Institutional Equities Blue Starin central air-conditioning products such as chillers, VRF and...

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Institutional Equities

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Blue Star

Reuters: BLUS.BO; Bloomberg: BLSTR IN Making Rapid Strides After foraying into the room air-conditioner (AC) category in FY11, Blue Star (BLSTR) has made rapid strides and outperformed the industry by garnering 12.8% market share. We are very optimistic on the growth prospects of the AC industry in India led by low penetration level (6%), hot weather conditions, rising affordability, growing disposable income as well as availability of consumer durable finance. We expect BLSTR to outperform industry growth led by increasing distribution network, rising market share and a favourable product mix (higher proportion of inverter ACs). Besides, scale-up in commercial refrigeration products and water purifier will also aid its growth. Similarly, EMPS segment’s growth prospects are brighter led by a strong pipeline of infrastructure, building and industrial projects as well as BLSTR’s healthy order book and its plans to tap large-value contracts. We expect BLSTR to post 14% net revenue CAGR over FY18-FY21E. Along with operating leverage benefit (with rising scale), in-house manufacturing of room ACs, turnaround in water purifier business and improving revenue mix of EMPS segment (higher share of product and service business) will lead to improvement in the margin profile. We expect EBITDA margin to improve 190bps over FY18-FY21E, leading to a 30% adjusted earnings CAGR over FY18-FY21E. Over the next five years, BLSTR’s management has ambitious plan of growing revenues by 20% CAGR and profitability by 25% CAGR. We initiate coverage on BLSTR with a Buy rating and a target price of Rs815 based on SOTP method.

Making rapid strides in AC and refrigeration products: With its superior product performance, high technology focus and a premium brand image, BLSTR is a preferred choice of aspirational consumers. Over the past five years, BLSTR’s market share has consistently increased from 7.5% in FY14 to 12.8% in FY19, despite a rising number of players in the AC industry including MNC brands with deep pockets. BLSTR aims to outpace industry growth led by its distribution network expansion (from 4,500 outlets to 6,000 outlets), rising market share (aims at 15% in FY21), favourable product mix (it has a higher market share in fast-growing inverter AC) and expansion in northern region. The margins are likely to improve owing to a rising share of in-house manufacturing content, premiumisation of portfolio and turnaround in the water purifier category likely in FY21. We expect the unitary product segment to post 14% revenue and 18% EBIT CAGR over FY18-FY21E.

Improving outlook and rising scale of EMPS segment: BLSTR aims to take MEP projects which are larger in value, but fewer in numbers, with an evenly spread portfolio across the three verticals of buildings (hotels, hospitals, commercial towers etc), infrastructure (airports, metro, railway, power transmission) and industrial projects (factories E&M). The order pipeline has improved considerably with a strong spurt in government-funded infrastructure projects. 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. We expect 14% revenue CAGR and 50bps rise in the EBIT margin profile over the next two years.

Strong growth and healthy financial franchise: BLSTR is a healthy financial franchisee with 30% earnings CAGR over FY18-FY21E, rising return ratios, healthy free cash flow, lean working capital cycle and a comfortable leverage position. BLSTR is placed favourably compared to listed brands in terms of its valuation vis-à-vis RoE and EPS growth prospects. We have valued BLSTR on SOTP method, assigning a P/E of 35x FY21E earnings to its unitary products segment (Rs595/share) and 15x FY21E earnings to its projects business (Rs220/share). We initiate coverage on BLSTR with a Buy rating and a target price of Rs815, having an upside potential of 22% from the current market price.

BUY

Sector: Capital Goods

CMP: Rs670

Target Price: Rs815

Upside: 22%

Chirag Muchhala Research Analyst [email protected] +91-22-6273 8092

Key Data

Current Shares O/S (mn) 96.3

Mkt Cap (Rsbn/US$mn) 64.3/931.6

52 Wk H / L (Rs) 842/507

Daily Vol. (3M NSE Avg.) 56,631

Shareholding (%) 1QFY19 2QFY19 3QFY19

Promoter 38.8 38.8 38.8

Institutions 30.7 30.5 30.6

Non-Institutions 30.5 30.7 30.6

One -Year Indexed Stock Performance

Price Performance (%)

1 M 6 M 1 Yr

Blue Star 7.5 17.4 (11.5)

Nifty Index 7.2 5.9 14.4

Source: Bloomberg

Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E

Net sales 43,852 46,390 51,240 59,574 68,641

EBITDA 2,224 2,659 3,193 4,181 5,210

Adjusted net profit 1,230 1,387 1,437 2,340 3,052

Adjusted EPS (Rs) 12.8 14.4 14.9 24.3 31.7

EPS growth YoY (%) 5.5 12.7 3.6 62.8 30.4

EBITDA margin (%) 5.1 5.7 6.2 7.0 7.6

P/E (x) 52.4 46.5 44.9 27.6 21.1

P/BV (x) 8.5 7.8 7.4 6.5 5.6

EV/EBITDA (x) 29.5 25.4 21.2 16.3 13.0

Dividend yield (%) 1.1 1.5 1.3 1.6 1.7

RoCE (%) 16.4 18.6 19.2 24.1 28.7

RoE (%) 17.7 18.1 17.4 25.1 28.4

Source: Company, Nirmal Bang Institutional Equities Research

60

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80

90

100

110

120

Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

BLUE STAR LTD Nifty 50

29 March 2019


Blue Star

Blue Star – Company and business overview

Blue Star (BLSTR) was founded during World War II on 27 September 1943 by Mr. Mohan Advani as a three-member team repairing and reconditioning air-conditioners and refrigerators. Today, it is a prominent player in the air-conditioning and commercial refrigeration industry in India, with a strong foothold in international markets. Its integrated business model of being a manufacturer, installer and after-sales service provider, offering comprehensive solutions for the residential, commercial and infrastructure segments has proved to be a significant differentiator in the market. The traditional central air-conditioning business has successfully morphed into a full-fledged electro-mechanical turnkey solutions provider, delivering superior project delivery. This leading B2B firm has, in recent years, acquired a prominent B2C profile as Blue Star has become a brand to reckon with in the residential segment after its foray into room ACs in FY11. It is further diversifying and entering new consumer durable categories such as air cooler, water purifier and air purifier. With a turnover of over Rs46bn, it has a network of 32 offices, five modern manufacturing facilities, over 2,800 employees, and a robust channel management system comprising 3,000 channel partners, 1,000 retailers as well as 800 service associates reaching out to customers in over 800 towns. It exports to 19 countries across the Middle East, Africa, SAARC and ASEAN regions. BLSTR was listed on the Bombay Stock Exchange on 18 September 1969 and over the last 49 years has ensured dividend pay-out every year. The current year marks the platinum jubilee year for BLSTR as it has successfully completed 75 years of existence.

