Hold Blue Star; target of Rs 199: Nirmal Bang

Nirmal Bang`s research report on Blue Star

"Blue Star, Revenue for the quarter was at Rs 858 cr, up 5.5% yoy and 43.3% qoq. EBITDA was Rs 19.9 cr as compared to a loss of 34.7 cr in the year ago quarter and profit of Rs 25.4 cr in the sequential quarter. EBITDA margin improved on a yoy basis but was 190bps lower sequentially at 2.3%. Higher other income (due to profit on sale of some properties and write-back of some provisions) for the quarter led to PAT of Rs 18.6 cr as compared to a loss of Rs 45.4 cr in Q4FY12 and profit of Rs 5.4 cr in Q3FY13.”

“The revenues of EMP&PAS business, accounting for 56% of the total revenues in the quarter increased by 3.8% yoy and 21.4% qoq, while EBIT margin of the segment improved to 2.2% from -12.4% in Q4FY12 but fell from 5.8% in Q3FY13 yoy. Improvement in EMP margins is attributed to product mix, cost optimization and careful booking of orders during the year. However, drop in margin on a QoQ basis is attributed to drop in billing as project execution continues to be slow Cooling Products revenue registered a growth of 8.4% in the quarter, while EBIT improved by 12.4% to Rs 31.1 cr. The improvement was mainly due to 13% volume growth due to improvement in industry demand scenario after being stagnant for the past 2 years and decline in input costs. However, erosion of margins in sourcing and selling of installation accessories such as copper pipes continued and hence management has discontinued this business from March 2013. The PE&IS business revenues grew at a modest 4.4% yoy, while EBIT declined 31.7% to Rs 10.5 cr, due to the unfavourable industrial projects business and declining demand in capital goods sector. Though revival in this segment is not likely to be immediate, the margin outlook should improve owing to management focus on the bottomline. The order book at the end of the quarter was at Rs. 1418 cr which saw a drop 12.1% yoy. This was mainly as order inflows continued to remain weak due to delay in order finalizations and as the company remained cautious in bidding for new contracts to safeguard its margin profile. Going forward, the company will continue with this strategy to compromise on volumes and focus on profitability which should lead to higher overall margins.”

“Although the macroeconomic environment continues to remain challenging in the near term, the corrective steps taken by the company are showing results. We think FY13 was the year of all the concerns bottoming out and the revival of economy in FY14 can help the company achieve similar growth as shown in past in its previous up cycles. We expect FY14 to be a better year. The focus on profitability should also lead to better margin performance in FY14. We remain positive on the long term prospects of the company and see no significant downside risk from current levels. We advise to HOLD the stock for a target price of Rs 199 (earlier 215),” says Nirmal Bang research report.

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