Blue Star, 1Q FY 2014

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Blue Star | 1QFY2014 Result Update

July 27, 2013 2

Exhibit 1:1QFY2014 performance highlightsY/E March (` cr) 1QFY2014 1QFY2013 % chg (yoy) 4QFY2013 % chg (qoq) FY2013 FY2012 % chgNet Sales 771 731 5.4 858 (10.2) 2924 2820 3.7Net Raw material 551 539 2.2 657 (16.1) 2184 2200 (0.7)(% of Net Sales) 71.5 73.7 76.5 74.7 78.0

Staff Costs 58 53 10.2 58 0.6 230 221 4.2

(% of Net Sales) 7.6 7.2 6.7 7.9 7.8

Other Expenses 123 106 16.5 124 (0.4) 420 422 (0.6)

(% of Net Sales) 16.0 14.5 14.4 14.4 15.0

Total Expenditure 732 698 4.9 838 (12.6) 2834 2843 (0.3)EBITDA 38 34 14.6 20 92.9 90 (22) (506.4)EBITDA margin (%) 5.0 4.6 40 2.3 266 3.1 (0.8) 388

Interest 12 13 12 53 72

Depreciation 8 7 11.5 9 (6.1) 33 32 5.1

Other Income 4.4 7.0 (37.5) 20.8 (78.9) 36 23 61.1

PBT 23 21 10.9 19 17.3 41 (103) 12.6(% of Net Sales) 3.0 2.8 2.3 1.4 (3.7)

Tax - - 1 3 1

(% of PBT) - - 4 6 (1)

Reported PAT 23 21 10.9 19 22.7 38 (105) (136.5)PATM (%) 3.0 2.8 2.2 1.3 (3.7)

Equity capital (cr) 18 18 18 18 18

EPS (`) 12.7 11.4 10.9 10.3 22.7 21.2 (58.2) (136.5)

Source: Company, Angel Research

Exhibit 2:Actual vs Angel Estimates (1QFY2014)(` cr) Actual Estimate % variationNet Sales 771 761 1.3

EBITDA 38 27 43.1

EBIDTA margin 5.0 3.5 146bp

Adjusted PAT 23 16 43.4


Revenue in-line, margins higher than expectation

For 1QFY2014, Blue Star reported a revenue of `771cr, which is in-line with our

estimate and 5.4% higher on a yoy basis from `731cr in 1QFY2013. Better

performance of the Cooling Products division was offset by 6.7% yoy decline in

revenue from the EMPPACS division owing to selective order booking which is

in-line with the companys policy to improve margins. The PEIS division reported a

4.3% yoy growth in its revenue. Overall the EBITDA margin was at 5.0%, 146bp

higher than our expectation of 3.5%, primarily due to reduced raw material cost as

a percentage of sales, leading to a net profit of`23cr, ie 43.4% higher than our

expectation of`16cr.

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Division-wise performance

Exhibit 3:Division-wise performance (Standalone)Y/E March (` cr) 1QFY14 1QFY13 % chg (yoy) 4QFY13 % chg (qoq)Total RevenueA) EMPPACS 342 367 (6.7) 481 (28.7)

B) Cooling Products 396 334 18.8 307 29.0

C) PEIS 32 31 4.3 70 (54.4)

Total 771 731 5.4 858 (10.2)Less: Inter-DivisionalRev.

- - -

Net Sales 771 731 5.4 858 (10.2)

EBITA) EMPPACS 20 12 63.0 11 (90.0)

B) Cooling Products 42 38 12.7 31 36.0C) PEIS 3 7 (53.1) 10 (67.8)

EBIT Margin (%)A) EMPPACS 5.9 3.4 252 2.2 368

B) Cooling Products 10.7 11.3 (58) 10.1 55

C) PEIS 10.5 23.3 (1,283) 14.9 (437)


EMPPACS division on an improvement path: The divisions revenue de-grew by6.7% yoy to `342cr in 1QFY2014 from `367cr in 1QFY2013. The EBIT margin

improved on both, yoy as well as qoq basis and came in at 5.9% for the quarter as

compared to 3.4% in 1QFY2013, driven by greater focus on execution, better

margin in air-conditioning projects, and focus on business from profitable sub-

divisions.

Cooling products division revenue jumps 18.8%: Revenue of the division jumpedby 18.8% yoy backed by significant increase in sales of room air conditioners

which resulted in an increase in market share in the room air conditioner division

by around 1%, both in number as well as value terms. The EBIT margin for the

division plunged marginally by 58bp to 10.7% as compared to 11.3% in

1QFY2013, owing to an increase in competition and re-entry in some low margin

business accounts. The company has taken a price hike of upto 6% in the room air

conditioner division to offset the impact of the rupees depreciation.

