Hold Blue Star; target of Rs 185: Emkay

Emkay Global Financial Services has recommended hold rating on Blue Star (BLSR) with a target of Rs 185 in its August 3, 2012 research report.

“BLSR reported strong all round performance-sharply ahead estimates. Strong performance was driven by (1) 4% yoy revenue growth to Rs7.3 bn (Vs estimate of no-growth)-led by EMP &PAC segment (+7% yoy) (2) 70 bps yoy expansion in EBITDA margins to 4.6% (Vs estimate of stable margins) - aided by improvement in gross margins and (3) High other income and lower tax incidence. Led by above, net profit was sharply ahead estimates to Rs205 mn.”

“After posting EBIT losses for past 4 quarters, BLSR turned around in EMP & PAC segment – in line with expectations. EMP & PAC segment posted healthy revenue growth at 7% yoy to Rs3.7 bn. With all cost over-runs and provisions booked in previous quarters, BLSR reported a clean set of numbers with EBIT margins at 3.4% and EBIT profit of Rs124 mn-above estimates. Performance not marred by one-offs – allaying investor concerns. BLSR witnessed healthy order inflows despite no pick-up in demand momentum and intense competition. BLSR secured orders worth Rs6.6 bn (-22% yoy, +17% qoq) – equivalent to 23% of FY13E target, in line with estimates. But, order book continued to decline – down 12% yoy and 4% qoq to Rs18.5 bn. Sustenance of order inflow momentum will be crucial for maintaining our earnings estimates.”

“We cut our earnings estimates by 3% to Rs11.6 for FY13E and by 19% to Rs16.6 per share for FY14E to factor (1) lower growth in Cooling products segment and (2) conservative EBITDA margins at 6% and 8% for FY13E and FY14E respectively. Cut in FY13E earnings estimates is lower due to taxation benefit from carry forward of prior year losses. We expect BLSR’s strategy to pursue profitability before growth to reap rich dividends going forward."

"We expect BLSR ROE and ROCE to revert back to +30% range in FY14E with strong ROIC at 45% - comparable to FY11 levels. While positive catalysts are gaining prominence, we would review the rating in subsequent quarters on further improvement in balance sheet and business fundamentals. Retain Hold rating with price target of Rs185 per share,” says Emkay Global Financial Services research report.

Non-Institutions holding more than 90% in Indian cos

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