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Weak performance; margin pressure weighs on earnings Focusing on market share; margin recovery to be gradual

* Blue Star’s (BLSTR) 1QFY27 performance was significantly below estimates, affected by lower-than-estimated revenue growth in UCP and margin pressure across UCP/EMPS segments. Revenue was up 13% YoY at INR33.8b (~4% below our estimates). EBITDA declined ~13% YoY to INR1.8b (~30% miss). OPM contracted 1.5pp YoY to 5.2% (1.9pp below our estimates). Adj PAT declined ~21% YoY to INR957m (~38% miss).

* Management indicated that it was unable to fully pass on ~13% input cost pressure due to intense competition and lower-cost inventory with peers, resulting in only ~5% price hikes. Further, it lost market share by ~50bp in Apr’26 but recovered some in May-Jun’26, with overall 1Q market share loss of ~30bp to ~14%. In the next 6-9 months, it will focus on improving RAC profitability through product portfolio optimization while maintaining market share. It guided UCP EBIT margin of ~6.5% in FY27, with long-term aspiration to achieve 7.0-7.5%. BLSTR remains confident that the B2B business will continue to perform well, backed by a healthy order book.

* We cut our EBITDA estimates by 17%/11% for FY27/FY28 as we estimate lower margins. This led to EPS cut by ~19%/13% for FY27/FY28. We reiterate our Neutral rating on the stock with a TP of INR1,580 (based on SoTP)

UCP revenue up ~13% YoY (~10% miss); margin at 2.9% (est. 7.0%)

* Consol. revenue/EBITDA/adj. PAT stood at INR33.8b/INR1.8b/INR957m (+13%/-13%/-21% YoY and -4%/-30%/-38% vs. our est.) in 1Q. Gross margin dipped 1.7pp YoY to 22%. OPM contracted 1.5pp YoY to 5.2%. Depreciation/ interest costs increased ~37%/34% YoY, while ‘other income’ rose ~40% YoY.

* Segmental highlights:

a) UCP: Revenue was up ~13% YoY to INR16.9b, EBIT declined ~43% YoY to INR497m, and EBIT margin contracted 2.9pp YoY to 2.9%.

b) EMPS: Revenue rose 15% YoY to INR16.3b, EBIT declined ~1% YoY to INR1.1b, and EBIT margins contracted 1.1pp YoY to 6.8%.

c) PES: revenue declined ~10% YoY to INR636m, EBIT increased ~26% YoY to INR96m, and EBIT margins expanded 4.2pp YoY to 15.1%.

* Net cash balance stood at INR9.0b as of Jun’26 vs. INR1.75b as of Mar’26

Valuation and view

* BLSTR’s 1QFY27 performance was below our/consensus estimates due to significant margin pressure in the UCP and EMPS segments. We believe nearterm earnings recovery is likely to remain gradual as the RAC industry is entering a seasonally soft period, along with higher competitive intensity and an uncertain macro environment. Positively, the strong order book in the EMPS business and the rapidly expanding data-center MEP opportunity provide a healthy medium-term growth opportunity.

* We estimate a CAGR of ~14%/16%/18% in revenue/EBITDA/PAT over FY26-28E, albeit on a low base. We estimate overall OPM to remain range-bound at ~7% (in line with last four-year average). We estimate cumulative OCF of INR12.8b over FY27-28 vs. INR8.4b over FY25-26 (lower due to higher working capital). We estimate cumulative FCF of INR7.0b over FY27-28 vs. INR1.5b over FY25-26. We estimate net cash balance of INR893m in FY28 vs. net debt of INR2.2b in FY26.

* At CMP, BLSTR trades fairly at a PE of 54x/40x on FY27E/FY28E. We maintain our Neutral rating with SoTP-based TP of INR1,580 (valuing UCP at 45x , EMPS at 40x and PES at 25x FY28E EPS).

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