The business activity of BLSTR is divided into three segments. Segment 1, electro-mechanical projects and packaged air-conditioning systems comprises 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 52% of 9MFY19 revenues. Segment 2, unitary products comprises 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 9MFY19 revenues. Segment 3, professional electronics and industrial systems comprises business lines such as healthcare systems, data security solutions, infra security systems, communication systems, testing machines and industrial products. This segment accounted for 5% of 9MFY19 revenues.

Exhibit 1: Segment-wise revenue trend Exhibit 2: Segment-wise revenue mix

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Segment-wise EBIT margin trend Exhibit 4: Segment-wise EBIT mix


18,622 16,757

17,766 17,334 17,036 18,760

22,334 23,611

19,058

-

5,000

10,000

15,000

20,000

25,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 9MFY19

EMPS Unitary products PE & IS

(Rsmn)

65 59 61 59 54 49 51 51 52

2833 33 37 42

41 45 45 43

7 8 6 4 54

4 4 5

0

20

40

60

80

100



(%)

9.4

(5.1)

4.1 5.1 2.9

4.3 4.1 5.2 6.0

11.49.4 8.3 8.8

11.0 10.48.4

8.0 7.2

26.424.7

16.417.5

21.3

16.2 17.0

12.1

16.5

(10)

(5)

0

5

10

15

20

25

30



(%)

39.6 43.0

21.927.0 31.2

38.845.0

44.046.3

64.455.1 57.7

53.5 44.2

16.310.6 13.7 9.2 11.2 7.6 10.9

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15 FY16 FY17 FY18 9MFY19



Blue Star

AC industry – low penetration offers strong long-term growth prospects

The AC industry’s market size in India is estimated at 5.5mn units (Rs137bn in value) with a low penetration level of only 6%. It is the least penetrated consumer durable category compared to other home appliances like colour television (65% penetration), refrigerator (23% penetration) and washing machines (13% penetration). Considering the low penetration level of ACs in India, the AC industry is likely to post a sustainable long-term CAGR of 12%-15% at least for the next 10 years. The growth in AC industry is likely to be driven by rising global warming (as it is a seasonal product mainly used in the harsh summer season), rising urbanisation, increase in household income, availability of consumer durable finance and improving lifestyle as well as aspiration of Indian consumers. Average life of an AC is eight years after which replacement demand kicks in, giving incremental avenues to tap existing customers. When compared to other emerging economies of the world like China, Brazil and Russia, the low penetration level of AC industry in India clearly stands out, and is destined to grow considering: (a) India is a hot-weather country. (b) With easy access to credit and rising household income, the middle-class consumer spending also rises.

Exhibit 5: Consumer durable industry synopsis

Home appliance Size - FY18

(Rsbn) CAGR

(FY10-FY18) Size in units

(mn) Penetration

level (%) Key players

Colour television 258 10.5% 13.7 65% Sony, Samsung, LG, Panasonic

Refrigerator 228 14.4% 12.3 23% LG, Samsung, Whirlpool, Godrej

Washing machine 84 12.5% 6.2 13% LG, Samsung, Whirlpool, IFB, Panasonic

Air-conditioner 137 13.5% 5.5 6% Voltas, LG, Daikin, Blue Star, Hitachi, Lloyd

Source: Crisil, Industry, Nirmal Bang Institutional Equities Research

Exhibit 6: Market penetration level in India

Source: CRISIL, Industry, Nirmal Bang Institutional Equities Research

Exhibit 7: AC market size comparison of India and China

Source: Industry, Company, Nirmal Bang Institutional Equities Research

65

23

13

6

0

10

20

30

40

50

60

70

Colour TV Refrigerator Washing machine Air-conditioner

(%)

5.5

80

0

10

20

30

40

50

60

70

80

90

India China

(mn units)


Blue Star

Compared to a 11.1% CAGR increase in per capita GDP over FY10-FY18, average selling price of AC increased by only 5.6% over the same period. Thus, the affordability indicator for AC improved from 2.9x in FY10 to 4.4x in FY18 (refer Exhibit 8). Affordability indicator is measured as GDP per capita divided by average selling price of an AC.

Exhibit 8: Affordability indicator of AC

Source: Industry, Nirmal Bang Institutional Equities Research (ASP = average selling price)

Exhibit 9: GDP per capita versus rise in ASP of consumer durables over FY10-FY18

Source: Industry, Nirmal Bang Institutional Equities Research

AC is available in two sub-categories, namely window and split AC. Over the past few years, the share of window AC steadily reduced from 40% in FY12 to 23% in FY18, in volume terms. Split ACs are preferred over window ACs despite being priced more by 1.2x to 1.3x times because of their zero noise level, lower running costs (electricity consumption) and easier portability. Among all white goods products, Indians are most conscious of energy-efficient star rating standards in AC as it is a power guzzler. India’s energy efficiency rating is comparable with global standards. Currently, the market share break-up between split and window AC categories is 78:22 in volume terms and 81:19 in value terms for the industry. The penetration of inverter AC is on the rise globally aided by new technology of variable flow as against fixed flow in split ACs. In India, the share of inverter ACs, as a percentage of split AC market, has risen rapidly from 12% two years ago to 40% in FY19 as inverter AC offers 30% higher energy efficiency which has driven its faster adoption. With rising volume, even the price gap between inverter AC and split AC has narrowed down to ~5%. As per CRISIL estimate, the share of split (including inverter) AC in total market size is likely to further rise to 89% in volume terms and 91% in value terms over the next five years. In terms of tonnage, 1.5tn is the largest product category with 55% share followed by 1tn with 37% share.

2.93.1 3.2 3.3 3.4 3.5

3.94.2

4.4

0

1

2

3

4

5

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

ASP of AC (LHS) GDP per capita (LHS) Affordability indicator (RHS)

(Rs) (%)

6.7

5.0 5.6

9.5

11.1

4

6

8

10

12

Refrigerator Washing machine Air-conditioner Television GDP per capita

CAGR (FY10-FY18)

(%)


Blue Star

Exhibit 10: AC industry growth trend – in value terms Exhibit 11: AC industry growth trend – in volume terms

Source: CRISIL, Nirmal Bang Institutional Equities Research Source: CRISIL, Nirmal Bang Institutional Equities Research

Exhibit 12: Split and window AC share – value-wise Exhibit 13: Split and window AC share – volume-wise


Exhibit 14: Rising share of inverter AC Exhibit 15: Tonnage-wise AC industry share


-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


(Rsmn)

0

1

2

3

4

5


(mn units)

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Split AC (including inverter) Window AC

0%

20%

40%

60%

80%

100%


Split AC (including inverter) Window AC

10 12

2840

50

90 88

7260

50

0%

20%

40%

60%

80%

100%

FY16 FY17 FY18 FY19P FY20E

Inverter AC Non-inverter split AC

Less than 1 ton, 2%

1 ton, 37%

1.5 ton, 55%

2 ton and above, 6%


Blue Star

Exhibit 16: Rising realisation (ASP) per AC Exhibit 17: Five-year forecast of split and window AC trend

Source: CRISIL, Nirmal Bang Institutional Equities Research Source:CRISIL, Nirmal Bang Institutional Equities Research

AC industry status in 9MFY19

9MFY19 was a difficult period for the AC industry owing to a weak summer season. As AC is a weather- dependent product, a large part of the demand is driven by harsh summer during the months of February to June. In 9MFY19, the summer season was impacted by unprecedented rains and floods in many parts of the country which kept the climate cool and affected AC demand. Consequently, there was a build-up of inventory across brands and distribution channel. Adding to the woes of AC industry, even the cost pressure increased owing to the rise in commodity prices, depreciation of the Indian rupee (import content is high in an AC at around ~40%-45%) as well as a hike in customs duty by the Indian government (customs duty on import of fully built unit was hiked from 10% earlier to 20%, while customs duty on compressors was hiked from 7.5% earlier 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 4% in 9MFY19, while operating margin fell 200bps-300bps.

