Hold Blue Star; target of Rs 850: Sharekhan

Sharekhan's research report on Blue Star

Q1FY2024 performance was impacted by weakness in the RAC business due to unseasonal rains. Revenue/PAT grew by 13%/12%, while OPM rose 20 bps y-o-y to 6.5%. The RAC industry is expected to grow at a slower pace of 10-15% in FY2024 and the company would grow in-line with the industry with EBIT margin of 8.0-8.5%. The company expects better institutional demand for ACs and commercial refrigeration to support growth. Order momentum and inquiries continue to be encouraging in the EMPS segment. The order book stands at Rs. 4,038 crore, up 45.4% y-o-y. The company plans to raise ~Rs. 750 crore through QIP to fund its capex plans for the next 2-3 years, as it believes there is an ample growth opportunities in the domestic as well as export markets such as USA and Europe for its air conditioner business.

Outlook

We build in ~17.4%/~34% revenue/PAT CAGR of FY2023-FY2025E. The stock trades at ~40x its FY2024E and ~31x its FY2025E EPS. However, we believe positives are priced in and the upside is limited from current levels, given near-term concerns over weakness in the RAC business and impending QIP. Hence, we downgrade the stock to Hold from Buy with a revised PT of Rs. 850.