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Performance above our estimate; margin recovery gradual Data center opportunity supports medium-term growth outlook

* Blue Star (BLSTR)’s 2QFY27 performance was above our estimates, driven by higher revenue and OPM. Revenue grew ~21% YoY to INR29.3b (~10% beat), led by PES/UCP/EMPS growth of ~51%/29%/16%. EBITDA rose ~10% YoY to INR2.0b (~64% beat). OPM dipped 70bp YoY to ~7% (est. 4.6%). The segment EBIT was INR1.8b (~26% beat), representing a smaller beat than EBITDA despite PES provision write-backs. Adj. PAT grew 8% YoY to INR1.1b (~95% beat).

* Management indicated that margins remain under pressure from escalating input costs pressure and an inability to fully pass on these increases. However, product portfolio rejigs, recent price hikes, and operating leverage are likely to pull unitary cooling products (UCP) margins to at least 6.5% for full-year FY27. In the EMPS projects segment, it reiterated EBIT margin guidance of 7-7.5%, with potential to improve towards 8.5% over the medium term as data center contribution increases. It has secured ~INR20b of orders in the data center segment and expects another ~INR20b in 2HFY27, with order bookings targeted to reach ~INR80b by FY30.

* We raise our PAT estimate by 10%/6% for FY27/FY28, factoring in the 2Q outperformance and higher margins going forward. We reiterate our Neutral rating on the stock with a TP of INR1,510 (based on SoTP)

UCP revenue up ~29% YoY; UCP margin at 2.3% (est. 3.0%)

* Consol. revenue/EBITDA/adj. PAT stood at INR29.3b/INR2.0b/INR1.1b (+21%/+10%/+8% YoY and +10%/+64%/+95% vs. our estimates) in 2QFY27. OPM contracted 65bp YoY to 6.9% (+2.3pp vs. our estimates).

* Segmental highlights: a) UCP: revenue was up 29% YoY (~13% beat) at INR9.0b, EBIT declined ~51% YoY to INR207m, and EBIT margin contracted 3.9pp YoY to 2.3% (-70bp below estimates). b) EMPS: revenue increased 16% YoY to INR19.4b (~7% beat), EBIT declined ~10% YoY to INR1.3b, and PBIT margin contracted 2.0pp YoY to 6.9%. c) PES: revenue increased ~51% YoY to INR973m (~56% beat), PBIT surged 3.7x YoY to INR231m, and PBIT margin expanded 14.1pp YoY to ~24%. The strong margin was driven by the reversal of the write-back of warranty provision following the MedTech business divestment.

* In 1HFY27, revenue/EBITDA/PAT stood at INR63.1b/INR3.8b/INR2.0b (+17%/-2%/-8% YoY). OPM declined 1.1pp YoY to ~6.0%. Operating cash inflow stood at INR4.1b vs. operating cash outflow of INR7.3b in 1HFY26. Capex stood at INR1.4b vs. INR1.3b in 1HFY26. Net cash inflow stood at INR2.8b vs. net cash outflow of INR8.6b in 1HFY26.

Key highlights from the management commentary

* BLSTR’s RAC primary sales grew ~42% in 2QFY27 vs. the estimated industry growth of ~35-40%. The 1HFY27 industry growth stood at ~30% in value terms, while BLSTR grew ~28-29%, maintaining its market share.

* In EMPS, growth remains heavily anchored in strong data center and factory segments, while infrastructure is intentionally being defocused.

* The data center business could deliver EBIT margins of 10%-12%. However, taking into consideration other businesses such as equipment/other projects, the EMPS segment margin guidance is maintained at 7.0-7.5%.

Valuation and view

* BLSTR’s 2QFY27 performance reflected strong revenue growth across UCP and EMPS, though profitability remained under pressure due to elevated input costs and project execution delays. Near-term UCP margin recovery is likely to remain gradual amid intense competition and uncertain demand, while the data center opportunity and healthy order book provide strong medium-term growth visibility in EMPS segment.

* We estimate a CAGR of ~14%/15%/12% in revenue/EBITDA/PAT over FY26-28E. We also estimate overall OPM to remain range-bound at ~7-8% and cumulative OCF to remain at INR13.4b over FY27-28 vs. INR8.4b over FY25-26. Further, we project cumulative FCF of INR7.4b over FY27-28 vs. INR1.5b over FY25-26. We also project a net cash balance of INR1.3b in FY28 vs. net debt of INR2.2b in FY26.

* At CMP, BLSTR trades fairly at a P/E of 62x/48x based on FY27E/FY28E EPS. We reiterate our Neutral rating with an SoTP-based TP of INR1,510 (valuing UCP and EMPS at 45x each, and PES at 25x FY28E EPS).

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