Neutral Blue Star; target of Rs 435: Motilal Oswal

Motilal Oswal 's research report on Blue Star

Blue Star (BLSTR) barely managed to report operating profit in 1QFY21 as revenue for Unitary Cooling Products (UCP) and Electromechanical Projects (EMP) declined 70% and 50%, respectively. Profitability was further affected in the EMP segment as BLSTR took an INR150m provision. Loss of key-season sales in the UCP segment dented profitability in spite of certain cost-cutting initiatives undertaken by the company. While employee cost and other expenses reduced by ~39% and 53%, respectively, we expect most of these cost elements to return once sales normalize. To maintain adequate liquidity and working capital requirement, BLSTR opted for debt funding of INR3.5b, leading to net debt of INR4.3b at the end of 1QFY21 v/s nil debt YoY (end-FY20 net debt stood at INR1.5b). We have cut our FY21E/FY22E earnings by 59%/12%, as we factor: (a) likely weak primary sales in the UCP segment in FY21 until inventory normalizes, and (b) weak order inflow and execution in the EMP segment as the company focuses on cash conservation, and (c) an increase in interest expense on account of higher borrowings. Our SOTP-based TP stands at INR435 (prior: INR450) – Maintain Neutral. We continue to prefer Voltas over BLSTR to play the underpenetrated AC market in India.

Outlook

Our SOTP-based TP stands at INR435 (prior: INR450) – Maintain Neutral. We continue to prefer Voltas over BLSTR to play the underpenetrated AC market in India.