Blue Star - Lockdown impacts growth; provisions hurt project margins - ICICI Securities

Blue Star's Q1FY21 revenue was weak as per expectations; however, certain project-related provisions of Rs150mn and Rs80mn of demurrage charges further impacted margins which were low due to subdued sales. Room AC dropped 65% in Q1FY21, in-line with industry, due to lockdown and higher channel inventory (30 days more than usual). Currently, room AC industry has recovered to ~77% of normalised level and is expected to normalise gradually by Q4FY21E. The uncertainty of the progress on Covid-19 pandemic is likely to impact near-term demand. Likely change in policy towards Chinese imports may weigh over medium to long-term margins. Factoring in near-term demand stress, we cut FY21E earnings by 15.5%, assuming recovery from Q4FY21E, we raise FY22E earnings by 6.2%. We maintain our REDUCE rating with a revised target price of Rs436 (earlier: Rs410).

- Demand stress likely to continue under cooling products in near term: Weak demand environment under cooling products for all segments including commercial refrigeration is expected to continue impacting the overall growth in FY21E. Normalisation of demand will come with a lag as the risk of Covid-19 pandemic will continue despite lifting up of the lockdown.

- Room AC segment may be adversely affected in FY21E due to Covid-19 pandemic: Channel inventory levels were higher than normal by 30 days, this led to 10-12% reduction in prices to aid liquidation of the same. North has been relatively less impacted compared to south due to the late onset of monsoon. Overall, demand recovery may limp back to normalcy by Q4FY21E.

- 'Atmanirbhar Bharat' push will be an overhang for medium- to long-term margins: The recent rhetoric by the government towards self-reliance can lead to an increase in cost structure for room AC industry. Management believes shift will be gradual and will provide a level-playing field for all. This will be a key development to watch out for given the high dependence on Chinese imports by room AC industry.

- Project execution to remain slow: Although one-third of 150 sites have opened in project segment, low-availability of workforce and adherence to social distancing norms are impacting execution. Also, the management will be prioritising execution for projects where its chances of collections are higher based on customer's credit-risk assessment. The current segmental orderbook is at Rs20.4bn (0.8x TTM project sales) and the overall orderbook at Rs29.2bn.

- Maintain REDUCE amid challenging outlook: Delay in scale-up of water purifier division is adversely affecting the overall margins and RoCE. The company is also unable to expand its footprint overseas as earlier targeted. We believe current valuation at 25.2x FY22E earnings is rich; hence, we maintain our REDUCE rating with a revised target price of Rs436 (22x FY22E earnings)

Shares of BLUE STAR LTD. was last trading in BSE at Rs.513.55 as compared to the previous close of Rs. 513.45. The total number of shares traded during the day was 5570 in over 473 trades.

The stock hit an intraday high of Rs. 529.6 and intraday low of 511.65. The net turnover during the day was Rs. 2889146.

Source : Equity Bulls

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