Blue Star Limited

Blue Star Limited (BSL’s) performance in 1QFY09 was slightly above our estimates. Given its order book of Rs14.1bn (up 43.3% yoy) and managements focus to improve business profitability makes us positive about its prospects. We trim our target PE multiple from 20x to 15x, however we maintain Buy with a lower target price of Rs427.

BSL’s 1QFY09 sales was marginally above our expectation, sales at Rs6.31bn up 36.5% YoY (expected Rs6.26bn). On account of strong order backlog the Central Air-Conditioning Systems (CAS) segment grew by 37.2% YoY to Rs3.8bn. Cooling Products (CP) grew by 36.4% YoY to Rs2.2bn largely driven higher sales of split airconditioner. Professional Electronics (PE) revenues at Rs349mn also showed a healthy growth of 29.8% YoY.

BSL’s EBITDA grew by 50.4% yoy to Rs570.5mn. EBITDA margin was higher by 80bps from 8.2% in 1QFY08 to 9% (8.8%) in 1QFY09. During the quarter BSL provided Rs74.6mn on account of accounting standard AS- 15 on ‘Employee Benefits’ which is included in employee expenses. Sans this expense, EBITDA would have been at Rs646.9mn and EBITDA margins would have been at 10.2% way above our estimate of 8.8%.

BSL’s reported PAT was 9.1% above our estimates at Rs364.3mn (333.8mn) from Rs223.2mn up 63.2% yoy. The higher growth in PAT was primarily on account of better operating performance, higher other income (up to Rs16.5mn from Rs.7mn yoy) and lower interest expense (down 10.7% yoy).

We remain sanguine about the prospects of BSL as segments such as telecom, multiplexes, hospitality, power and other infrastructure projects are showing demand growth and expected to offset the demand slowdown in IT/ITES and organized retail slowdown. Looking at the current market environment, we maintain buy, but we trim our target PE multiple from 20x to 15x. At our revised target price of Rs427, BSL would trade at 19.6x FY09F EPS of Rs21.8 and 15x FY10F EPS of Rs28.5. The key risk for the stock would be lower order booking and margin pressure due to higher raw
material price.