Blue Star loses sheen on weak fundamentals

Blue Star loses sheen on weak fundamentals

Last week, Blue Star Ltd announced that it was expanding its commercial refrigeration capacity in the near term. This did nothing to boost sentiment on the Street. Shares of the country’s largest air conditioning systems firm have fallen 75% in the past one year.

The September quarter’s dismal performance saw soaring raw material and employee costs as a percentage of sales, which dragged operating profit margin down by 740 basis points from the year-ago period to 2.3%. One basis point is 0.01%.

The firm has also had to cope with issues in executing orders and project delays from the side of customers—especially those in retail and real estate. Further, there was a 13% contraction in revenue during the quarter to 600 crore. Spiralling interest rates and rising debt hit cash flows. Debt as of 30 September was 620.7 crore, up from 400.4 crore a year ago. An Emkay Global Financial Services Ltd report said the firm has lowered debt by around 125 crore since September.

Analysts expect Blue Star’s refrigeration business will grow at around 25% a year versus the industry growth rate of 5-10%. Similarly, commercial refrigeration, too, might grow 20% a year. But the competitive environment and the depreciated rupee will make margin improvement an uphill task.

Even the company’s intent to revisit its pricing strategy with an escalation clause built in (which was not the case earlier) may take time to shore up margins. Strategies outlined by the management to renegotiate old projects and collect payments, raise the threshold of operating margins for new projects and outsource a greater proportion of jobs will no doubt yield results, but not in the next four-six quarters.

Further, the market it mainly caters to—realty, power and retail—is also in limbo. Weak order inflows and an order book of around 2,000 crore (a little lower than estimated 2012 revenue) are insufficient to enthuse investors about the future outlook for the stock.

In any case, Blue Star’s 21 crore loss in the September quarter—the first loss reported in eight quarters—has left investors with no interest in the counter. It will be a long haul before they see light at the end of the tunnel.

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Blue Star (PDF)