Outlook on the upcoming summer season

While the summer season of February to June 2019 started late by two weeks, the IMD (India Meteorological Department) has predicted a hot summer. The secondary sales of AC in southern states, where the summer season starts first, have been healthy in March 2019, as per channel checks. States like Tamil Nadu, Andhra Pradesh, Kerala, Karnataka, Maharashtra (central part) and Odisha have witnessed a rise in temperature, which has led to resumption in healthy demand for ACs. Overall, the upcoming summer season is expected to be very healthy for AC sales with YoY growth likely to be ~20%, partly owing to the low base of last year’s summer sales. For FY19, the AC market is likely to grow 5% (considering 9MFY19 witnessed a 4% decline) while in FY20, the AC market is likely to grow 15%-20%. With revival in demand, the inventory levels across the distribution channel as well as brands are likely to normalise in March 2019, while the build-up of new inventory for peak summer months of April to June 2019 is likely to begin. With stabilisation of commodity prices and exchange rates, even the margins are likely to improve as the new AC models for the upcoming summer season are offered at revised prices after factoring in higher input costs and customs duty. Considering the low penetration level of AC and the base year of FY19 being a damp year in terms of sales, the revival of demand in FY20 is expected to be strong led by hot weather conditions as well as fructification of deferred demand from the previous year.

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000


(Rs/Unit)

33

22

11

28

19

9

67

78

89

72

81

91

0 10 20 30 40 50 60 70 80 90 100

FY14

FY19P

FY24E

FY14

FY19P

FY24E

Vo

lum

eV

alu

e

Window Split (including inverter)

(%)


Blue Star

Extract from IMD forecast for March, April and May 2019 summer season

The season averaged maximum temperatures are likely to be warmer than normal by >1 degree Celsius over Uttarakhand. It is likely to be warmer than normal by 0.5 to 1 degree Celsius over Himachal Pradesh, West Rajasthan, Konkan and Goa, coastal Karnataka, Kerala, and Arunachal Pradesh. Rest of the country is likely to experience near normal maximum temperatures (departure from long-term normal: between -0.5 and 0.5 degree Celsius).

The season averaged minimum temperatures are likely to be warmer than normal by 0.5 to 1 degree Celsius over Uttarakhand, Himachal Pradesh, West Rajasthan, Saurashtra, coastal Karnataka, Kerala, Tamil Nadu, coastal Andhra Pradesh and Arunachal Pradesh. Rest of the country is likely to experience near normal minimum temperatures (departure from long-term normal: between -0.5 and 0.5 degree Celsius).

The season averaged mean temperatures are likely to be warmer than normal by 0.5 to 1 over Uttarakhand, Himachal Pradesh, West Rajasthan, coastal Karnataka, Kerala and Arunachal Pradesh. Rest of the country is likely to experience near-normal mean temperatures (departure from long-term normal: between -0.5 and 0.5 degree Celsius).

There is around 37% probability of maximum temperature in the core heat wave zone during March to May 2019 to be above normal. Core heat wave zone covers the states of Punjab, Himachal Pradesh, Uttarakhand, Delhi, Haryana, Rajasthan, Uttar Pradesh, Gujarat, Madhya Pradesh, Chhattisgarh, Bihar, Jharkhand, West Bengal, Odisha and Telangana and meteorological sub-divisions of Marathawada, Vidharbha, Madhya Maharashtra and coastal Andhra Pradesh. This, in turn, suggests that normal to slightly above normal heat wave conditions are likely in the core heat wave zone during the season.

Exhibit 18: Weather forecast by IMD for March, April, May 2019

Source: IMD, Nirmal Bang Institutional Equities Research


Blue Star

Blue Star – Brand positioning and business strategy for AC

The AC industry is highly fragmented with a presence of around 15 credible brands and a lot more low-priced brands because of high import content. As large components of ACs like compressor, IDU plastic and electronic chipsets are imported from China, AC manufacturing becomes essentially an assembly work without any entry barrier. Voltas is the industry leader with 24% market share while players such as LG, Daikin, Blue Star, Hitachi and Lloyd have double-digit market share (in the 10%-13% range) while Panasonic, Samsung, Whirlpool and Godrej have single-digit market share. Despite the presence of many brands, BLSTR has performed incredibly well in the room air-conditioner segment considering that it forayed into it very recently in FY11 and garnered 12.8% market share in eight years overtaking many MNC giants and established domestic brands in the process. Consumer preference is tilted towards brands which specialise in AC and not multi-product consumer durable firms. This is evident from the success of brands such as Voltas, Blue Star, Daikin, Hitachi and Lloyd which are specialised AC players, while multi-product companies like LG and Samsung have lost market share.

BLSTR offers high technology and highly energy efficient products with superior aesthetics and low noise levels. The products are priced at a marginal premium (up to 5%) to mass market brands. With its focus on high technology, BLSTR has a higher market share and larger revenues from premium products such as inverter AC and five-star split AC. This leads to a premium brand image for BLSTR which is generally preferred by aspirational consumers. Over the past five years, BLSTR’s market share has consistently increased from 7.5% in FY14 to 12.8% in FY19, despite rising number of players in the AC industry including the entry of MNC brands with deep pockets. BLSTR now has an installed base of over two million units with 52% revenues coming from Tier 3/4/5 towns.

BLSTR targets to attain 15% market share by FY21E by sustaining the strong growth momentum and growing faster than the industry. To achieve the same, it aims to: (a) Expand its distribution network. (b) Enhance its research & development capabilities to offer best-in-class products and features. (c) Become gold standard in customer service. (d) Continue to have above-industry in-house manufacturing content by further reducing imports. (e) Strengthen the brand salience by enhancing its image as a premium player through sustained investment in advertising and brand communication.

