Blue Star - Uncertain outlook and margin stress - ICICI Securities

Blue Star has reported strong 24% YoY growth in revenues led by early arrival of summer. Room AC segment witnessed robust growth of 33% YoY vs industry growth of 27% YoY, implying a marginal increase in market share to 13.3%. Despite 5%-8% price hikes, margins were low due to high indirect taxes and high marketing expenses. Covid second wave is likely to impact overall growth traction. Factoring-in the higher other income in Q4FY21, we raise earnings by 2.2% and 2.2% for FY22E and FY23E respectively. Given the likely impact of Covid surge, delay in the recovery of project division, and overall rich valuation, we maintain REDUCE with a revised target price of Rs765 (previously: Rs658).

- Strong growth in room AC and market share improvement: Room AC industry witnessed strong growth of 24% YoY in Q4FY21 and Blue Star grew 33% YoY, increasing its market share by 100bps YoY to 13.3%. Company took 5-8% price hikes during Jan'21 and again of 3-4% in Apr'21.

- Margin stress continues to limit earnings growth: Despite the strong growth, margins in the product segment were under stress due to higher marketing expenses, commodity prices and indirect tax increase.

- 'Atmanirbhar Bharat' push will be an overhang for medium to long term margins: Recent policy actions 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.

- Growth outlook to be uncertain due to covid second wave: We believe, the second wave of the pandemic will impact the overall growth recovery in both project and cooling product segments. Company has proactively reduced production and will be taking a measured approach to the same given the growth uncertainty.

- Maintain REDUCE on rich valuation and margin risk: Delay in scale-up of water purifier division is adversely affecting the overall margins and RoCE. Company is also unable to expand its footprint overseas as earlier targeted. Covid second wave is likely to impact overall growth prospects. We believe the current valuation at 32.3x FY23E earnings is rich, hence we maintain our REDUCE rating with a revised target price of Rs765 (29.4x FY23E earnings) from Rs658 earlier.

Shares of BLUE STAR LTD. was last trading in BSE at Rs.840.85 as compared to the previous close of Rs. 828.5. The total number of shares traded during the day was 13117 in over 974 trades.

The stock hit an intraday high of Rs. 870 and intraday low of 834.2. The net turnover during the day was Rs. 11140293.

Source : Equity Bulls

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