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Blue Star - Still not out of the woods - ICICI Securities

Posted On: 2020-10-30 08:26:44

Blue Star reported better than expected margins supporting overall earnings. Company was able to adapt quickly towards e-commerce, hence maintained its market share at 12.75%. Project margins improved by 70bps YoY to 6.4% despite 31% YoY decline in sales due to better mix, and the management has increased margin guidance for FY21. The uncertainty over progress on Covid pandemic is likely to keep near-term demand volatile. Recent change in policy towards Chinese imports will impact the overall margins and returns for the cooling product segment. Assuming recovery from Q4FY21E and factoring-in the better than expected margins, we raise FY21E earnings by 8.6%. However, given the near-term demand stress and rich valuation, we maintain our REDUCE rating on the stock with an unchanged target price of Rs544.

- Demand stress likely to continue in cooling products in near term: Weak demand environment under cooling products for all segments, including commercial refrigeration, is expected to continue impacting overall growth in FY21E. Management guided for 7-7.5% margins for the UCP segment for FY21. Although it expects demand recovery for industry to limp back to normalcy by Dec'20, we believe, normalisation will come with a lag as the risk of Covid pandemic will linger even after lifting of the lockdown.

- Room AC inventory levels under control: Due to supply issues in the beginning of March and halted production at month-end, the company's current inventory is at 45-60 days, which is under control and lower than the industry average.

- Atmanirbhar Bharat push will be an overhang for medium to long term margins: Recent policy actions by the government towards self-reliance can lead to an increase in cost structure for room AC industry. Management believes shift will be gradual and will provide a level-playing field for all. This will be a key development to watch out for given the room AC industry's high dependence on imports from China.

- Project execution to remain slow: Though most sites have opened in the project segment, low availability of manpower and adherence to social distancing norms is affecting execution. Also, the management will be prioritising execution for projects where its chances of collections are higher based on customer's credit risk assessment. Order intake for the quarter declined 27% YoY to Rs6.4bn and included Rs1.5bn order from Mumbai metro. Current overall orderbook is at Rs30.2bn (1.3x TTM project sales).

- Maintain REDUCE amid challenging outlook: Delay in scale-up of water purifier division is adversely affecting the overall margins and RoCE. Company is also unable to expand its footprint overseas as earlier targeted. We believe the current valuation at 31.1x FY22E earnings is rich; hence we maintain our REDUCE rating with an unchanged target price of Rs544 (27x FY22E earnings)

Shares of BLUE STAR LTD. was last trading in BSE at Rs.627.65 as compared to the previous close of Rs. 630.9. The total number of shares traded during the day was 3352 in over 559 trades.

The stock hit an intraday high of Rs. 635.8 and intraday low of 613.75. The net turnover during the day was Rs. 2093569.

Source: Equity Bulls

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