Blue Star ~ Leading player in RAC & Commercial Refrigeration (Market Leader)


there are no specific patterns but it seems blue star might be getting ready to come out of the woods.

__Excerpts of theconference call held on 27 Jan 2014,by Capital Mkt & was addressed by Mr. Vir Advani, President-Electro Mechanical Projects Group and Mr. B.Thiagarajan President Air Conditioning and Refrigeration Products.

  • Order Book as of end of Dec 2013 was up 7% YoY and flat QoQ to Rs.1737 crore. As of end of Dec 2012 the order book stood at Rs.1628 crores and as of end of Sept 2013 the order book stood at Rs.1744 crores.
  • Within the total order book, low or Zero margin business stood at Rs.350 crore as of end of Sept 2013; however company has not achieved material success in reducing it and now stands at close to Rs.275-300 crores as of end of Dec 2013.
  • Some of the major order wins in quarter ended Dec 2013 are Apollo Hospital, Navi Mumbai, GIFT City, Gujarat, Tech Mahindra, and Hyderabad, Police Head quarters, Delhi.
  • Total Debt as of end of Dec 2013 stands increased by Rs.16 crore compared to Rs.471 crore as of end of Dec 2012.
  • 9% Salary hikes were given to staff in the month of July 2013; however management level people have reduced from 185 to 115 as of end of Dec 2013.

Electro Mechanical Projects and Packaged Air conditioning Systems (EMPS)

  • Electro Mechanical Projects (EMPS) and Packaged Airconditioning Systems (PAS) segment revenue (64% of the total), declined 12% compared to the corresponding previous quarter due to lower billing volume. While segment PBIT registered a decline of 21%, mainly due to slower execution of projects as well as correction in the estimates of project revenues and costs based on revised quantity estimates.
  • Many projects under this segment are facing completion delays and company has maintained JIT (Just in Time) policy to avoid building inventory and save costs.
  • Legacy projects (with low or Zero margin) are being cleaned up and company plans to begin FY15 with a clean order book.
  • 5% growth seen in Ducted AC business
  • For FY15, EMPS segment revenue growth is expected to be flat and margins are expected at 6.5% if legacy order book is cleaned up by end of quarter ended Mar 2013.

Cooling Products

  • Cooling Products Segment revenue remained flat primarily due to higher priced product line as new energy efficiency requirements BEE (Bureau of Energy Efficiency) have become effective from Jan 2014. Prices were increased by approx 5% for the new energy efficiency complaint products. However segment PBIT grew 21% compared to the corresponding previous quarter due to better market penetration, revision in selling prices as well as a higher mix of in-house manufactured products.
  • Commercial refrigeration and Cold Storage business remains good due to demand from industries such as Pharma, Food Processing and Ice Cream.
  • Q3 is usually a lean period for Cooling Products segment due to winter
  • Company has exhausted all stocks that were as per previous energy efficiency levels
  • Target 8 to 8.5% segment margins for FY14. For FY14 the company expects Room AC segment volume growth to be 10-15%.
  • Capital Employed decreased due to lower inventory and lower receivables
  • System Integration business showed increased enquiries but no conversion
  • Import content is overall 70%. Proactive price hikes has protected the company against Rupee Depreciation and also a 10% reduction in import content has been achieved due to increased indigenization.
  • In 2-3 years Window AC will go away from the market, and in Jan 2016, only Window AC energy efficiency norms will be revised, as Split AC energy efficiency norms in India are already the highest in the world.

Professional Electronics and Industrial Systems

  • Professional Electronics and Industrial Systems segment revenues declined 11%, while segment PBIT registered a decrease of 10% due to the unfavorable business climate and impact of rupee depreciation.
  • As per company management, this segment also should not be analyzed on a quarterly basis and should be seen from a long-term perspective


  • The dull business environment continues to dampen capital investment decisions as well as commercial construction, resulting in adverse impact on the profitability of the Company.

  • New enquiries are coming up but conversion remains poor

  • Passing off rising cost of materials to show good margins but absorbing cost escalation in orders that the company is winding up.

  • Other Income for the quarter ended Dec 2013 largely due to provision write-back; Within Other income Rs.8.8 crores forex loss for the quarter ended Dec 2013 and Rs.19.70 crores forex loss for the nine-month period ended Dec 2013. Forex costs are high as company hedges around 70-75% of its net forex exposure.