1) Consistent gain in market share

Since its foray into room AC category in FY11, BLSTR has consistently gained market share. Its market share rose from 7.5% in FY14 to 12.8% in FY19, in value terms. It aims to increase the market share further to 13.5% in FY20E and 15% in FY21E, which will enable it to become the third-largest player. BLSTR aims to increase the market share on the back of measures such as increasing focus on north India market, structured distribution expansion, enhancing customer experience at the store level, strengthening premium brand image and backward integration for higher value addition. North India is India’s largest AC market, but BLSTR has a relatively lower market share in this region compared to its national average. By strengthening its distribution network in the northern region as well as more focused advertising, BLSTR intends to scale up its presence in North India. On an average, the regional revenue mix for BLSTR is 35%-40% from southern region, 25%-27% from western and northern region each and the balance 10% from eastern region. In comparison, for the entire AC industry, northern region is the largest market accounting for 35%-38% of sales.

In terms of product portfolio, while BLSTR has differentiated products across all price points and all energy ratings, it has a higher market share in inverter AC owing to its high technology focus and premium brand image. Currently, it is ranked third behind LG and Daikin in the inverter AC segment and hence a rising share of inverter AC in the total AC industry is favourable for BLSTR. The share of inverter AC in India has risen rapidly from 12% two years ago to 40% now, while in case of BLSTR, inverter AC accounts for 43% of total AC sales.


Blue Star

Exhibit 19: Consistent rise in market share of BLSTR AC


2) Distribution network to continue to expand

In the past three years, distribution reach of BLSTR has expanded from 2,500 outlets to 4,500 outlets on a pan-India basis. In FY21, BLSTR targets to increase this reach to 6,000 outlets across 575 locations pan-India through exclusive as well as multi-brand sales outlets, sales & service dealers, retail showrooms, modern trade as well as on major e-commerce platforms. The company has a strong installation and service franchise network to support retailers. Currently, BLSTR has 200 exclusive brand stores in the country, and it plans to increase it to 250 stores by the end of FY20. Around 52% of BLSTR’s room AC sales are from smaller towns (Tier 3/4/5) since consumers in these markets are aspirational and prefer premium brands. Also, BLSTR aims to have its presence at all AC dealers who sell more than 500 units of ACs per year. There are approximately 4,000 such dealers in India and collectively they represent ~70% of the AC market. The core focus of BLSTR is the depth of sales (more sales per counter) rather than just breadth of the network (number of dealers).

Exhibit 20: Trend in distribution network expansion


7.5

9.510.5

11.1 11.5

12.813.5

15.0

0

2

4

6

8

10

12

14

16

FY14 FY15 FY16 FY17 FY18 FY19P FY20E FY21E

(%)

2,500

4,200 4,500

5,000

6,000

-

1,000

2,000

3,000

4,000

5,000

6,000

FY15 FY17 FY18 FY19P FY21E

(Nos)


Blue Star

3) Enhancing R&D capabilities to offer best-in-class products

BLSTR is known for launching break-through products based on cutting edge technology which offers innovative features and enhances a consumer’s experience. It has high level of product development and testing skills and believes in consistent investment in R&D to enhance technical capabilities including electronics for digital and smart products. Some of the highly innovative and distinct features developed by BLSTR includes decimal cooling capabilities which offers precise temperature setting in the multiple of 0.1 degree Celsius, sound-proof acoustic jacket for the compressor for extra quiet performance, dual rotor technology for faster cooling and a built-in voltage stabiliser designed to operate smoothly from 160V to 270 V without the aid of an external voltage stabiliser.

Some of the newly introduced features in BLSTR’s inverter AC includes faster temperature pull-down feature as ACs are capable of delivering 30% extra cooling over and above their rated capacity, Wi-Fi enabled mobile-app operations and a smart budget management feature which enables users to smartly manage their budget by tracking their AC usage trend. BLSTR aims to spend Rs500mn in FY20 as against Rs400mn in FY19 to develop customised, modern and sophisticated products. BLSTR is also investing in indigenising inverter technology (electronics and PCB) as well as plastic components.

BLSTR aims to enhance its R&D capabilities and plans to bring at least two break-through products every year. It is investing in areas such as solar, air purification and digital products. Aesthetically appealing water- cooler with internal water purifier is a key new product developed recently, which proved highly successful in the market place. BLSTR is currently working on new developments such as integrated AC with air purifier, hybrid model of air cooler with AC capabilities and solar air-conditioning. As seen in Exhibit 22, BLSTR incurs a lot more R&D expense versus its peers such as Voltas and Whirlpool despite being much smaller in size.

Exhibit 21: Trend of R&D spending

Source: Company, Nirmal Bang Institutional Equities Research (# Assuming entire R&D spend is for unitary product segment)

Exhibit 22: Peer comparison of R&D spending


0.91.0 1.1 1.1

1.3 1.3 1.2 1.2

3.33.2

3.4

3.0 3.1 3.2

2.7 2.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

100

200

300

400

500

600


R&D spend As a % of total sales As a % of unitary products sales #

(Rsmn) (%)

-

100

200

300

400

500

600

FY14 FY15 FY16 FY17 FY18

Blue Star Voltas Whirlpool

(Rsmn)


Blue Star

4) Aims to be gold standard in customer service

BLSTR believes that customer service will continue to be its winning differentiator and a growth enabler. It aims to be the best-in-class gold standard in customer service in the next three years. BLSTR also intends to use technology tools like apps, chatbot and data analytics to enhance customer experience. BLSTR is one of the largest after-sales air-conditioning service providers in the country. Currently, BLSTR has 800 expert service associates across the country, which it intends to increase to 1,000 associates in FY20E. As part of its Gold Standard Service Programme, it offers superior after-sales service equipped with several customised smart applications, modernisation of tools as well as remote monitoring. All the services of BLSTR are ISO 9001-2008 certified.

5) Higher focus on in-house manufacturing by reducing import content

For most of industry peers, AC is an assembly-based trading business model owing to high import content. However, BLSTR always had above-industry content of in-house manufacturing. It has reduced the import content from 45% two years ago to 35% now by localising plastic components for indoor cases as well as inverter drives. BLSTR aims to further reduce its import content to de-risk itself from rising trade barriers and rising cost of imports as well as to drive higher value addition. Domestic manufacturing and sourcing can help in driving higher value addition through backward integration, procurement, supply chain efficiency and margin improvement initiatives as well as help in faster changes in product aesthetics through the local knowledge of consumer’s taste and preferences, which are changing at a faster pace.

BLSTR currently has five manufacturing plants located at Dadra (in the Union territory of Dadra & Nagar Haveli), Kala Amb (Himachal Pradesh – two facilities), Wada (Maharashtra) and Ahmedabad (Gujarat) with a manufacturing foot print of 100,000 sqkm. BLSTR has decided to significantly enhance its manufacturing footprint by increasing localisation at existing plants, expand its Wada facility to manufacture water coolers and deep freezers as well as set up a new greenfield plant at Sri City in Andhra Pradesh.