PEIS division disappoints on the margin front: The divisions revenue grew by 4.3%yoy to `32cr; however, its EBIT decreased by 53.1% yoy to `3cr, due to

unfavorable business climate and declining demand in the capital goods sector.

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July 27, 2013 4

Investment Rationale

Improvement in macro scenario to support Blue Stars growth

The macro-economic sentiment has improved in the recent past on back of a flurry

of reforms announced by the government. Blue Star has a major presence in the

EMPPACS division, which contributes ~60% to the total revenue (FY2013). The

division caters to different industries like IT/ITeS, retail (including malls and

multiplexes), industrial, healthcare, hospitality, infrastructure, etc which are

dependent on the macro-economic environment. There's been some improvement

in demand from hotel, hospital, healthcare and industrial divisions. Overall, the

EMPPACS division has also shown some signs of gradual recovery in FY2013 by

growing at 6%. We expect a revival in the economy due to prevalence of favorable

sentiments, thus resulting in a recovery in the capex cycle.

Exhibit 4:Revenue trend in EMPPACS division vs GDP growth


38.4

11.4

3.6

10.5

(15.6)

6.0

9.3

6.7

8.69.3

6.2

5.0

(4)

(2)

0

2

4

6

8

10

12

(20)

(10)

0

10

20

30

40

50

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

(%)

(%)

Revenue growth (RHS) GDP growth (RHS)

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July 27, 2013 5

Quality order execution supports EBITDA margin expansion

Selective order booking with respect to better terms of payment, other commercial

terms, and better margins is an indication towards gradual improvement in the

EBITDA margin. However, a delay in execution of high margin projects, coupled

with delayed closure of low margin jobs, has resulted in snail-paced expansion of

the EBITDA margin. The order book currently stands at`1,438cr as on June 2013.

We are conservative on new order inflow and expect a decline of 6% yoy in

FY2014. Order inflow is expected to remain flat in FY2015 as well. Nevertheless,

concentration on improving margins by cost reduction measures is expected to

support gradual improvement in EBITDA margins.

Exhibit 5:Order book trend


Exhibit 6:Order book/sales to improve


Profitability of Cooling Products division to gain traction post FY2014

Blue Star has been observing robust demand in the commercial refrigeration and

cold storage division, while growth in the room air conditioner division has also

started gaining traction. In 1QFY2014, Blue Stars market shares in the room air

conditioner business improved by around 1%, in both number and value terms.

Going forward, the company will continue its effort to increase market share in

both room air conditioners and refrigeration through initiatives like increase in

product range with color options and focus on the light commercial division.

Moreover, the companys focus on selectively expanding the channel network in

tier 2, 3 and 4 cities and in light commercial division is expected to support

revenue growth. Blue Star has also taken a price hike of upto 6% in the room air

conditioner division, which is expected to support margins in the scenario of a

depreciating rupee.

1,1

39

1,6

99

1,9

60

1,9

17

1,4

18

1,8

58

2,2

48

0.4

49.2

15.4

(2.2)

(26.0)

31.1

21.0

(30)

(20)

(10)

0

10

20

30

40

50

60

0

400

800

1,200

1,600

2,000

2,400

2,800

3,200

3,600

4,000

FY2009 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

(%)

(`c

r)

Order book (LHS) yoy growth ( RHS)

1,9

05

1,9

44

2,1

92

1,8

88

1,9

59

1,8

70

1,9

21

0.60

0.87

0.89

1.02

0.72

0.99

1.17

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1,700

1,800

1,900

2,000

2,100

2,200

2,300

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E

(x)

(`cr)

EMPPACS+PEIS sales ( LHS) Order book/ sales (RHS)

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EBITDA margin to improve, but at a slow pace

The companys EBITDA margin has witnessed a marginal improvement on a yoy

basis in 1QFY2014 to 5.0% from 4.6% in 1QFY2013. This is due to better margin

from the EMPPACS division. However, the cooling products divisions margin

declined marginally due to high volatility in commodity prices on account of rupee

depreciation. We expect the EBITDA margin to stabilized at 3.4% levels in

FY2014E, post which, the EBITDA margin would see a gradual improvement. In

addition, declining debt level and interest rate would reduce interest cost, thus

resulting in higher profits. Consequently, the net profit is expected to be at`84cr in

FY2015E as compared to`39cr in FY2013.