  • From an Industry perspective Room AC business may see a 15% value growth and 10% volume growth

  • Taxation will continue to be MAT till FY15; beginning FY16 the taxation may return to normal levels

  • Company focused on reducing working capital and thus planning to reduce receivables, but that will be offset by an increase in Capex in the products business

  • FY15-16 target market will be the Metro Rail infrastructure across various cities of India and High Rise (more than 65 floors) buildings in Mumbai and NOIDA. Also Farm Equipment and Light Industrial businesses have seen some increased Capex and will be targeted by the company.

  • VRF (Variable Refrigerant Flow) Air Conditioning business seeing traction and domestic market size currently stands at Rs.800-900 crore. Currently 12 players in VRF market and Blue Star has 10% market share. VRF in Room AC industry are also called as Inverter ACs.

Con call was addressed by Mr.Vir Advani, President-Electro Mechanical Projects Group and Mr.B.Thiagarajan President Air Conditioning and Refrigeration Products.

Excerpts of the conference call by Capital Mkt:

  • Order Book as of end of Mar 2014 grew 4% YoY and fell 15% QoQ to Rs.1478 crore. As of end of Mar 2013 the order book stood at Rs.1418 crores and as of end of Dec 2013 the order book stood at Rs.1737 crores.
  • Within the total order book, low or Zero margin business stood at Rs.300 crore as of end of Dec 2013; however company only partially succeeded in reducing it and now stands at close to Rs.175 crores as of end of Mar 2014. Also some jobs within the Rs.175 crore order book have negative margins
  • Balance order book (Rs. 1478 minus Rs. 175) has site margins of 11 to 12%
  • Some of the major order wins in Q4FY14 Tata Elxi, Maruti Suzuki-Jaipur Vishakhapatnam Steel plant, Taj Krishna-Secunderabad, and HAL-Bangalore.
  • Total Debt as of end of Mar 2014 stands reduced to Rs. 430 crore compared to Rs.478 crore as of end of Mar 2013. Net of cash, the current debt stands at Rs.384 crores and management considers this as high.
  • Every year management targets to reduce Rs.100 crores from debt levels, but has been unable to do so due to difficult market conditions
  • Overall hedging policy for the year ended Mar 2014 (FY14) has been around 50% levels (4 to 5 months in FY14, the company hedged upto 100% of its net Forex exposure)
  • Other income had some exceptional items such as Income Tax refund (including interest) of Rs. 5 crores and Dividend received from subsidiaries form one-time sale of properties at Rs.9 crores
  • Provision write-off has been normal and in line with regular financial policies of the company
  • Company to stay with MAT (Minimum Alternate Tax) for the year FY15 as well.Inventory is well under control and turnover days stand at 45
  • Amalgamation of subsidiaries Blue Star Design and Engineering Ltd (BSDEL) and Blue Star Electro-Mechanical ltd (BSEML) has been approved

Electro Mechanical Projects and Packaged Air conditioning Systems (EMPS)

  • Order book for this segment as of end of 31 Mar 2014 stands at Rs.1341 crores.
  • Order inflow in Q4FY14 was Rs.235 crores compared to Rs. 314 crores in comparable previous quarter. Also total execution of orders in Q4FY14 was Rs. 453 crores. Order inflow for quarter ended Mar 2014 (Q4FY14) has been lower than expected. Very little order intake in Q4FY14 as large clients waited until the election results to decide on new tenders issuance
  • Order inflow in FY14 was Rs.1582 crores compared to Rs. 1472 crores in comparable previous year. Company expects this order book to be executed at faster pace.
  • Low/Zero margin orders of Rs.175 crores will take some more time to cleanup and these legacy jobs may remain in H1FY14 and affect margins for this segment. Legacy projects (with low or Zero margin) are being cleaned up and company plans to begin H2FY15 with a clean order book.
  • Macro-economic scenario continues to be challenging; Client enquiry levels remain low; Overall order inflow scenario continues to be stagnant
  • Some improvement seen in IT and Pharma sector related orders.Co continues to hold its leadership in the Packaged Airconditioning Systems (PAS) segment
  • Middle East and North African AC market doing well, but competition remains tough. It has been observed that usually clients do not always award the contracts to the lowest bidder and do think on the ability of the project awardees to successfully execute the projects. However some clients have been holding project awards on the grounds of low pricing from competing companies and have been bargaining for lower prices.

