Price hikes not sufficient to protect the margins – Blue Star

Update on the Indian Equity Market:

On Monday, Nifty closed in the red at 17,207 (-0.4%) dragged by MEDIA (-2.7%), METAL (-2.1%), and OIL & GAS (-2%) were the top losers while PRIVATE BANK (+0.3%), BANK (+0.2%), and FINANCIAL SERVICES (+0.03%) were the top gainers for the day. Among the Nifty50 constitutents, the top losers were HINDALCO (-3.4%), UPL (-2.8%), and DIVISLAB (-2.3%) while WIPRO (+1.7%), INFY (+1.3%), and SHREECEM (+1.3%) were the top gainers.

Edited excerpts of an interview with Mr. B Thiagarajan, MD of Blue Star with ET Now on 17^th February 2022:

• Redesigning of product portfolio and correction of distribution penetration in northern regions led to improved market share. The company improved its market share from ~13% to ~13.25%, and its growth beat market expectations despite the muted festival season.
• Redesigning of product portfolio happened because of the inflated commodity prices. Due to commodity price increase in FY21, the margins were under pressure but the company expects 4QFY22 to be a good quarter.
• The company did the price hikes in Apr-21, Jul-21 as well as in Oct-21. Despite the price hikes company couldn’t able to protect margins. ~1.5% margin erosion was there.
• If the commodity prices continue to go upward, the company will raise the prices and the call on price hikes will be taken in Apr-22 or May-22. The Company will be watching how the summer season is going to be.
• On the debt front, the company doing well as well as cash flows are maintained strongly, with no concern over there.
• Despite the CAPEX in Wada for the deep freezer plant which is going to be commissioned in March or April and another investment in Sri city for a new room air conditioner plant under the PLI scheme, the cash flow will remain strong.
• The margins for 4QFY22 of Segment – I should be around 5.5% to 6% and for Segment – II it should be around 7%. For FY22, it should be ~6% to 6.25% as the summer season of FY22 wasn’t good for the company. The company expects its ROC to be the industry benchmark.
• Order book as of 31^st December 2021, was Rs 33,010mn vs Rs 31,570mn on 31^st December 2020. The company expected that the office segment will not perform well but the demand came from that segment also which beat expectations.
• Office consumption is going up but the growth was driven by manufacturing-related electromechanical products and for that segment, the outlook is very strong in the coming year. Big orders are expected to be finalized, whether it’s metro, railway, airport, or water-related MEP projects.
• The company continues its expansion plan despite the hit in two consecutive summers because the outlook for the room air conditioner and commercial refrigeration business is very strong. The penetration of room air conditioner business is below 7% and the company expects that for the next five years it will continue to grow more than 15% and might be touch 20%.
• For deep freezers, the company is setting up a new 2.5 lakh unit plant. In phase one of Sri city plant company targeting of ~4 lakh units and this plant expected to be commissioned in Oct-22 or Nov-22.

Asset Multiplier Comments

• We expect increased penetration in newer geographies and segments will improve the company’s market share going forward. The company’s ongoing expansion plans, strong cash flow generation and healthy growth in order book will contribute to the company’s growth trajectory.
• We believe that the increased pace of economic recovery, increased investments by both private as well as public sectors, and revival in consumer expenditure are expected to boost revenue and the summer season which is a demand driver for the company will bring more clarity on the demand scenario post covid
• We expect the increased commodity prices to put margins under pressure in the subsequent quarters.

Consensus Estimate (Source: market screener website)

• The closing price of Blue Star was ₹ 1,063/- as of 21-February-2022. It traded at 61x/39x/31x the consensus EPS estimates of ₹ 17.4/27.5/34.8 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 1,102/- implies a P/E Multiple of 32x on the FY24E EPS estimate of ₹ 34.8/-.

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