Exhibit 10:EBITDA margin to improve gradually


Exhibit 11:PAT expected to recover in FY2015E


Exhibit 12:Relative valuationYear end Net Sales(` cr) OPM(%) PAT(` cr) EPS(`) ROE(%) P/E(x) P/BV(x) EV/EBITDA(x) EV/Sales(x)

Blue Star FY2015E 3,099 4.2 84 9.3 18.0 16.7 2.8 12.9 0.5Voltas FY2015E 6,244 6.2 295 8.9 15.0 9.4 1.4 5.7 0.4

Source: Company, Bloomberg, Angel Research

260 287 256 (22) 90 99 131

10.4

11.4

8.6

(0.8)

3.1 3.44.2

(2)

0

2

4

6

8

10

12

-50

0

50

100

150

200

250

300

350


(%)

(`cr)

EBITDA (LHS) EBITDA margin (RHS)

182 198 161

(105)

39 54 84

7.3 7.8

5.4

(3.7)

1.31.8

2.7

(6)

(4)

(2)

0

2

4

6

8

10

(150)

(100)

(50)

0

50

100

150

200

250


(%)

(`cr)

PAT (LHS) PAT margin (RHS)

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July 27, 2013 8

Outlook and valuation

We have reduced our earnings estimates marginally downwards for FY2014E and

FY2015E due to delay in execution of high margin orders and volatile commodity

prices. At the current market price, the stock is trading at EV/sales of 0.5x for

FY2015E which we believe is attractive from its historical level of 0.9x (five year

median). Hence, we maintain our Buy rating on the stock with a target price of`208 based on a target EV/sales of 0.7x for FY2015E.Exhibit 13:One year forward EV/sales band


Key concerns

Further slowdown in investment cycle may impact the order inflow, thusimpacting revenue. It may also force the Management to compromise on its

strategy to stay away from low margin projects.

Slowdown in consumer divisions like IT/ITES, healthcare, hospitality andinfrastructure is also expected to impact the companys growth.

Volatile commodity prices are expected to put pressure on the margin ofcooling products division.

Foreign exchange fluctuations have a direct impact on the profit of the coolingproducts division since commercial refrigerators are imported. Further

depreciation may impact the profits of Blue Star.

0

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

4,500

5,000

5,500

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

EV(`cr)

EV 1.6x 1.2x 0.8x 0.4x

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July 27, 2013 9

Company Background

Blue Star is India's largest central air-conditioning company with a network of 29

offices, seven manufacturing facilities, over 1,600 dealers and around 2,800

employees. The companys operations could be classified under three main

divisions:

EMPPACS Division: This division comprises central and packaged air-conditioning(involving design, engineering, manufacturing, installation, commissioning and

support of large central air conditioning plants, packaged air conditioners and

ducted split air conditioners) as well as electrical projects and plumbing and fire

fighting projects. In addition, the company promotes after-sales service as a

business, by offering several value added services in the areas of upgrades and

enhancements, air management, water management, energy management and

LEED consultancy for Green Buildings.

Cooling Products: Blue Star offers a wide range of contemporary window and splitair conditioners. The company also manufactures and markets a comprehensive

range of commercial refrigeration products and services that cater to the industrial,

commercial and hospitality sectors.

PEIS: This division has been the exclusive distributor in India for manyinternationally renowned manufacturers of hi-tech professional electronic

equipment and services, as well as industrial products and systems.

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Profit and loss statement (Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EGross sales 3,010 2,820 2,924 2,941 3,099Less: Excise duty 29 - - - -Net Sales 2,981 2,820 2,924 2,941 3,099

Total operating income 2,981 2,820 2,924 2,941 3,099% chg 19.3 4.6 9.4 13.3 -

Net Raw Materials 2,145 2,200 2,184 2,191 2,297

Personnel 215 221 230 224 236

Other 364 422 420 428 435

Total Expenditure 2,724 2,843 2,834 2,842 2,968

EBITDA 256 (22) 90 99 131% chg 21.7 4.3 (0.3) 0.3 4.4

(% of Net Sales) 8.6 (0.8) 3.1 3.4 4.2

Depreciation 32 32 33 32 33

EBIT 224 (54) 57 67 99% chg (11.0) - - 17.8 46.9

(% of Net Sales) 7.5 (1.9) 2.0 2.3 3.2

Interest (incl. forex loss) 26 72 53 39 28

Other Income 32 23 36 29 33

(% of Net Sales) 1.1 0.8 1.2 1.0 1.1

PBT 231 (103) 41 57 104% chg (16.5) - - 41.0 82.1

Tax 73 1 3 4 21

(% of PBT) 31.5 (1.1) 6.3 6.3 20.0

PAT (reported) 158 (105) 38 54 84Extraordinary (Expense)/Inc. 0 - - - -

ADJ. PAT 158 (105) 38 54 84% chg (18.5) - - 37.5 55.5

(% of Net Sales) 5.3 (3.7) 1.3 1.8 2.7

Basic EPS (`) 17.9 (11.7) 4.3 6.0 9.3Fully Diluted EPS ( ) 17.9 (11.7) 4.3 6.0 9.3% chg 81.5 (65.3) (37.2) 137.5 155.5

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Balance sheet (Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ESOURCES OF FUNDSEquity Share Capital 18 18 18 18 18Reserves& Surplus 493 377 383 416 478