BLSTR aims to significantly de-risk its dependency on Chinese imports and plans to reduce import content in ACs from the current level of 35% to 20% in three years’ time. BLSTR is likely to import only compressor and some electronic chipsets, while it aims to make the remaining products in-house or source it from local vendors. The indoor unit (IDU) of an AC will be a key unit where maximum indigenisation will take place. Currently, 90% of IDU plastics is imported, which BLSTR aims to reduce it to zero in three years through in-house manufacturing (as it has achieved a decent scale now) and through local supply chain being developed by Indian EMS players. BLSTR currently has AC production capacity of 5,50,000 units spread across its two plants in Himachal Pradesh. This year, nearly half of that total capacity (around 2,50,000 units) will have IDU units which will be made indigenously. It has also tied up with two Japanese universities to indigenise the electronic drivers that are used in the outdoor units of split ACs.

BLSTR is spending Rs1.4bn-Rs1.5bn capex at Wada (Maharashtra) plant for brownfield expansion (to make water-coolers and deep freezers) while it is also building a greenfield manufacturing plant at Sri City in Andhra Pradesh, having 0.5mn unit AC capacity (in phase 1) and will service South and West India markets from this facility. Its existing plant at Himachal Pradesh will service North and East India markets. According to BLSTR, the consumer durable brands are likely to opt for a higher share of India-based manufacturing rather than relying on imports. The key reasons for the same are: (a) To improve value addition, which is the main driver to increase gross margin. (b) Trade barriers. (c) Forex fluctuations. (d) Rising commercial sense to manufacture in India owing to benefits of scale, cost and logistics.

BLSTR 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. The fact that other domestic brands (like Voltas) and MNC brands (like Midea) have also announced domestic manufacturing plants is an early indicator of a shifting business model from trading/assembly-based to in-house manufacturing-based. It is also a vindication that BLSTR’s higher focus on above-industry in-house manufacturing content was the correct choice. As seen in Exhibit 23 and 24, rising cost of manufacturing in China is also acting as a trigger for companies to opt for domestic manufacturing.


Blue Star

Exhibit 23: Trend in labour and overheads as a percentage of total costs in India and China

Source: Frost & Sullivan, Company, Nirmal Bang Institutional Equities Research

Exhibit 24: Rise in average annual manufacturing wage in China

Source: National Bureau of Statistics, Nirmal Bang Institutional Equities Research

6) Sustaining brand salience through advertising and communication

Consumers in the room AC segment are brand-conscious, preferring specialist air-conditioning players. This has worked to the advantage of BLSTR as it enjoys the reputation of being a premium and aspirational brand, and its rich pedigree and high quality product array has been in conjunction with this image. The company aims to strengthen the Blue Star brand with a value proposition of “Built On Trust.” It aims to increase advertisement spending from 2.7% of product revenues to 3% in order to grow its image as a premium player. It also plans to increase digital media presence so as to resonate with young customers. BLSTR plans to increase its advertising and brand spending to Rs550mn in FY20 versus Rs450mn in FY19. 70% to 75% of the annual advertisement spend is done during the summer season period of February to June. BLSTR will continue to highlight its differentiated value proposition ‘Nobody Cools Better’ with a set of TV commercials, advertisements in mainline newspapers, cinema and hoardings. It also intends to enhance its digital marketing efforts in social media as well as the internet. The advertising efforts have been successful in building a premium brand image for BLSTR. As seen in Exhibit 27, BLSTR has a higher advertisement expenditure outlay compared to peers such as Voltas and Whirlpool despite being smaller in size.

12 12.5 1313

16-18

18-19

0

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FY14 FY17 FY21EIndia China

(%)

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Blue Star

Exhibit 25: Rising expenditure on advertising and sales promotion


Exhibit 26: Advertising and sales promotion as a percentage of sales

Source: Company, Nirmal Bang Institutional Equities Research (# Assuming entire ad spend is for unitary product segment)

Exhibit 27: Peer comparison of advertising and sales promotion expenses


51.5

21.5

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Ad spend as a % of total sales Ad spend as a % of unitary product sales #

(%)

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Blue Star Voltas Whirlpool

(Rsmn)


Blue Star

Market leadership in commercial refrigeration products

BLSTR 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. BLSTR is well entrenched at both retail and institutional level in terms of its distribution network. In terms of its revenue mix, retail sales and OEM accounts for 50:50 share. Deep freezers and modular cold rooms (MCR) are witnessing robust growth owing to expansion of e-tailers and portals such as Big Basket, Swiggy and Zomato along with aggressive expansion from Quick Service Restaurants (QSR) such as Jubilant FoodWorks, Hardcastle etc. In addition, dairy, ice-cream and food processing segments are also witnessing high growth.

BLSTR recently forayed into adjacent complementary categories such as kitchen refrigeration, medical refrigeration and retail refrigeration. The outlook on these categories is promising, considering the expansion plan of end-user industries such as food processing and cold chain logistics providers, pharmaceutical manufacturers and hospitals as well as large and medium format modern retail stores. BLSTR also forayed into product categories like air purifier, air cooler and water purifier. The air coolers, launched under ‘Windus’ sub-brand, are equipped with a unique cross-drift technology that helps in faster cooling in harsh and dry summer season. The range comes with different water tank capacities starting from 35 litres to 75 litres and a price range from Rs8,990 to Rs13,490. The air purifiers have been launched with innovative features such as SensAir technology and UV purification systems and are priced between Rs8,990 to Rs23,990. Among the three, water purifier is the largest and most promising category as it has the potential to grow exponentially.

Exhibit 28: Commercial refrigeration product portfolio of BLSTR


Water purifier category offers immense potential

BLSTR forayed into the water purifier category in FY18. 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.

The market size of residential water purifier market is estimated to be Rs42bn with around 2.6mn units being sold every year in variants such as RO, UV, RO+UV. In terms of value, because of their higher price points, electric water purifiers account for around 80% of the market, while the balance comprises gravity-based water purifiers. The market is dominated by three players - Eureka Forbes, Kent RO and Live Pure.


Blue Star

BLSTR garnered sales of Rs500mn in FY18 and aims to achieve sales of Rs1bn in FY19, thereby registering 2.5% market share. With a refreshed product portfolio, asset-light model, deeper market penetration, strong brand image and differentiated service network, it aspires to achieve 10% market share by FY21E. This implies a quantum jump in sales to Rs5bn in FY21, which would also help to turn the category profitable for BLSTR as currently it is in the investment phase. In terms of product portfolio, BLSTR offers stylish, premium and differentiated range of RO+UV+UF products across price points from Rs10,900 to Rs44,900, while only UV purifiers are sold at price points ranging from Rs7,900 to Rs8,900. The product offers unique features such as cold and hot water, filter change alerts, aqua taste boosters and electronic dispensing. While the price points are competitive, the distribution network has also expanded to 2,800 touch- points across 150 towns through 200 channel partners. The retail presence will be further strengthened across the country by expanding the touch-points to 3,500 outlets by end-FY20E.

