BLUE STAR: BEING SUPER COOL
With its ‘premium yet affordable’ tag, Blue Star has continued to deliver good financial performance supported by its lines of businesses and operational efficiencies
Blue Star Ltd. is an air-conditioning and commercial refrigeration company conducting various activities such as electrical, plumbing and fire-fighting services. Its business segments include electro-mechanical projects and packaged air-conditioning systems along with unitary products. Blue Star’s products include central air-conditioning, room air-conditioners and speciality cooling products. Its other businesses include marketing and maintenance of imported professional electronic equipment and services, as well as industrial products and systems, which is handled by Blue Star Engineering & Electronics.
Blue Star’s manufacturing footprint spans across five state-ofthe- art facilities located in Wada, Dadra, Himachal Pradesh and Ahmedabad that are dedicated to various product lines. The company has around 3,880 channel partners with over 6,000 stores for room air-conditioners, packaged airconditioners, chillers, cold rooms and refrigeration products and systems as well as about 1,060 service associates involved in reaching out to customers in more than 900 towns. Blue Star exports its products to around 18 countries in the Middle East, African, SAARC and ASEAN regions.
Its subsidiary, Blue Star International FZCO, headquartered in Dubai Airport Free Zone, manages the company’s international business and also its joint ventures which focus on heating, ventilation, air-conditioning and refrigeration, in addition to MEP projects for residential, commercial and industrial segments. Blue Star International FZCO is responsible for the export of air-conditioning and commercial refrigeration products and original equipment manufacturing (OEM) and original design manufacturing (ODM) businesses for globally recognised brands such as Danfoss and Rheem as well.
Industry Overview
In FY20, the market size for air-conditioning products in India as a whole was assumed to be approximately Rs 17,500 crore. The market for central air-conditioning, including central plants, packaged and ducted systems and VRF systems, was about Rs 3,250 crore and the market for other ancillary equipment was at around Rs 3,050 crore. The market for room air-conditioners comprised around Rs 11,200 crore. In FY20, government, industrial, infrastructure, hospitality, retail and healthcare segments boosted growth in central air-conditioning while room air-conditioners’ market was seriously hit due to lockdown disruptions as it missed its most important summer sales. Thus, its growth trajectory remained comparatively flat in FY20 compared to FY19.
Electro-Mechanical Projects and Commercial Air-Conditioning Systems
The company’s electro-mechanical projects and commercial air-conditioning systems’ business segment accounts for around 53 per cent of the company’s total revenue from operations for FY20. The segment’s growth is mainly driven by buildings and factories, infrastructure and industrial segments. Gaining new orders, the segment had received an order from Mumbai Metro while Larsen and Toubro awarded with significant orders for major airports. For FY20, more than 40 per cent of the orders were multi-service orders. Due to the pandemic, flow of credit was disrupted in the realty sector affecting the company’s electro-mechanical projects and commercial air-conditioning systems business segment. In spite of this, the company continued to focus on product launches across four major metros to introduce its new range of commercial air-conditioning products to support its growth trend.
Unitary Products
Blue Star’s unitary products’ business segment consists of room air-conditioners as well as commercial refrigeration products and systems, apart from water purifiers, air coolers and air purifiers. The room air-conditioner business was seen strongly recovering in the beginning of the calendar year 2020, but then suffered on account of the pandemic. Not only did it miss its most important summer sales’ season but also festive sales remained low.
In spite of that, compared to the industry sales volumes, Blue Star performed well, gaining around 12.5 per cent of the market share in terms of value. It entered into the ‘premium yet affordable’ segment by introducing a range of three-star inverter split air-conditioners at attractive prices. In FY20, Blue Star made significant progress in the residential water purifier business as it continued to expand its product portfolio along with aggressively pricing the product range for e-commerce platforms.
Financials
Blue Star has continued to deliver good financial performance supported by its lines of businesses and operational efficiencies. But financial performance in the recent quarters was affected by the pandemic. On the quarterly front, on a consolidated basis the company reported net sales of Rs 902.12 crore in Q2FY21, a decrease by 27.8 per cent compared to Rs 1,249.47 crore reported for Q2FY20. Operating profit for Q2FY21 declined by 27.61 per cent to Rs 60.94 crore from Rs 84.18 crore reported for Q2FY20. The company gained net profit of Rs 15.04 crore in Q2FY20, contracting by 59.53 per cent compared to Rs 37.16 crore gained in Q2FY20. On the annual front, for FY20 the company reported net sales of Rs 5,360.19 crore, increasing by a mere 2.39 per cent from Rs 5,234.84 crore reported in FY19.
The operating profit declined by 11.79 per cent to Rs 327.48 crore in FY20 from Rs 371.23 crore in FY19. Blue Star reported net profit of Rs 140.67 crore in FY20, decreasing by 32.74 per cent compared to the net profit of Rs 209.15 crore reported for FY19. Improvement in cash conversion cycle and overall cash flow discipline led to improvement in Blue Star’s debt to equity ratio which was 0.2 as on March 31, 2020 compared to 0.3 as on March 31, 2019. In FY20, the total investment in research and development saw a significant increase to Rs 68 crore compared to Rs 51 crore of FY19. Out of total investment during the year, Rs 46 crore was operating expenses’ investment and Rs 22 crore was capital expansion investment.
Conclusion
The markets witnessed a surge in demand driven by surging expansion plans from fast-growing segments such as food, dairy, quick service restaurants (QSRs), e-retailers such as Big Basket, and cloud kitchens like Swiggy and Zomato. These e-commerce channels will further provide for new channels and growth opportunities for the company. For Blue Star, supermarket refrigeration also provides for tremendous growth opportunities as well as the healthcare and pharmaceutical sectors. To maintain a stable cash flow balance, the company intends to focus more on projects with timely cash collections.
In spite of the current disruption and setbacks, Blue Star has always enjoyed a strong brand image and industry position, allowing it to strongly benefit from growth prospects in the AC industry as well as refrigeration over the long-term period. Blue Star has also been increasing its market outreach by spreading its distribution channels to make its products easily available pan-India. With the company regularly working towards embarking on initiatives to leverage and build on its existing strengths and as well as keeping pace with dynamic market conditions, its growth outlook looks positive. Hence, we recommend HOLD.