Cooling Products

  • Operating margins improved due to favorable climate, good distribution and good amount of in-house manufacturing
  • In FY14, Room AC business saw improvement in volumes for Blue Star as well as market.
  • Prices of Room AC may see a drop as no regulatory changes in entire FY15 scheduled. North Indian markets have seen cuts in the prices of Room AC.
  • Trying to maintain market share in VRF (Variable Refrigerant Flow) segment. VRF in Room AC industry are also called as Inverter ACs.
  • Overall Market share in Room AC business is 7% with a target of 9%. First time players or Fringe players have been wiped out from the market due to tough competition from top 6-7 players who have been able to maintain their market share
  • Capital Employed for this segment increased on higher inventory due to summer season.Demand from Hotels & Restaurant and Dairy market continues to be good
  • As per GFK-Nielsen survey Room AC market has observed a negative growth rate in the quarter ended Mar 2014, primarily due to new BEE (Bureau of Energy Efficiency) norms becoming effective from Jan 2014. New BEE norms have led to higher product prices.
  • Delayed summer in most parts of India also affected Room AC business in Q4FY14.Overall inflation scenario in the country affected spending from retail clients
  • Commercial refrigeration has seen intense competition due to unorganised players in the market. Rs.200 per square feet is usually the size estimation for a commercial refrigeration order
  • Cold storage business has seen good traction in the Food Processing segment and Pharma segment. This segment has been growing at a pace of 20% YoY as the market size currently remains too small and has a huge scope for growth
  • Not much difference will be made if MNC players start their own manufacturing facility in India as 70% of the material required for making an AC is not made in India and needs to be imported. A domestic manufacturing facility is more of an assembly plant rather than full-fledged manufacturing
  • Operating margin target for this segment for FY15 is 9 to 9.5%

Professional Electronics and Industrial Systems

  • Poor government spending, tight liquidity affecting this segment.However outlook remains good on rupee appreciation


  • CENVAT concession (2%) that was given in the interim budget (valid until July 2014) may be continued by the new Government for the rest of the year in its FY15 budget announcements in July 2014.Enhanced capital investment to benefit EMPS and Projects business overall
  • Large project order inflow and then execution to take time to implement.Overall operating margin is targeted at around 6 to 6.5% from 3-4% currently
  • FY14 had some very large Metro rail related orders, which may not be seen in FY15. However commercial real estate may see some uptick in FY15. In FY16, again Metro, Airport and Commercial Real estate related orders may see awards
  • FY15 margins to improve on business friendly actions by the new Government
  • In FY15 Room AC market (for the industry as a whole) may see 15% growth on a current market size of 3.5 million units
  • Taxation will continue to be MAT by FY15; beginning FY16 the taxation may return to normal levels

Company was represented by Vir Advani, President-Electro Mechanical Projects Group and B.Thiagarajan, President Air Conditioning and Refrigeration Products.

Key takeaways of the conference call by Capital Mkt;

Operating Income for the quarter ended June 30, 2014 stood at Rs 845.48 crore, a rise 10%. But operating Profit for the quarter increased by 37% (to Rs 53.08 crores) as the operating profit margin expands by 130 bps to 6.3%. Other Income declined 15% (to Rs 3.54 crore); interest/finance cost declined marginally by 6% (to Rs 11.04 crore) and depreciation was up by 13% (to Rs 9.41 crore). Thus the PBT was up by 59% to Rs 36.17 crore. Taxation for the quarter was Rs 5.16 crore as compared to no expense in the same period last year. Consequently the Net Profit grew by 36% to Rs 31.01 crore.The Electro Mechanical Projects and Packaged Air-conditioning Systems business (EMP&PAS) accounted for 40% of the total revenues in Q1FY15 and the share of Cooling products (CP) was at 57% and the balance 3% was accounted by Professional Electronics and Industrial Systems (PE&IS)segment.

