Blue Star - Challenging growth environment continues - ICICI Securities

Blue Star's FY20 annual report highlights the impact of events post Covid-related demand slowdown and its effect on growth. Company has shored up its balance sheet and raised non-convertible debentures amounting to Rs3.5bn. The peak demand season has been hit; hence we believe FY21E will be a subdued year for the company. Looking forward, Blue Star will try to diversify sourcing, focus on brand building with Virat Kohli (Indian cricket captain) as brand ambassador. We have rolled over our valuation multiple to FY22E earnings given the depressed performance expected in FY21E. Maintain REDUCE with a revised target price of Rs410 (earlier Rs401).

Demand stress likely to continue under cooling products: Weak demand environment under cooling products for all segments including commercial refrigeration is expected to continue impacting overall growth in FY21. Normalisation of demand will come with a lag as the risk of pandemic will continue even post-lockdown.

Healthy cashflows and strong dividend payout: Blue Star was able to control its working capital resulting in 77% YoY growth in cashflow from operations leading to Rs3.7bn of FCF. Improvement in cashflows led to the company paying a handsome dividend of Rs1.9bn at Rs20 per share in FY20.

Room AC industry growth subdued in past three years: Domestic room AC industry had galloped at 10.4% CAGR from FY12 to FY17; however, post-FY17 growth has become flattish. The change in energy ratings towards ISEER has increased the unit price of room ACs, which is one reason for the stagnation in growth. Low penetration and improved availability of electricity coupled with increasing income levels are the key factors that can spur demand in the longer term. Outlook on near to medium term prospects is challenging due to extension of lockdown and the resulting general challenges in installation, etc.

Delay in scale-up of water purifier business hits margins and RoEs: The water purifier and air purifier segments continue to be in investment phase. This in itself will keep overall margins restrained till the segments reach a critical volume. Company targets to breakeven and have 14% market share in water purifiers by FY21.

Maintain REDUCE amid challenging outlook: Company recently raised Rs3.5bn through non-convertible debentures. Delay in scale-up of water purifier division is adversely affecting the overall margins and RoCE. We believe it will be difficult for Blue Star to penetrate the water purifier market given strong domestic competition. Company is also unable to expand its footprint overseas as earlier targeted. It has been trying to improve its market share in North India and has shifted room AC headquarters to Delhi. This however does not seem to have helped meaningfully in terms of market share gains in the North. We believe the current valuation at 26.1x FY22E earnings is rich; hence we maintain our REDUCE rating with a revised target price of Rs410 (22x FY22E earnings).

Shares of BLUE STAR LTD. was last trading in BSE at Rs.488.35 as compared to the previous close of Rs. 485.85. The total number of shares traded during the day was 4577 in over 631 trades.

The stock hit an intraday high of Rs. 491.8 and intraday low of 482.65. The net turnover during the day was Rs. 2237346.

Source : Equity Bulls

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