This business is highly service-intensive with a regular need for replacement of consumables such as the sediment, carbon as well as RO membrane filters. Considering that BLSTR is India’s largest air-conditioning and refrigeration service provider, it aims to offer differentiated service in the water purifier category too and create new benchmarks in the industry. It has appointed over 100 service franchises which are being supported by a team of trained company engineers to lead the installation and service requisites, and strong service processes have been put in place.

BLSTR has partnered with O&M, India’s leading creative advertising agency for the formulation of its communication strategy. The value proposition for the category is ‘Choose Purity’. The company launched TV commercials featuring babies with a message that BLSTR’s purified water is best suited for them as they are the most vulnerable to water-borne diseases. This is being supported by advertisements in mainline newspapers and digital campaigns on social media and e-commerce channels. Just like in AC, BLSTR has adopted integrated marketing communication comprising mass media, field promotions, digital platform, press, events and social media. BLSTR has also undertaken an outdoor media campaign including branding of nearly 1,000 Uber cabs in all the metro cities.

While BLSTR is expanding its retail presence, it is doing extremely well in terms of online sales and has a higher market share than the three established peers. The share of online sales for BLSTR is much higher at 20% versus 6%-7% for the industry. This helps BLSTR to grow quicker than general trade channel as well as industry growth rate. BLSTR has exclusive models for the e-commerce channel comprising Amazon, Flipkart, PayTM and Tata CliQ.

While BLSTR is currently offering residential water purifiers, it will gradually enhance its range to cover commercial water purification systems as well. This initiative is part of the company’s aggressive growth plans to expand its presence in related new product categories.

Exhibit 29: Water purifier product portfolio of BLSTR



Blue Star

Scaling up international markets

BLSTR has its presence in 19 countries with strong presence in the MENA, Gulf and SAARC regions. It is evaluating and exploring emerging opportunities in other regions as well. It has started to service West Asian countries. Earlier, BLSTR used to sell products only on enquiry basis across West Asian countries. But, over the past three years, it has started setting up distribution and seller networks. BLSTR is also exploring to set up assembling units in Egypt and Bangladesh to comply with local laws. Recently, BLSTR launched a range of room AC, water-cooler, bottle water dispensers and water tank chillers for the Saudi Arabian market through an authorised distributor.

Key takeaways from our ground research channel check on BLSTR

We interacted with various dealers, distributors and large modern-retail stores to find out their views on the brand and business practices of BLSTR. The three key takeaways are summarised below.

BLSTR enjoys very strong brand pull and high percentage of repeat customers. Despite a cluttered market, BLSTR has been able to differentiate itself owing to superior product performance. Consumers feel BLSTR’s product quality is comparable to brands like Daikin and Hitachi.

BLSTR offers one of the most consistent trade terms to the distribution channel. Its trade terms (credit period, commission, inventory replenishment policy) remains consistent, irrespective of whether the market is witnessing high growth or weak growth.

BLSTR enjoys one of the highest levels of faith from the distribution channel owing to its transparent business dealings and parity across different trade formats.

Unitary product segment – outlook and assumptions

While 9MFY19 sales of room AC were subdued, both for the industry and BLSTR, the outlook on the upcoming season is bright. BLSTR cleared out unsold inventory in 3QFY19 and is ready with a new and refreshed product portfolio. Over the next two years, BLSTR is likely to register healthy growth driven by pent-up demand for ACs, strengthening distribution network, rising market share and improving revenue mix owing to a higher proportion of inverter ACs. Besides, scale-up in commercial refrigeration products and water purifiers will also aid growth. Further, BLSTR had gone for a 5% price hike in 2QFY19 for its new product portfolio, whose full impact will be realised in the coming quarters. We expect 18%/16.5% revenue growth for BLSTR in FY20E/FY21E, respectively.

Considering a negative impact of 150bps on margin owing to investments in the water purifier category, BLSTR has given EBIT margin guidance of ~8% for FY19. The negative impact of water purifier will reduce progressively as the category is likely to turn profitable in FY21 on achieving scale. In addition, price hikes, backward integration as well as recovery in demand in the room AC market should improve the underlying margin of room AC and commercial refrigeration business. We expect BLSTR to register 8.3%/9% margin in FY20E/FY21E, respectively. It must be noted that over FY14-FY16, BLSTR has operated at an EBIT margin profile of 9%-11%, prior to undertaking investments for the foray into the water purifier category. The capital employed for the segment stood at Rs4.5bn as of 3QFY19, down from Rs5bn QoQ, and includes inventory build-up for the upcoming summer season across its product portfolio.


Blue Star

Exhibit 30: Unitary product revenue trend


Exhibit 31: Unitary product EBIT margin trend


Exhibit 32: Unitary product capital employed trend


11.6

23.7

18.6

26.4

4.67.3

18.016.5

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FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

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(%)(Rsmn)


Blue Star

Electro-mechanical projects and packaged air-conditioning systems segment

The electro-mechanical projects and packaged air-conditioning systems segment of BLSTR comprises MEP works (mechanical, electrical and plumbing projects), central air-conditioning projects and packaged air-conditioning solutions like ducted systems, VRF and chillers where BLSTR has a strong presence. The company is highly selective in the project order it takes and gives priority to healthy cash flow and profitability. Considering the relatively subdued industrial capex as well as residential real estate sector, BLSTR did not increase the size of its order book materially over the past five to six years. However, considering the 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 have strongly improved.

MEP and HVAC projects – Set to become bigger and better

Under the MEP and HVAC (heating, ventilation and air-conditioning) vertical, BLSTR undertakes design, supply, installation and commissioning of large central air-conditioning projects, electrical projects, plumbing projects, fire-fighting projects as well as turnkey industrial projects. The value proposition offered by BLSTR is its superior project delivery through intelligent engineering, modern execution practices and committed teams. The HVAC market in India is expected to touch US$7.7bn by 2022. 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 is likely to further push growth.

Considering the strong spurt in government-funded infrastructure projects, healthy pipeline of commercial construction and the initial signs of revival in industrial capex, BLSTR is aiming at a bigger and better order book. BLSTR aims to take MEP and HVAC projects which are larger in value, but fewer in numbers. It also aims to have an evenly balanced portfolio across the three verticals of buildings (hotels, hospitals, commercial towers etc), infrastructure (airports, metro, railway, power transmission) and industrial projects (factories E&M). While BLSTR intends to improve its market share in sectors such as airports, metros, railway redevelopment and power transmission, it is also evaluating entry into select adjacencies with high-margin opportunities within factory E&M, industrial EPC and infrastructure MEP.

BLSTR continues to expand remote monitoring and intelligent diagnostics capabilities, while also scaling up engineering facility management services. It aims to enhance customer engagement and grow revenues from service by way of annual maintenance contracts as well as energy management, air management and water management solutions. 25% of BLSTR’s service revenues come from maintaining products of other competing brands, which signifies tremendous scope to scale up the service vertical.