Revenue of EMP&PAS for the quarter declined 4% (to Rs 335.43 crore) while the segment profit of the same registered a sharp decline of 70% (to Rs 5.42 crore) as its segment margin contracted to 1.6% for the quarter compared to 5.1% in the corresponding previous period.Revenue of CP for the quarter registered a growth of 22% (to Rs 483.92 crore) and its segment profit grew significantly by 67% (to Rs 70.59 crore) with its segment margin expand to 14.6% for the quarter compared to 10.7% in the corresponding previous period. Typically first and fourth quarter of any fiscal will be strong quarter for CP business.The PE&IS segment revenues increased by a marginal 2%, while segment results declined 24% to Rs 4.27 crore, owing to the un-favorable business climate.The decrease in profitability of EMP&PAS was mainly due to slower execution of projects resulting in lower billings coupled with cost overruns in specific legacy projects.

Strong 22% growth in sales of CP is driven by enhanced sales of room air-conditioners and refrigeration products due to an extended summer and superior brand perception. Strong 67% jump in segment profit of CP segment is mainly due to higher manufacturing capacity utilization due to indigenization, stable foreign exchange and higher price realization.The cooling products business, driven by the residential segment, has been performing better than the industry owing to superior brand equity, wider distribution reach and impressive product range. The Company intends to continue to focus on prudent cost control and fiscal management in order to sustain this performance for the rest of the year.

Room air conditioner â In Q1FY15 while the aid of extended summer the Industry grew by 10%yoy in volume and 20%yoy in value terms. But the company has registered a growth of 15%yoy in volume and 28%yoy in Q1FY15. Growth in volume is driven by strong demand growth in residential sales with the regions of West and East driving the growth. Specialized air-conditioning players preferred than general consumer durable players.

Room air conditioner âThere is an exponential growth in the offing and the market size can grew from 3.5 mln numbers to 20 mln numbers in next 5-6 years. With economic situation improving the market can grew to 10 million in next 3 year. But the competition is intense. The company is one of the few pure air-conditioning professional and the company's positioning as air-conditioning expert is well perceived in the market.Deep freezer and coolers seen demand from dairy biz however the margin in this segment seen pressure due to unorganized segment and increased presence and competition of/from foreign players.Carry Forward Order Book as on June 30, 2014 increased by 9%yoy to Rs 1572 crore. Order inflow in Q1FY15 increased by 14%yoy to Rs 418 crore compared to Rs 366 crore in the corresponding previous period.

Share of legacy order book in carry forward OB is Rs 125 crore spread over about 80-85 jobs. Of the total carry forward OB about 25% will be accounted by infrastructure and balance will be accounted by commercial buildings (IT, Hospitals, Hotels) and integrated commercial complexes.The electro mechanical projects business while continues to be adversely impacted mainly due to significant correction in project estimates of specific legacy orders. However, such legacy projects now form a small base of the total order book and the margin of this business is likely to improve over the next few quarters since the rest of the order book comprises projects with healthy margins. The performance is likely to improve in the medium term with the revival of the commercial construction segment.Enquiry levels for EM&PAS segment are up 30% compared to earlier. Average size of orders enquiries is about Rs 10-20 crore.

In EMP&PAS business the company continues to be selective and opted out of certain segments. Power generation market, where it has too much of legacy job is one such segment where the company is opting out until all the legacy orders in this segment get over. Similarly the company is no longer bidding with civil contractor and general contractor.

EMP&PAS business - Until quality order inflows improves, the under utilization will continue and resultantly the margins will be suppressed.Legacy orders in EMP&PAS will get completed in next 2 quarters. There can also be some additional cost kick in these legacy orders going forward till their closure.PE&IS - Quarterly performance is not a good indicator and can be presumed for full year. Full year prospects is still good even though there is about 540 bps contraction in segment margin of PE&IS in Q1FY15.

Margins of Multi service jobs will be higher than single service jobs once that business mature and attain size. The company expects 10-12% margin for multi service biz.Manpower cost for Q1FY15 can be annualized for full year but the company is exiting certain segment and the company will do better.VRF product â competition is intense. Keep improving market share in these products given service and product differentiation.Steady state operating margin of EMP&PAS project is 8% and that of cooling projects is 9-10%. Similarly the steady state margin of PE&IS is about 18-20%.The company expects the EBIT margin of CP business for FY15 to be in the range of 9-10% even though the Q1FY15 margin stand higher.

Current project management band width including manpower. Capacity 35% higher volume which is underutilized. This manpower was employed in non profitable projects.Room A/c â the company has adequate capacity for growth till Dec 2015. The duty concession in Himachal is expiring in June 2015 and the company will look for contract manufacturing in location with duty concession. The plant in south is on hold as the company is watching for any duty concession in erstwhile AP under the bifurcation package promised.

