BOB Caps initiates coverage on Blue Star Limited

Strongest growth but among the cheapest valuation

- Leading player in HVAC and commercial refrigeration; also emerging as a major player in room ACs with 13% market share

- Pent-up demand post Covid, mass market AC launches, consumption of processed food and infrastructure activity to fuel growth

- Stock offers the highest EPS growth (97% FY21-FY23E) but one of the lowest valuations (39x FY23E P/E) in our coverage; initiate with BUY, TP Rs 1,371

Major player in HVAC and emerging player in RAC: BLSTR is a leading player in heating, ventilation, air conditioning (HVAC) and commercial refrigeration with 28% market share. In addition, the company has steadily expanded its share in the room AC (RAC) segment to ~13% and currently features among the top 6 players.

Uptrend in HVAC and refrigeration market: India's HVAC market is expected to grow by ~10% driven by the pickup in infrastructure development (commercial buildings, metro rail, railway station modernisation). Commercial refrigeration is also gathering momentum in sectors like healthcare. Refrigeration space is becoming a must-have for retail grocery stores while the emergence of cloud kitchens and organised food delivery is further spurring demand.

Economy room AC launches to buoy growth: BLSTR has expanded market share in the RAC market to 13% from 11% in FY17 aided by launches at a lower price point. We expect the RAC category to rebound in FY22-FY23 due to two summers of pent-up demand amid the pandemic. In the water cooler business, BLSTR plans to grow via conventional distribution rather than the current online-only model, once it attains market share of +5% from ~4% at present.

FY15-FY20 EPS CAGR of 97%: We expect BLSTR to deliver a strong 97% EPS CAGR over FY21-FY23 as RAC demand recovers and the company continues to capture market share (14% by FY23E from 13% currently). We also model for high-single-digit revenue growth in other products, viz. electromechanical projects, packaged air conditioning systems, professional electronics and industrial systems.

Initiate with BUY: BLSTR is forecast to clock the highest EPS growth in our coverage whereas its valuations are among the cheapest at 39x FY23E P/E. We initiate coverage with BUY and a DCF-based TP of Rs 1,371, which implies an FY23E P/E of 51x, 48% premium to the five-year mean. Key stock drivers include YoY recovery in Q2/Q3FY22. Keys risk include RM inflation (leading to a drop in demand), increased competition and slower growth in infrastructure projects.

Shares of Blue Star Limited was last trading in BSE at Rs. 990.65 as compared to the previous close of Rs. 988.00. The total number of shares traded during the day was 1786 in over 527 trades.

The stock hit an intraday high of Rs. 996.30 and intraday low of 972.00. The net turnover during the day was Rs. 1757755.00.

Source : Equity Bulls

Keywords

BlueStarLimited INE472A01039 BLUESTARCO ConsumerElectronics BOBCAPS InitiatingCoverage