Highlights:
- Electro-mechanical projects will be selected based on margin profile
- Demand for commercial refrigeration is growing
- The stock can be accumulated on dips
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For Blue Star, consumer durables outperformed the capital projects division during the March quarter. Emphasis on profitable electro-mechanical projects (EMPS), gradual regularisation of AC orders and demand uptick in commercial refrigeration should augur well for the company.
Q4 FY19 review
Positives
- Healthy top-line growth in EMPS and unitary cooling products (UCP) segments
- Operating leverage was attributable to margin improvement in UCP and professional electronics and industrial systems (PEIS) segments
- Higher other income and one-time deferred tax credit led to better bottom-line margins
Negatives
- Revenue in the PEIS segment de-grew noticeably
- There was a nominal margin decline in the EMPS segment
Segment-wise performance
Observations
Electro-mechanical projects (EMPS) Blue Star will continue to capitalise on its market leadership position in ducted systems -- 39 percent market share at the moment -- predominantly through repeat contracts with existing clients. The company has a strong list of clientele in areas such as industrials, metros, healthcare and offices.
Simultaneously, the company is working towards gaining traction in high-margin products such as VRF (variable refrigerant flow) and chillers, which currently stands at 17/15 percent, respectively. Scroll chillers may be launched in FY20 to consolidate its strengths on this front.
The order outlook in international markets such as Qatar and Malaysia is pretty positive. Due to cost overruns, operations in Oman have been closed.
As on March 31, Blue Star had a strong order book of nearly Rs 3,000 crore, up 18 percent year-on-year. Steady growth in orders is a positive sign.
Unitary cooling products (UCP) Expectations of a normal summer in FY20 should help offset the sub-par demand across trade channels for ACs in FY19.
The share of high-margin inverter ACs, which stood at close to 47-50 percent of overall AC sales in FY19, is expected to increase to 55-60 percent over the next two financial years.
The company aims to launch new AC variants periodically to gain market share, which stood at 12.5 percent in 2018-19 as against 11.8 percent in 2017-18.
Prospects in the commercial refrigeration space have been promising on the back of orders from hospitals, dairy centres, cold storage warehouses, restaurants, among others.
Since demand for non-AC products -- water dispensers, deep freezers, water coolers and water purifiers -- is less seasonal and volatile compared to ACs, the company will invest in brand-building exercises to boost sale volumes.
Professional electronics and industrial systems (PEIS) Partial improvement in industrial capex on fronts such as automation in manufacturing, increased adoption of Internet of Things (IoT) technology and Bharat Stage-VI should help sustain demand momentum. Data security products are picking up, too.
Outlook While improving profitability of the EMPS segment makes us positive, it's the UCP segment that'll have to demonstrate healthy margins -- ACs in particular -- for the stock to re-rate noticeably.
After being on a downtrend for the most part of the past 12 months, the stock’s price has shown signs of recovery in recent times. We recommend investors to accumulate on dips.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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