Exhibit 33: Gross fixed capital formation trend Exhibit 34: Bank credit to GDP ratio

Source: CSO, Nirmal Bang Institutional Equities Research Source: CSO, RBI, Nirmal Bang Institutional Equities Research

25.6

27.7

29.1

31.5 31.5 31.5 32.2

34.3 34.1

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Blue Star

Central air-conditioning projects

BLSTR is India’s largest air-conditioning and refrigeration service provider, maintaining around 2mn tonnes of air-conditioning and refrigeration equipment. It has service reach of more than 3,000 towns and is handling more than 1mn service calls per year. For central air-conditioning projects, BLSTR has expertise of over seven decades in system design, contracting, installation and maintenance. It provides expert turnkey cooling solutions to a variety of customers in the corporate, commercial and industrial sectors. BLSTR has significant market share in segments such as industrial, infrastructure, metro rail, power, hospitality, education, IT/ITeS, retail and healthcare. It has superior project management capabilities resulting in on-time delivery, high project quality and seamless coordination at all levels. BLSTR continues to invest in technology and R&D to grow its business as well as profitability. BLSTR is growing higher than the market with key growth drivers being rising penetration in the northern region and network expansion.

Among central air-conditioning products, BLSTR has market leadership in ducted systems, which it aims to sustain and consolidate, while it also aims to increase market share in VRF and chillers and become the second-largest player. It aims to stay ahead of the curve by investing in technology, introducing advanced products as well as undertaking channel expansion. Configured chiller and ducted inverter were the highly successful new products developed by BLSTR recently.

Chillers, VRF and ducted systems – BLSTR moving from strength to strength

The market size of central air-conditioning including packaged/ducted systems, VRF system and other ancillary equipment like chiller is expected to be Rs70bn. In ducted system category, BLSTR is the industry leader with a strong market share of 35%. It continues to innovate a new range of ducted system, and has recently brought inverter technology in the ducted system which will help it to remain at the forefront of the industry and further grow its market share. BLSTR has a market share of 16% in VRF system and 14% in chiller. In both VRF and chiller categories, BLSTR aims at growing its market share to 20% each in the near term and become the second-largest player.

BLSTR developed its own VRF technology after its tie-up with Sanyo ended in 2008. In 10 years’ time, BLSTR attained technological expertise as well as self-sufficiency in manufacturing. BLSTR’s margin increased 700bps as it started in-house manufacturing of VRF. Having mastered inverter technology, BLSTR aims to keep ahead of the curve in VRF systems as well. The company intends to aggressively grow its market share in VRF by strengthening the product mix and through channel expansion. Some of the new key products launched by BLSTR include: (a) VRF V Plus, a fifth generation VRF, which is 100% inverter-based VRF system with higher output capacity (large capacity outdoor unit of 24HP to 28HP) and efficiency. (b) VRF Sprint, which is a pre-piped inverter-based VRF system for residential application. It helps to cater to growing demand from Tier-3 markets as it enables system integrators to offer VRF technology in small towns. (c) VRF IV S is a side discharge inverter-based VRF system for medium-sized commercial applications. The demand for the product is driven by segments such as offices, educational institutes, industrial units, show-rooms, healthcare, hospitality, banquet halls and retail shops.

Even in chillers, BLSTR aims to adopt the inverter technology soon. In its product portfolio, BLSTR has highly efficient centrifugal chillers, screw chillers, flexible and energy-efficient scroll chillers, process chillers for industrial and non-comfort cooling applications, air-cooled and water-cooled chillers. In 9MFY19, while the chiller market grew in the range of 15% to 18%, BLSTR grew at a much rapid pace of 25% to 30%. The central air-conditioning products of BLSTR are highly energy-efficient as they offer power savings of up to 20% while maintaining precise internal cooling conditions.

A strong presence in products such as chillers, VRF and ducted systems has not only helped BLSTR to register healthy growth in electro-mechanical project segment, but has also been a key driver of profitability for the segment.


Blue Star

Exhibit 35: VRF product portfolio of BLSTR


Exhibit 36: Chiller product portfolio of BLSTR



Blue Star

International market – To grow product exports and consolidate overseas projects

BLSTR intends to significantly grow its product exports. Its key markets are the UAE, Oman, Qatar, Nigeria, Egypt, Saudi Arabia, Bangladesh, Sri Lanka and Vietnam which contribute 80% to its export revenues. BLSTR aims to increase its export revenues from Rs3bn currently to Rs7.5bn in the next three to five years by increasing its market share in key geographies stated above as well as entering new countries. The key geographies continue to be Middle East, Africa, SAARC and ASEAN region where BLSTR has maximum focus. The expansion of international footprint will be done through enhancing the reach of distributors, dealers, channel partners as well as associates. BLSTR is also in the process of opening its first international state-of-the-art exclusive showroom in Dubai in 4QFY19. This showroom would display the complete range of the company’s latest energy-efficient products to serve the UAE market. The growth outlook on UAE market is buoyant owing to upcoming mega events such as Dubai World Expo 2020 and FIFA World Cup in Qatar. Along with air-conditioning and refrigeration products, BLSTR also exports central cooling products like VRF and chillers as well as ancillary products such as water coolers. BLSTR also offers after-sales services and system integration in global markets.

For executing international projects, BLSTR has three global joint ventures – one each in Qatar, Malaysia and Oman. The joint ventures in Qatar and Malaysia are old and small in terms of scale as the primary interest of BLSTR lies in product exports and not international project execution. In these two joint ventures, the collective investment by BLSTR is only Rs100mn to Rs150mn while they have total order book of Rs1bn to Rs1.5bn on an average. However, the joint venture in Oman is facing cost overrun in its projects. After evaluating the business potential of Oman, BLSTR has decided to exit the country and wind up the joint venture. Consequently, it has made provision of Rs50mn in 2QFY19 and Rs145mn in 3QFY19 towards its share of the loss as well as its residual exposure in the JV. BLSTR does not expect any further loss to arise from Oman and the legal and procedural formalities to wind up the JV are expected to conclude in a few months.

Exhibit 37: Overseas sales trend Exhibit 38: Overseas sales as a percentage of total sales


EMPS segment – Outlook and assumption

The EMPS segment registered healthy execution with revenues growing 14.6% in 9MFY19. The order inflow was also healthy, leading to a rise in its order book to Rs22.8bn as of 3QFY19 compared to Rs20.9bn as of FY18. With BLSTR targeting to take large-value projects amid the rise in infrastructure, buildings and industrial projects, the outlook for the next two years is bright. In addition, scale-up in central air-conditioning products such as chillers, VRF and ducted systems as well as rising exports will aid revenue growth. We expect the EMPS segment to post 14.9%/14.1% YoY growth in FY20E/FY21E, respectively. The 9MFY19 EBIT margin stood at 6%, up 60bps YoY. With a rising share of product and service revenues, we are factoring in a 50bps improvement in the EBIT margin profile over FY19E-FY21E.

