Blue Star- The demand in the festival season is expected to grow 12% YoY in FY20

Update on the Indian Equity Market:

On Thursday, NIFTY was up 1.07% to close at 11,586 level. The top performers in the index were yes bank (+15.47%), Tata motors (+13.27%) and Eicher Motors (+7.96%). HCL tech (-1.06%), VEDL (-0.97%) and Grasim (-0.59%) were the worst performing NIFTY stocks. Among the sectorial indices, NIFTY Auto (+3.13%), NIFTY PSU Banks (+3.0%) and NIFTY PVT Bank (+1.71%) were the top gainers. NIFTY IT (-0.41%) was the only negative performing index today as all the other indices were in green.

Excerpts of an interview with B. Thiagarajan, managing director, Blue Star (From Livemint dated 17/10/2019)

• According to Mr. Thiagrajan, the festival season has been good.   Summer season has been great. Starting with Onam, the Dussehra season and now leading up to Diwali the consumption seems to be good and they are doing better than the market.
• They are launching new TV commercial, print and digital campaigns in an orbit-shifting move. It is because the market is doing well.
• They have engaged Virat Kohli and it is a new orbit-shifting move as far as Blue Star is concerned.
• Advertising expesnes will be somewhere around 12% over last year in value terms. Considering the entire festival season up to New Year perhaps starting from Onam. So far that figure is holding good.
• They would like to grow faster than the market. If the market is growing by 12%, they would aim to have 17% growth in the festival season. He expects between 10-12% market growth, anywhere between 15-17% Blue Star growth. This is in terms of room air conditioners.
• In air conditioners the penetration levels are around 6%, there are many first-time buyers, low-end products are getting sold, and consumer finance is at an all-time high.
• 90% energy consumption reduction has been achieved in AC. So it is no longer viewed as an energy guzzling device. Altogether, the monsoon season has ended well. Though there will be some delayed crops, he thinks agriculture income will be good.
• Therefore tier-3-4-5 markets also should be doing well. This prompts him to say that anywhere between 10% and 12% growth should be taking place in the market.
• Association with Virat will be for 14 months. Just like Virat is good in T20, one day and test cricket, Blue Star is a player in corporate commercial; light commercial like shop, showroom, and boutiques and residential. They need the mass connect because tier-3-4-5 towns are doing well. They are proud of that association.
• They will spend around ₹550 mn out of the revenue target in this association. In terms of percentage of ad expenses to revenue it is not going to make a difference because they are growing and this association is going to bring more sales, they are excited about this.

Consensus Estimate (Source: market screener website)

• The stock price was ₹ 826/- as of close of 17-10-19 and traded at 39x/ 29x/ 23x the consensus EPS for FY20E / 21E / 22E EPS of ₹ 23.1 /28.3 /36.1 respectively.
• Consensus target price of ₹ 805/- implies a PE multiple of 22x on FY22E EPS of ₹ 36.1/-.