Co was rep by Vir Advani, ED & President-Electro Mechanical Projects Group and B.Thiagarajan, ED & President Air Conditioning and Refrigeration Products.

Key takeaways of the call by Capital Mkt;

Order backlog as on September 30, 2014 declined by 14% to Rs 1492 crore as the company was selective in pursuing orders which offered healthy margins and better commercial terms. Order inflow for Q2FY15 declined by 37% to Rs 558 crore (from about Rs 889 crore in Q2FY14) on high base. In corresponding previous period there were good number of large order but that is absent in Q2FY15.Operating Income for the quarter ended September 30, 2014 registered a growth of 9% Rs 637.97 crore and the operating profit (PBIDT excluding Other Non Operating Income) was down by 20% to Rs 20.61 crore as OPM skid by 120 bps to 3.2%. Fall in operating profit despite higher sales is largely due to increase in marketing, advertising, sales promotion expenses and provisioning. However helped by higher other income and lower interest cost the net profit was eventually higher by 20% to Rs 9.05 crore. Spurred by provisions write back the other income jumped by 180% to Rs 8.16 crore. The interest cost was down by 17% to Rs 10.57 crore for the quarter.

Electro Mechanical Projects and Packaged Air-conditioning Systems (EMP&PAS): Sales for the quarter ended Sep 2014 has seen a marginal increase of 2% to Rs 396.13 crore but its segment profit declined by 5% to Rs 19.74 crore. Fall in segment profit is largely on account of higher input costs. The erosion in profitability of this business is now under control since legacy orders now form only a small portion of the order book.Cooling Products (CP): Sales for the quarter while increased by 21% (to Rs 204.96 crore), the segment profit grew an impressive 74% to Rs 14.17 crore. Though Q2 is typically a lean season for this line of business, an extended summer coupled with stable foreign exchange and commodity prices resulted in enhanced profitability.Professional Electronics and Industrial Systems (PE&IS): Revenues increased by 25% (to Rs 36.88 crore), while its segment profit registered a growth of 16% (to Rs 8.76 crore) due to enhanced demand.

Legacy orders to be executed numbers about 80-85 and is valued worth about Rs 125 crore as end of Sep 2014. Due to client side pressure the company could not close these legacy projects as early as it wants to. But the company is to take some hard decisions in second half. Negative impact of closure of legacy orders may happen in H2FY15 when the orders get completed.

EMP& PAS: Competitive intensity has not diminished in the last 6 months. Order booking is low as good quality orders are few. However the company have fairly healthy firm enquiry base and the order enquiry pipeline stand higher compared to corresponding last year at about Rs 3000 crore. Of the order in enquiry pipeline about 15% is from integrated commercial complexes, 13% from power, 12% from hospital and balance from metro, banks and others. Order inflow/finalization for H2FY15 is looking healthier and will be better than H1FY15 and H2FY14.

EMP& PAS: Expecting revenue to be flat for FY15 and the operating margin for the whole year to be about 4%. EMP&PAS revenue to grew by about 10-15% in next fiscal i.e. FY16 and see operating margin trending up.Tax â current year it will be about MAT and next year the company will return to normal tax.

Cooling products: Volume growth for water cooler was driven by education institution and manufacturing segment. Modular cold room demand is driven QSR segment and this is expected to see growth going forward. The cooling products business is expected to drive growth considering that Blue Star enjoys a strong brand perception in a low penetrated market thereby offering significant potential.Cooling Products: Room AC the company grew 30% while the market grew by 20% and the company expect to grew in excess of 20%. Market share in H1FY15 including both retail and commercial segment is 8.5% compared to 8% in the corresponding period. While the market data for retail is GSK and for commercial is industry estimate. Next 6 months the focus on room air-conditioner business is improving dealer productivity.

PE&IS: No pickup in demand from government, PSUs and defence segments but industrial investment has reviewed. So second half will be better than first half. Contraction in profit margin is largely due to change in biz mix. Overall prospect is good.Decision on Greenfield plant in southern region is put on hold as the division of Andhdra Pradesh into two states and likely tax exemption given to these states.

