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Blue Star 3QFY2013 performance highlights and results update

Contributed by Angel Broking

For 3QFY2013, Blue Star reported a 2.5% yoy growth in revenue (net sales) to Rs.599cr. The growth in the top-line was subdued as the 7.6% yoy growth in the company’s EMPPACS division was offset by a 5.1% yoy decline in the cooling products division. The EBITDA is positive for the quarter as compared to negative EBITDA of the corresponding quarter of the previous year. The EBITDA margin, coming in at 4.2% during 3QFY2013, was supported by better quality orders in the EMPPACS division. This led to a net profit of Rs.5cr for the quarter as compared to a loss of Rs.33cr during 3QFY2012. However the net profit declined on a sequential basis by 26.1% due to high interest cost and low other income.

Improvement in EBITDA margin to be snail- paced: Blue Star’s EBITDA has turned positive since 1QFY2013 after a loss in two consecutive quarters in 2HFY2012. The EBITDA margin is expected to sustain at levels of 3.5-4.0% for the rest of FY2013. We believe the recovery in the EBITDA margin is owing to improvement in macro-economic conditions and execution of high margin orders, although at a slow pace.

Outlook and valuation: We expect Blue Star to report a modest revenue growth of 5.4% yoy in FY2014 to Rs.2,896cr, post a decline for two consecutive years. This would be on the back of an expected improvement in macro-economic scenario. EBITDA margin is expected to expand by a sharp 642bp over FY2012-14E due to better margin orders. Consequently, the net profit is expected to be at Rs.84cr in FY2014E as compared to a loss of Rs.105cr in FY2012. At the current market price of Rs.169, the stock is trading at EV/sales of 0.6x for FY2014E which we believe is attractive. We maintain our Buy recommendation on the stock with a target price of Rs.237 based on a target EV/ sales of 0.8x for FY2014E.