Sell Blue Star; target of Rs 257: AnandRathi

AnandRathi's report on Blue Star

At Rs 5.9bn, Blue Star’s 3QFY15 revenue (up 8% yoy) was as we expected. Its core EMP business clocked negligible, 2% yoy, growth due to sluggishness in executing projects. A 26% jump in revenue of its cooling products business helped it post revenue growth in the quarter. Lastly, revenue of the PEIS business contracted 11% yoy to Rs 372m due to constrained discretionary capex by private and government bodies.

In two of its three business divisions, EMP and PEIS, margins declined, respectively, 438bps and 183bps. The closure of zeromargin earlier jobs of Rs 250m in the quarter and higher debtor provisioning on contracts resulted in margin erosion in the EMP business. The margin of the cooling products division improved 219bps yoy to 5%. At the enterprise level, OPM declined 234bps to 0.4% due to greater provisioning on projects and higher SG&A expenses. This was significantly lower than our estimated 2% for the quarter. EBIDTA came in at Rs 23m, down 85% yoy and 81% below what we expected. At Rs 63m, PAT was up 124% yoy due to an exceptional (net) gain of 183m in the quarter.

In the quarter Blue Star booked orders of Rs 5.1bn. Its order book is now Rs 14.1bn, down 19% yoy due to lower order finalisation and sluggish demand from the construction industry. The company currently has a TTM-OB ratio of 0.9x. It has earlier orders of ~Rs 1bn, with near zero to negative margins. It was attempting to close most of these in the last quarter as they constitute an overhang on operational parameters in the near term.

Our take - "The lower-margin earlier orders pose a serious challenge to the company at present. Despite the adoption of more prudent business practices, the company will not be able to take on new, lucrative business unless it completes its old, un-remunerative orders. Worryingly, failure to complete these orders could see greater provisioning required on account of cost escalations. This would significantly compromise its profitability and affect its working-capital cycle. Against this backdrop, at the present levels, the valuation of the company seems extremely rich. Hence, we maintain our Sell recommendation with a target price of Rs 257, which represents a downside of 24%", says AnandRathi Securities research report.

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