Buy Blue Star With Target Of Rs 258
Blue Star Ltd’s (BSL) declared disappointing set of results. The net sales grew by 6.6% YoY to Rs7.03bn (PINCe Rs7.04bn). OPM contracted by 476bps to 3.7% on account of cost overrun in the Elec-Mech project division. This coupled with higher interest charges (+278% YoY) translated in a 74% fall in adj net profit to mere Rs98mn (PINCe Rs359mn).
Cost overrun in the project division eroded margins: Most of the contracts are fixed price in nature and high commodity prices resulted in cost overruns on contracts under execution. Sales declined by 8.7% and it incurred a loss of Rs89mn at PBIT level. Management expects margin erosion of 3-5% on the orders worth Rs18bn which would get executed in the next 6 quarters. New orders are expected to have better margins. We have factored in reduced margins in our estimates.
Other Segments performed well: Entry into room-conditioners business resulted into growth of 30% in sales for cooling product division to Rs3.3bn and margins were healthy at 13.5%. The Prof. Elec. divison witnessed sales growth of 3.2% and margins expanded by 704bps to 24%. Management expects these segments to continue to perform well going forward.
Outlook: Standalone order book at end of Q1FY12 stands at Rs20.1bn (up by 6.2% YoY). Consolidated order book stands at Rs23bn. Current sluggish investment environment plagued with high interest rates and inflation have resulted into increased competition and muted order inflows. We believe the situation to continue for next few quarters on account of slowdown in the industrial capex cycle. Management’s main focus going forward would be managing capital employed rather than growth. The key triggers would be healthy order inflows and improved investment environment.
VALUATIONS AND RECOMMENDATION We have reduce our sales and profit estimates for FY12 by 4% & 26% respectively and introduced FY13. On account of expected slowdown in order inflows, pressure on margins and deteriorating return ratios, we downgrade our target multiple to 13x (earlier 18x FY12E) and roll forward our target valuation to FY13. We maintain our ‘HOLD’ recommendation with a reduced target price of Rs258 (13xFY13E).