Exports: UAE construction market is seeing aggressive growth led by building followed by infrastructure. About 9% average growth in expected going forward. Hospitality driving growth demand in Sri Lanka and Maldives.The electro mechanical projects business was adversely affected as the closure of specific legacy orders in its last phase is taking longer than expected. Further, the commercial construction industry is yet to revive. However, considering the imminent improvement in the economic climate, this business is likely to improve in the long term.The Company will continue its pursuit of prudent fiscal management in order to sustain this performance for the balance half of the year.

Co was rep by Vir S Advani, ED & President (EMP Business) & B Thiagarajan, ED & President (AC&R Products Business).Key takeaways of the call by Capital Mkt;

Operating Income for the quarter ended Dec 2014 stood higher by 8% to Rs 590.75 and the net profit was up by 124% to Rs 6.30 crore. Other Income spurred largely by profit on sales of assets stood higher at Rs 26.97 crore in Q3FY15 as compared to Rs 17.41 crore in corresponding previous period.Carry forward order book as on December 31, 2014 declined by 19% to Rs 1412 crore compared to Rs 1737 crore as at December 31, 2013. EMP order inflow down 24% to Rs 349 crore and the order backlog of EMP stood at Rs 1320 crore as end of Dec 2014. The company continued to be selective in pursuing orders and bagged orders only with good commercial terms and healthy margins.

EMP â Started the Q3FY15 with a legacy order book of Rs 125 crore and at the end of the quarter the legacy order book was below Rs 100 crore. The company closed legacy orders worth Rs 25 crore in Q3FY15. The company expects negative impact on account of this legacy orders and in the process of ascertaining it. The company is determined to close all the legacy order by end of March 2015 and it that is not possible the company will provide for that in Q4FY15.

Excluding the legacy orders the margin (site margin) of other orders in the book ranges between 10-13%.The pressure on order booking that witnessed in Q3FY15 will continue in Q4FY15 as well. Post Budget depending on the positives it may improve.All India market share of the company in room AC segment increased from 7.5% to about 9%The economic environment is improving and the macro-economic indicators are encouraging. The residential and light commercial segments are registering healthy growth with enhanced spends by consumers. The commercial construction cycle is likely to revive in FY16. In order to leverage on the growth opportunities available, the Company plans to make prudent investments in manufacturing, marketing, product development as well as human resources in the next few quarters.

Transfer of Professional Electronics and Industrial Systems undertaking : For over six decades, the Professional Electronics and Industrial Systems business has been the exclusive distributor in India for many internationally renowned manufacturers of hi-tech professional electronic equipment and services, as well as industrial products and systems. Over the years, the Company has changed its business model from merely being a distributor to that of a system integrator and value-added re-seller, thereby moving up the value chain. The Company has carved out profitable niches for itself in most of the specialised markets it operates in, such as Industrial Products and Systems, Material Testing Equipment and Systems (Destructive/Non-Destructive), Data Communication Products & Services, Testing and Measuring Instruments and Healthcare Systems. With the expected revival of the economy, most of the segments targeted by this business are planning to increase their capex investments which will result in significant growth in demand. Further, the Company has been selling Blue Star branded products in some of the segments and this initiative has met with encouraging response. Since this business segment is distinctly different from the main AC&R businesses of the Company, it needs an independent identity along with specialised resources in order to exploit its full potential. Keeping the above strategic imperatives in mind, the Board of Directors, in its meeting held on January 21, 2015 approved, subject to receipt of all statutory and regulatory approvals, the transfer of the Professional Electronics & Industrial Systems undertaking of the Company to Blue Star Electro-Mechanical Limited (BSEML), a wholly owned subsidiary of the Company, before the end of this Financial Year on a “going concern” basis at fair value estimated at about Rs 110.50 crore determined by an independent valuer. BSEML will discharge the consideration for the said transfer by issue and allotment of fully paid up equity shares to the Company. The company intends to stay invested for a long term and grow this business. Further, BSEML will be suitably renamed to reflect the nature of its business.

Other expenses in Q3FY15 were higher on account of higher debtors provisioning in case of EMP and higher advertisement spend in case of products. Debtors provisioning may not pertain to legacy orders and is across all business including non legacy orders.Demand for Water cooler segment has improved especially from educational institutions. Market for pure drinking water is on rise and to tap that segment the company joined hands with Eureka Forbes to launch water cooler built with inbuilt water purifier.

