Blue Star - Upgrade to Buy - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, Blue Star reported a 4.3% yoy decline in its revenue (net sales) to Rs.579cr owing to a slowdown in industrial capex. However, the EBITDA margin for the quarter improved by 123bp yoy to 3.5% on account of better margins from the electro-mechanical projects and packaged air-conditioning systems (EMPPACS) division. Consequently, the net profit (PAT) came in at Rs.7cr for the quarter as compared to a loss of Rs.21cr in 2QFY2012.

EBITDA margin to improve gradually: Blue Star's EBITDA has turned positive since 1QFY2013 after a loss in two consecutive quarters in 2HFY2012. However, the EBITDA margin is expected to sustain at level of 3.5-4.0% for the rest of FY2013. We expect a gradual increase in EBITDA margin post FY2013 on account of the company's strategy to book higher margin orders which would ultimately lead to better profit. Moreover, the company is in the process of reducing its debt which would add to net profit going forward.

Outlook and valuation: We expect Blue Star to report a marginal increase in its revenue over FY2012-14E to Rs.2,948cr in FY2014E driven by improvement in macro-economic scenario, while the EBITDA margin is expected to expand by a sharp 641bps over the same period due to better margin orders and declining commodity prices. Consequently the net profit is expected to be at Rs.77cr in FY2014E as compared to a loss of Rs.105cr in FY2012. At the current market price of Rs.196, the stock is trading at EV/sales of 0.7x for FY2014E which we believe is attractive. We recommend a Buy rating on the stock with a target price of Rs.242 based on a target EV/ sales of 0.8x for FY2014E.

Source : Equity Bulls

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