.9% (vs 10.4% in 4QFY26) as BLSTR was able to pass on only ~5% of the ~13% price hike required to offset commodity inflation, with competitors continuing to sell older/lower-cost inventory, limiting pricing flexibility, which impacted growth/margins. Higher brand investments and consumer financing schemes to recoup lost share in Apr-26 (~50 bps) further led to an EBITDA drag (37% miss vs estimates). Owing to near-term hiccups (elevated commodity, rising competition) and BLSTR’s intention to regain market share (broadening portfolio toward entry-level models), the management cut UP margin guidance to 6.5% for FY27 (believes industry should bounce back to ~7-7.5% levels in a normalized setup). Within EMP and CAC, data center is a key structural lever (BLSTR is a market leader with ~30% share in data center MEP). While we lower our FY27E/FY28E EPS by ~17%/11% to reflect a weaker margin outlook in UP, we believe BLSTR continues to benefit from an RAC under-penetration story with a premium play, coupled with data center/US exports avenues. We cut our Jun-27E TP (roll-forward) by ~7% to Rs1,900 (from Rs2,050); maintain BUY.
1Q growth subdued; UP margins slump
BLSTR’s 1Q revenue grew ~13% yoy to Rs33.8bn (7% miss vs our estimate of Rs36.3bn), mainly on weaker-than-expected UP performance (dragged down due to commercial refrigerators). EBITDA stood at Rs1.8bn (37/29% miss vs our/street estimates), as lower primary sales volume growth weighed on margins. APAT at Rs1bn was down 16% yoy.
Earnings call KTAs
1) BLSTR estimates that the domestic RAC industry grew ~21%/25% yoy in volumes/value during 1Q, while BLSTR reported ~18%/21% volume/revenue growth on a primary sales basis.
2) The delayed onset of summer, with BLSTR taking higher price hikes vs industry, led to a ~50bps market-share loss in April. To offset this, BLSTR increased consumer financing schemes, dealer incentives, and promotional spending from mid-May which helped recover ~10bps market share in May and ~50bps in June.
3) BLSTR plans to redesign products, increase localization, outsource components, and introduce more cost-competitive entry-level offerings, but not at the cost of hurting its premium brand positioning.
4) The 1Q margin decline was led by sharp commodity inflation, particularly imported components (~40% of BOM), while BLSTR could pass only ~5% via price hikes vs the ~13% requirement.
5) Data centers remain the largest growth avenue, with BLSTR expecting ~Rs30bn/Rs13.5bn order inflows/revenue in FY27, followed by ~Rs45bn/Rs21bn order inflows/revenue in FY28. 6) Commercial refrigerator weakness was industry-driven rather than company-specific, with revenue declining ~15% due to weak demand for deep freezers/cold rooms.
7) US exports remain a key long-term growth driver ($55–60mn in FY25 to ~$80–85mn in FY26), with BLSTR targeting ~$200mn of exports by FY28. 8) FY27 capex guidance: ~Rs3.5-4bn.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