BlueStar ACs seem to be doing good and competing with the best in the world brands like Mitsubishi an Daikin etc wondering why is this not getting reflected in sales. Is there a new symphony in making?

Bluestar has recently done well in sales although not as per their CEO’s expectation.
I know their chunk of sales come from corporates and I am also happy with their unit in my room. But are they just another ac reseller from Lloyd/Amber? Do they have any unique features like Godrej using efficient gases?
Again why are they not exporting globally and competing with the global big boys?

I am looking to add a small amount of stock in a white goods maker and looking at this stock compared to IFB and Havells (expensive).

One strict limitation is it should be a majority ‘make in India’ company and not an importer like Onida and BPL.

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Mumbai Metro Rail Corporation Limited (‘MMRCL’) has issued a Letter of Intent dated June 18, 2019 to the Company for Design, Manufacture, Supply, Installation, Testing and Commissioning of Tunnel Ventilation and Air Conditioning System approximately valued at Rs 253 crore, subject to the definitive agreements to be executed between the Company and MMRCL.

For outdoor and indoor unit of split ac custom duty hiked from 10-20%
Bluestar: India based production will benefit

Blue star prospects as a unique consumer durable(AC/Refrigeration/water purifier) & Infra Play

FY19 was a difficult year for the AC industry owing to weak summer season with unseasonal rains and floods hitting large parts of the country during February to June resulting in inventory built up across brands and distribution channel. Further accentuating to the woes were the cost pressure owing to rise in commodity prices, depreciating Indian rupee (import content is high in AC at ~40- 45%) as well as hike in customs duty by the India government (customs duty on fully built unit hiked from 10% to 20%, while customs duty on compressors were hiked from 7.5% to 10%). Lower sales, rising costs and intense competition to clear out inventory affected margins for all the players. The AC industry reported a sales decline of 3-4% in FY19, while operating margin fell 180bps-250bps. The situation has improved for FY20, even though things were not great till mid-March where there were average sales across brands. With elongated summer and deficient-delay in monsoons, AC sales have fired up in most parts of the country even leading to shortage in some of the markets where the demand is strong making the 1HFY20 probably the bumper season (40-45% growth) after many years of slow to moderate sales. Also, easy consumer finance has helped drive in number with nearly 90% of demand coming from split AC with inverter AC also seeing robust pick- up.

Heat wave conditions during April-June 2019 in Northern and Central India have made many companies to divert or double their manpower to AC business with many customers demanding same day installation.

A. Focus on North India, distribution expansion and customer experience
B. Expansion of distribution network along with improvement of depth of sales
C. Investment in R&D to enhance product offerings
D. Customer Service of gold standard to be the differentiator and growth enabler
E. Focus on in-house manufacturing by reducing import content
F. Investment in advertising and brand communication for brand sustenance
Market Leader in commercial refrigeration products

BlueStar is the market leader in the commercial refrigeration category with a share of 32%. The key products in this category include deep freezer, bottle cooler, visi cooler/freezer, storage water cooler/dispenser, bottled water dispenser, ice cuber/flaker and cold room.

Immense potential in water purifier

This category is witnessing strong growth of 20% as water quality is deteriorating while consumers are becoming more health conscious with the rise in disposable income. With a low penetration level of 6%, this category holds tremendous growth potential as it is a basic need of every household. Over the next 10 years, the penetration level is likely to increase to 20%-25% and the size of this industry is expected to be equivalent to that of the AC industry. The water purifier category also provides avenue for regular service income, which is another positive

Infra priority to propel Electro-mechanical projects and packaged air- conditioning systems (EMPS) revenues

Government-propelled infrastructure investments are key drivers of growth for the industry. Sectors like metro rail, airports, healthcare, education, light industrial projects and commercial office complexes are likely to see significant capital expenditure over the next 10 years. In addition, infrastructure investments in tier 2/3/4 cities like shopping malls, retail complexes and airports are likely to further push growth. For the company, government investments in these sector augers well for Blue Star’s Electro-mechanical projects and packaged air-conditioning systems (EMPS) segment which comprises of MEP works (mechanical, electrical and plumbing projects), central air-conditioning projects and packaged air-conditioning solutions like ducted systems, VRF and chillers. Considering the relatively subdued industrial capex as well as residential real estate sector in last few years, the company was highly selective in the project order it gave priority to healthy cash flow and profitability. However, considering the likely spurt in government-funded infrastructure projects, healthier pipeline of commercial construction and the initial signs of revival in industrial capex, the growth prospects for this segment is likely to improve.

