The central airconditioning projects business is a play on the domestic commercial real estate activity in the country.
Blue Star’s order booking in FY09 was affected by the slowdown in construction, retail and infotech segments. As a result, growth in order booking declined to 10.6% in FY09 from 41% in FY08.
With the overall improvement in business confidence and liquidity in the economy, there are indications of a sustained recovery in commercial real estate.
In the first quarter of the current fiscal, order bookings increased 114% on a sequential basis, thus indicating that the downward trend in order inflows has bottomed out. Order backlog is up 22% y-o-y to Rs17.2 billion.
Blue Star’s business has been traditionally driven by the IT/ITES, Retail and construction sectors.
Anticipating a likelihood of slowdown in these sectors, the company diversified into airconditioning of infrastructure sector projects including Metro stations, Electrical substations and healthcare.
The company’s acquisition of Nasser Electricals also helped drive new business in electrical projects.
Apart from this, new areas like Education, Healthcare and Telecom continue to expand aggressively thereby generating incremental business for the company.
Revenue growth for the first quarter came at a negative 14% mainly due general sluggishness in real estate projects. Order execution has also been taking longer as clients have been delaying completion in view of slack demand conditions.
The company had been going slow on billing given liquidity issues faced by clients. This could have also contributed to degrowth in revenues.
Outlook and valuation
While revenue growth would remain slack in the current year, we see strong potential for acceleration in growth in FY11. This will be on the back of faster revenue conversion as improved economic outlook speeds up project execution.
The stock is currently trading at 14.5x and 11.5x FY10 and FY11 earnings. On an EV/EBITDA basis, the stock is trading at 9.9x FY10.
Blue Star remains one of our favoured picks in the engineering madcap sector. However, in view of the reduced upside from these levels, we recommend BUY with a revised price target of Rs420 (earlier Rs 400).