Buy Blue Star Ltd for the Target Rs 2,000 by Emkay Global Financial Services Ltd
Blue Star (BLSTR) reported a strong 2Q, with revenue growth of ~21% (~9% above our estimate) primarily driven by ~29% yoy growth in the Unitary Products (UP) segment. EBITDAM improved to ~6.9% (vs 5.2% in 1Q; ~100bps above our estimate) despite commodity cost pressures. Within segments, margin of Electro-Mechanical Projects and Commercial Air Conditioning Systems (EMP and CAC) were sequentially stable at 6.9% (~10bps improvement), while UP margins declined further to ~2.3% (vs ~2.9% in 1Q), primarily due to elevated RM costs. Demand outlook remains healthy, with Management targeting ~25% full-year RAC growth (implying ~30% growth in 2H), while prioritizing market share retention (~14.2%) following recovery from 1Q losses. Per Management, cumulative cost inflation has been ~18% since Jan-26 and commodity costs continue to track elevated levels. To mitigate this, Management has taken calibrated price hikes of ~13% (including ~5% in Oct-26), with the balance to be mitigated through rejigging its product portfolio, including value engineering, feature rationalization, alternate components, and potential outsourcing of entry-level products, with UP segment EBITM target of 6-6.5% on full-year basis (implying >8% margin in 2H). BLSTR’s EMP and CAC margin target remains intact at 7-7.5% for FY27. We largely maintain FY28E/FY29E EPS and build in revenue/EBITDA/EPS CAGR of 15%/14%/16% over FY26-29E. We maintain BUY on the stock while raising our TP by ~5% to Rs2,000 at Sep-28E (roll-forward).
Strong topline growth; EBITDAM improvement; UP EBITM still under pressure
BLSTR’s revenue grew ~21% yoy to Rs29.3bn, led by the UP segment that logged ~29% yoy growth, with the EMP and CAC segment delivering ~16% yoy growth. EBITDA rose ~10% yoy to Rs2bn, with EBITDAM at 6.9% (~170bps qoq improvement) as gross margin recovered by ~270bps qoq on price hikes. APAT rose ~7% yoy to Rs1.1bn.
Earnings call highlights
1) RAC demand was strong, led by an extended summer and strong festive demand ahead. Management expects RAC demand to stay strong, and targets ~25% FY27 growth (implying ~30% in 2H) while prioritizing market-share retention (~14.2%) following the recovery from 1Q losses.
2) A weak macro environment (eg poor monsoons) leading to lower rural demand in smaller towns and rising interest rates are key monitorables.
3) The order book grew marginally to Rs7.3bn as of Sep-26 vs Rs7bn in Mar-26.
4) Margins continue to be under pressure, with ~15% rise visible in input costs since Jan-26, with no softening visible in the near term.
5) To mitigate cost pressures, BLSTR has taken calibrated price hikes of >13% (including ~5% in Oct-26), with the balance to be mitigated via rejigging its product portfolio, including value engineering, feature rationalization, alternate components, and potential outsourcing of entry-level products.
6) The EMP and CAC margin target remains intact at 7-7.5% for FY27; however, the growing data center business offers a potential upside (up to DD margins) on its standalone operating structure, supported by shorter project cycles and favorable cashflow profile.
7) Management targets UP segment EBITM of 6-6.5% on full-year basis, implying >8% margins in 2H.
8) Full-year capex guidance stands at ~Rs3bn.
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