The company aims to increase its operating margin by 200bps till FY21 by having higher in-house manufacturing content in core products like inverter AC, PCB, and deep-freezers as well as by deploying latest technologies (process automation and digital technologies) for enhancing productivity and achieving higher value addition through backward integration, procurement and supply chain efficiency.

  1. Electro-mechanical projects and packaged air-conditioning systems (EMPS) comprises of MEP works (mechanical, electrical and plumbing projects), central air-conditioning projects and packaged air-conditioning solutions like ducted systems, VRF and chillers. This segment accounted for 53% of FY19 revenues.
  2. Unitary cooling products (UCP) consists of room air-conditioner (AC), commercial refrigeration products and other consumer products such as water purifier, air purifier and air cooler. This segment accounted for 43% of FY19 revenues.
  3. Professional electronics and Industrial systems (PE&IS) provides products such as healthcare systems, data security solutions, infra security systems, communication systems, testing machines and industrial products. This segment accounted for 4% of FY19 revenues.

Outperformer in the AC Industry with 12.3% of market share

Since entering into the room air-conditioner category in FY11, Bluestar (BLSTR) has outperformed the industry by garnering 12.3% of market share.
low penetration levels (5%), hot-humid conditions, rising affordability and disposable income as well as availability of consumer finance.
BLSTR to grow on the back of increasing distribution network, rising market share and a trend of higher proportion of sales moving towards inverter AC’s.

Further, growth is aided by scale-up in commercial refrigeration production and turning around of water-purifier business. With priority of the current stable government towards infra space, the company is likely to witness health order book from large value contracts for the EMPS segment. Along with operating leverage benefit, in-house manufacturing of room AC’s and higher share of product and service business in EMPS segment

Guidance:Over the next five years, BLSTR’s management has ambitious plan of growing revenues by 20% CAGR and profitability by 25% CAGR.

Wants to outpace I industry growth via increase distribution outlets from 4500 to 6000 and higher market share of inverter ACs with expansion in northern region

The margins are expected to improve with due to in-house manufacturing content, premiumisation of portfolio and turnaround in the water purifier category likely in FY21, With stable government formation and priority on infra space, the company plans to improve its portfolio mix in the EMPS segment with large value but fewer projects across verticals of buildings (airports, metro, railway, power transmission) and industrials projects (factories). In addition, the healthy rise in market share in central air-conditioning products such as chillers, VRF and ducted systems as well as rising exports and service income will aid growth with improved profitability for the segment
It is further diversifying and entering new consumer durable categories such as air cooler, water purifier and air purifier
Disclosure: invested
Source: AR, Concall & research reports


Any recent outlook on the stock?

Exited as found better opportunities after recent run-up .

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Their recent signing of Virat Kohli for their ad campaign has been largely successful

Blue Star Q2 FY20 conference call :

  • 21% revenue growth and 26.7% growth in EBITDA. Net profit grew by 94%.

  • Order book : 2934 crore Vs 2216 (32% increase).

  • Net debt: 189 crore Vs 463 crore in Q2 FY19.

  • Room AC : In Q1, market grew by 22% but we grew by 25%. In Q2, both market and Bluestar grew by 10%.

  • In the current year, we are intending to manufacture at least 20% of our overall indoor unit consumption in our own factory in Himachal. Progressively, by next year we expect this 20% to increase to 70% or 80% and then over the next year and a half or two years.

  • Unitary Cooling products : Blue Star may grow by 15-18% in FY20.

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Air conditioning, Air Cooler and other consumer durable feeling heat of COVID-19 and not having strong summer (intermittent rain) resulted in lower sales and stuck with huge inventory. Expecting no sell in subsequent monsoon season. Now they have hope in next half of FY21 only. Hence, to meet working capital and other expenditure requirement now they need external borrowing…

Could be a trigger for Blue Star given that they are the market leader in commercial refrigeration.

In COVID value chain, it becomes apparent that storage and distribution, which would require cold chains, present new challenges and opportunities… Among cold chain equipment providers, Bluestar is prominent with 70 per cent market share in pharma cold chain products and appears ready to ramp up supply given the vaccine roll out requirements.

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Annual Report 2020-21