Slowing orders, cost overruns to crimp Blue Star's margins

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Slowing orders, cost overruns to crimp Blue Star's margins

Air conditioning major Blue Star expects its margins will decline 3-5% over the next few quarters due to the continued challenges in its electro mechanical projects and packaged air conditioning business.

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Nachiket Kelkar
Moneycontrol.com

Air conditioning major Blue Star expects margins to decline 3-5% over the next few quarters on continued challenges in its electro mechanical projects and packaged air conditioning business.

"The overall investment climate has significantly deteriorated in 6-9 months...In the EMP business the next few quarters will be challenging," said Executive Director Vir Advani.

The electro mechanical projects and packaged air conditioning (EMP) business accounts for 49% of Blue Star's total revenues.

Advani said while orders had slowed, cost overruns in some projects are also hurting margins in the business.

Blue Star's first quarter net profit crashed 74% year-on-year to Rs 9.79 crore, mainly due to the electro mechanical projects and packaged air conditioning business, which slipped to a loss of Rs 8.87 crore in April-June. The EMP business had reported a profit of Rs 33.57 crore in the year ago quarter.

Overall the company's revenue grew 7% from a year ago to Rs 703.18 crore, while the revenue in the EMP segment was down 9%.

Advani said Blue Star has now initiated several measures including advancing long delayed orders, reducing capital employed in some of these projects and remaining selective in new order acceptance, which coupled with internal cost cutting measures, should stem the margin decline.

The company expects there will be margin pressures for at least 6-9 months going ahead. Advani said although order inflow had slowed, quality of the new orders was better than in the past few quarters.

"New orders are coming in at higher margin...They are definitely better than the last 12 months," he said. But there will be pain through the current fiscal and maybe even in the first half of FY13, he added.

In the long-term Blue Star expects its margins will return to around 11% levels.

Some of the pressures from the EMP business were offset by the room air-conditioning business, which saw good growth on the back of expansion in the retail channel, widening of product portfolio and increased advertising in the first quarter.

First quarter revenue in cooling products business, which includes room air conditioners, rose 30% to Rs 328.14 crore.

However, Advani expects there will be some stagnancy in large-scale air conditioning, as apart from the ongoing projects like airport development, and metro rail construction, he doesn't envisage there will be any large projects on the anvil over the next few quarters.

There also are limited prospects from the retail sector until the sector is opened up for foreign direct investment, he said. Companies like Blue Star are hoping the opening up of retail for FDI will bring in the big multinational supermarket chains, which will drive demand for air conditioning and refrigeration systems.

Blue Star shares were trading down 3.6% at Rs 269.70 on NSE on Tuesday. The stock has fallen near 25% since April amid the growth pressures.