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Buy Blue Star, target Rs 675: SBICAP Securities

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SBICAP Securities has a buy call on Blue Star with a target price of Rs 675.

The current market price of Blue Star is Rs 584.30.

Time period given by the brokerage is one year when Blue Star price can reach the defined target.

Investment rationale by the brokerage-

EMP sales strong though margin moderates: EMP segment grew by a robust nearly 16 per cent YoY in Q3FY19. Within the EMP segment, Packaged AC grew nearly 13 per cent YoY (VRF: +25 per cent YoY, Chiller: +25-30 per cent YoY) faster than the market (VRF: +11 per cent YoY, Chiller: +15-18 per cent YoY). While sales growth remained strong, PBIT margin fell 80bps YoY to 4.6 per cent due to completion of some large projects with lower margin. The management indicated a margin of 5.5-6.0 per cent in the segment. Due to continued cost over-runs in the Oman project and unattractive business potential, the company has decided to exit the joint venture (JV). The Oman JV’s exposure is now completely provided for. The company said that the other two JVs in Malaysia and Qatar were doing good. As it intends to explore export opportunities in VRF, Chillers and water coolers, the company is adopting a product-centric approach rather than project management in its key export markets. It targets annualized exports worth USD100mn in the near term.

UCP segment margin remains a pain point: Sales of unitary products grew 22 per cent YoY contributed by strong growth in deep freezers, storage water coolers, air coolers and water purifiers. Sales grew in the RAC segment by nearly 8 per cent, thus increasing the market share to nearly 12.5 per cent. BLSTR management highlighted that the RAC market is expected to grow by nearly 0-5 per cent (YTD flat) in FY19e, and it expects the company to grow at 8-10 per cent. Continued pricing pressure in the Room AC business resulted in poor PBIT margin (-250bps YoY) in the UCP segment. But the management noted that the company would clock nearly 9.0-9.5 per cent PBIT margin in FY19, excluding negative 150bps impact due to water purifiers. Inventory in the RAC segment has stabilized now (0.2mn vs. nearly 0.7mn in end-Q2FY19).

Valuation, catalysts and risks: We have cut our FY19-FY20e EPS estimates by 3-5 per cent factoring in a lower margin and a higher tax rate. BLSTR remains one of the beneficiaries of the underpenetrated RAC segment, along with a strong presence in packaged ACs. We maintain BUY with a target price of Rs675 based on 28x (unchanged) PE. Key downside risks to our rating include sustained high input cost.

Source: Economic Times