Blue Star Limited (BLUESTARCO): Will use the extra money from corporate tax cut in capital expenses

Update on the Indian Market:

On Friday, Market was more or less flat. Nifty closed 0.5% lower at Rs 11,512. Bharti Airtel (+2.89%), Bajaj Finance (+1.61%), ITC (1.36%) were among the biggest gainers. IndusInd bank (-4.92%), Yes bank (-5.0%), Vedanta (-5.69%) were the losers. Among the sectoral indices Pharma (-2.06%), Realty (-2.28%), Metal (-2.84) closed lower while there were no gainers.

Excerpts from the interview by Mr. B Thiagarajan, MD – Blue Star

• Effective tax rate was 32% in FY19 and would have been ~ 31% in FY20. So, setting aside certain concessions they will forego if they move to this regime, they should be gaining around 4.5 percent and 5 percent in terms of EPS.
• They will pump in this extra money into the capital expenses. They have been on an indigenization mode and they will accelerate indigenization or reduce in-China dependency.
• In FY20, they are looking at indigenizing deep freezers. So ~ Rs 120 cr is being invested in Vada in Maharashtra. Sri City plant which they had acquired the land there, they would have looked at FY22-23, they may end up accelerating that because the room air conditioner market continues to be good.
• Plastic injection moulding, compressor manufacturing industry will benefit due to indigenization drive.
• They will accelerate the capital investment there. So the entire Sri City plant should get frozen sometime in January-February 2020.
• Unlike many other durables, air conditioners have been witnessing and even during Onam season they witnessed good growth. He thinks that will further grow.
• The Onam season is an indication because there were floods. He thought Onam season will be a washout, the markets are priced close to around 40% growth over last year, but last year also there were floods. The year before there was around 12% growth.
• Going forward, the festival season should be ~ 12-15% growth. Having said that, the demand is for lower-end products and 40% of the sales have been through consumer finance schemes.
• According to him, there is no room for more discounts because the dollar has moved up. They have to keep a close watch on the exchange rates because copper and quite a few components still get imported.
• The competition is stiff and the reach is becoming very complex; with 65% of the market for them are tier III, tier IV, and tier V.
• To reach out, they have to pump up the advertising expenses. So, there won’t be price dilution. He expects that they would maintain last year margin levels and marginally improve that.

Consensus Estimate (Source: market screener website)

• The closing price of BLUESTARCO was ₹ 794/- as of 27-September-19. It traded at 34x / 28x / 22x the consensus EPS for FY20E/ FY21E/ FY22E of ₹ 23.1 / 28.3 / 36.1 respectively.
• Consensus target price of ₹ 792/- implies a PE multiple of 22x on FY22E EPS of ₹ 36.1/-