Shareholders Funds 511 395 401 434 496Total Loans 445 367 422 382 347

Deferred Tax Liability (1) (0) (0) (0) (0)

Other Long Term Liabilities 3 5 5 5 5

Total Liabilities 958 767 827 820 848APPLICATION OF FUNDS - - - - -Gross Block 377 418 469 485 523

Less: Acc. Depreciation 183 211 242 274 306

Net Block 194 207 227 212 217Capital Work-in-Progress 25 32 8 8 8

Goodwill - - - - -

Investments 27 28 27 27 27

Long term Loans & adv 40 77 112 118 124

Other non-current assets - - - - -

Current Assets 2,020 1,742 1,785 1,743 1,821Cash 52 54 17 27 21

Loans & Advances 113 102 98 94 93

Inventory 498 447 510 493 518

Debtors 821 768 835 806 849

Other current assets 536 372 325 324 341

Current liabilities 1,349 1,317 1,332 1,288 1,349

Net Current Assets 671 424 453 456 472Misc. Exp. not written off - - - - -

Total Assets 958 767 827 820 848

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Cash flow statement (Consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EProfit before tax 231 (103) 41 57 104

Depreciation 32 32 33 32 33Change in Working Capital (287) 248 (66) 8 (23)

Other income (32) (23) (36) (29) (33)

Direct taxes paid (73) (1) (3) (4) (21)

Others 16 92 57 - -

Cash Flow from Operations (113) 244 26 64 60(Inc.)/Dec. in Fixed Assets (47) (47) (28) (16) (38)

(Inc.)/Dec. in Investments (23) (6) 0 - -

(Inc.)/Dec. In L.T loans and adv (40) (36) (35) (6) (6)

Other income 32 23 36 29 33

Others (48) 16 7 - -Cash Flow from Investing (126) (51) (20) 7 (11)Issue of Equity - - - - -

Inc./(Dec.) in loans 379 (78) 55 (40) (35)

(Dec.)/Inc. in long term provision 3 2 0 - -

Forex difference on cash equivalent (0) (0) - - -

Dividend Paid (Incl. Tax) (73) (10) (32) (21) (21)

Others (41) (106) (67) - -

Cash Flow from Financing 267 (192) (44) (61) (56)Inc./(Dec.) in Cash 28 1 (37) 10 (6)

Opening Cash balances 25 53 54 17 27Closing Cash balances 53 54 17 27 21

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Key ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 8.7 (13.3) 35.7 26.0 16.7P/CEPS 7.2 (19.0) 19.3 16.3 12.0

P/BV 2.7 3.5 3.5 3.2 2.8

Dividend yield (%) 4.5 0.6 1.9 1.3 1.3

EV/Sales 0.6 0.6 0.6 0.6 0.5

EV/EBITDA 6.9 (75.6) 19.6 17.4 12.9

EV / Total Assets 1.8 2.2 2.1 2.1 2.0

Per Share Data (`)EPS (Basic) 17.9 (11.7) 4.3 6.0 9.3

EPS (fully diluted) 17.9 (11.7) 4.3 6.0 9.3

Cash EPS 21.4 (8.2) 8.1 9.5 12.9

DPS 7.0 1.0 3.0 2.0 2.0

Book Value 56.8 44.0 44.5 48.2 55.2

DuPont AnalysisEBIT margin 7.5 (1.9) 2.0 2.3 3.2

Tax retention ratio 0.7 1.0 0.9 0.9 0.8

Asset turnover (x) 4.5 3.9 4.3 4.1 4.3

ROIC (Post-tax) 23.2 (7.4) 7.9 8.8 11.0

Cost of Debt (Post Tax) 0.0 0.3 0.1 0.1 0.1

Leverage (x) 0.4 0.7 0.8 0.8 0.7

Operating ROE 32.4 (13.0) 14.4 16.2 18.3

Returns (%)ROCE (Pre-tax) 29.6 (6.3) 7.2 8.2 11.8

Angel ROIC (Pre-tax) 33.8 (7.4) 8.5 9.4 13.7

ROE 32.1 (23.2) 9.8 12.9 18.0

Turnover ratios (x)Asset Turnover (Gross Block) 8.8 7.7 7.3 6.9 6.9

Inventory / Sales (days) 46 61 60 62 59

Receivables (days) 89 103 100 99 99

Payables (days) 161 171 171 171 171

WC cycle (ex-cash) (days) 58 64 50 54 52

Solvency ratios (x)Net debt to equity 0.4 0.7 0.8 0.8 0.7

Net debt to EBITDA 1.4 (12.8) 4.2 3.3 2.3

Interest Coverage (EBIT / Int.)) 8.8 (0.7) 1.1 1.7 3.6

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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Blue Star

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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Documents

Blue Star, 1Q FY 2014