Slow business recovery, new investments raise profitability challenge for Blue Star
Even after the 3% rise on Friday, the Blue Star Ltd stock is still lower by about 13% from its September quarter (Q2) results announcement.
The stock slumped after the firm reported lacklustre performance for the second quarter on 31 October and warned about pressure on profitability for the rest of the fiscal. The firm is building new consumer product business lines such as water and air purifiers and air coolers.
But disruptive pricing strategies in the industry and the need for high advertisement and promotional expenditures means profitability is expected to be hit. “We expect segment (water purifier business) results to be impacted by 120-150 bps (basis points) for the current financial year, due to investments in this product category primarily in distribution, R&D and brand building,” Blue Star said in a note. 100 basis points is one percentage point.
Of course, the new businesses are yet to acquire scale, and electro mechanical projects and cooling products divisions remain Blue Star’s mainstay businesses currently. But business recovery post the implementation of the goods and services tax (GST) is rather slow. In electro mechanical projects, spending is largely driven by government projects. New order booking from heavy industrial and factory segments remain muted.
The unitary cooling products unit, which was hit due to inventory liquidation ahead of GST implementation is recovering rather slowly. Normalcy is expected to return only from next quarter (Q4), points out a note from Motilal Oswal Securities Ltd. Further, a rise in raw material prices and no price hikes (till now) indicates realizations are expected to be under pressure.
“Management expects the GST-related disruptions to impact revenue in 3QFY18 also. Blue Star’s helplessness to pass on the recent hike in commodity prices in the current scenario is also likely to impact margins in the near term,” Emkay Global Financial Services Ltd said in a note.
These concerns have led to cuts in earnings estimates. While the stock, over the past one year, has done relatively well even after accounting for the recent correction (still about 31% from a year ago), much depends on recovery in core business divisions in 2018. “We believe the capex cycle should see a recovery post announcements in the next 12-18 months. Hence, while the MEP (electro-mechanical projects) business is being discussed in a limited manner at this stage, we believe margin upside will continue in this segment during FY18E-20E,” Jefferies India Pvt. Ltd said in a note.