(6.4)

16.4

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3.7

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Blue Star

Exhibit 39: Order book trend of EMPS segment


Exhibit 40: Revenue trend of EMPS segment


Exhibit 41: EBIT margin trend of EMPS segment


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Blue Star

Exhibit 42: Capital employed trend of EMPS segment


Professional electronics and industrial systems segment

The professional electronics and industrial systems (PE&IS) segment comprises business lines such as healthcare systems, data security solutions, infra security systems, communication systems, testing machines and industrial products. This is the smallest segment of BLSTR, accounting for 5% of its 9MFY19 revenues. 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 for industrial products and systems. Over the years, the company has significantly scaled up operations in this business and has moved up the value chain by changing its business model from being merely a distributor to that of a system integrator and value-added re-seller. This business is handled by Blue Star Engineering & Electronics, a wholly-owned subsidiary of BLSTR. The business operates in two broad segments - professional electronics comprising healthcare systems, data security solutions, infra security solutions and communication systems and industrial systems that encompasses testing machines, non-destructive testing (NDT) systems and industrial automation, NDT products and industrial products. The business has been successful in capturing the pulse of the market and has carved out a profitable niche for itself in most specialised markets that it operates in.

Professional electronics segment is growing on increased orders in the data security systems and healthcare businesses. The healthcare systems business is registering good growth against the backdrop of a significant large order for CT scanners from the government, medical and health services sector, which was bagged in FY18. This order secured from the Government of Uttar Pradesh was the largest order ever secured in this arena. A major portion of this order is likely to be executed in FY19. The data security business is performing well aided by digitisation initiatives with orders from major banks, certification authorities, telecom and payment technology companies. The infra security business, which mainly revolves around video surveillance, and the communication systems business that largely deals with radio frequency, microwave as well as avionics test and measuring equipment, are receiving good orders from the defence, space and aerospace sectors. The industrial products business, which mainly transacts in industrial valves and pumps, is witnessing subdued demand, barring good orders from the paper industry.

BLSTR aims to expand the addressable market by launching adjacent products in sectors such as healthcare, data security and non-destructive testing systems. BLSTR also plans to evaluate new opportunities in industrial robotics, 3D printing, non-radiology medical devices and railway safety testing. BLSTR is open to exploring joint ventures to augment capabilities and enhance value addition.

With multiple growth opportunities across several verticals, we expect the segment to sustain its healthy growth traction and are factoring in a 15% revenue CAGR over FY19E-FY21E. The 9MFY19 EBIT margin stood at 16.5%, up 470bps YoY. The management expects to sustain the current profitability level and, thus, we are factoring in EBIT margin of 16%/15% for FY20E/FY21E, respectively.

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5,000

6,000

FY14 FY15 FY16 FY17 FY18 9MFY19

Capital employed RoCE

(%)(Rsmn)


Blue Star

Exhibit 43: Revenue trend of PE & IS segment


Exhibit 44: EBIT margin trend of PE & IS segment


18.2

15.2

13.3

3.6

14.9 15.015.0

0

2

4

6

8

10

12

14

16

18

20

-

500

1,000

1,500

2,000

2,500

3,000

3,500



(Rsmn) (%)

17.5

21.3

16.217.0

12.1

15.6 16.015.0

0

5

10

15

20

25


(%)


Blue Star

BLSTR is a healthy financial franchise

Healthy 14% revenue CAGR, 25% EBITDA CAGR and 30% PAT CAGR likely over FY18-FY21E

Over the past five years from FY14-FY18 BLSTR posted revenue CAGR of 12%. We expect the growth momentum to improve, driven by rising penetration of ACs from a low base coupled with BLSTR’s strengthening distribution network, rising market share and improving revenue mix (higher proportion of inverter ACs). Besides, scale-up in commercial refrigeration products and water purifier will also aid growth. Similarly, EMPS segment’s growth prospects are brighter led by a strong pipeline of infrastructure, building and industrial projects as well as BLSTR’s healthy order book and also plans to tap large-value contracts. We expect BLSTR to post 14% revenue CAGR over FY18-FY21E. Along with operating leverage benefit (with rising scale), in-house manufacturing of room ACs, turnaround of water purifier and improving revenue mix of EMPS segment (higher share of product and service business) will lead to improvement in the margin profile. We expect EBITDA margin to improve 190bps over FY18-FY21E from 5.7% to 7.6%. This will translate to 25% EBITDA CAGR and 30% adjusted PAT CAGR over FY18-FY21E. Over the next five years, BLSTR’s management has ambitious plan of growing revenues by 20% CAGR and profitability by 25% CAGR.

Exhibit 45: Revenues to post 14% CAGR over FY18-FY21E Exhibit 46: EBITDA CAGR of 25% likely over FY18-FY21E


Return ratios to improve

BLSTR operates at decent return ratios of 18.1% RoE and 18.6% RoCE as of FY18, which are relatively lower owing to a larger share of projects business (EMPS segment) in total revenues (52% of 9MFY19 sales). However, the shift in revenue mix of the EMPS segment (rising share of product and service business), improvement in the margin of unitary segment (after a weak summer season in 9MFY19) and turnaround in the water purifier category (to turn profitable in FY21E), the operating margin is likely to materially expand. Rising profitability coupled with a moderate leverage position (debt-equity ratio of 0.5x) will lead to healthy improvement in return ratios. We expect RoE/RoCE to rise to 28.4%/28.7% in FY21E, respectively. RoIC is likely to increase to 31.9% in FY21E from 20.5% in FY18.

Exhibit 47: Adjusted PAT CAGR of 30% over FY18-FY21E Exhibit 48: Return ratios set to rise


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


(Rsmn)

5.1 5.35.7

5.15.7

6.2

7.07.6

0

1

2

3

4

5

6

7

8

9

0

1,000

2,000

3,000

4,000

5,000

6,000


EBITDA EBITDA margin

(%)(Rsmn)

2.6

3 3.12.8

3.02.8

3.9

4.4

0

1

2

3

4

5

0

500

1,000

1,500

2,000

2,500

3,000

3,500


(Rsmn) (%)

17.6

11.6

19.3 17.7

18.1 17.4

25.128.4

12.6

13.617.1

16.4

18.619.2 24.1

28.7

13.7

15.1

20.3 19.6 20.5 21.7

27.6

31.9

0

5

10

15

20

25

30

35


RoE RoCE RoIC

(%)


Blue Star

Healthy free cash flow generation likely

BLSTR has generated positive operating cash flow of Rs8.3bn and free cash flow of Rs3.8bn over the past five years. We expect BLSTR to generate operating cash flow of Rs9.8bn over FY18-FY21E, driven by rising profitability. We expect BLSTR to incur a capex of ~Rs3bn over FY18-FY21E on capacity expansion (at Wada and Sri City plants) besides maintenance capex of Rs750mn-Rs1bn per annum. However, we still expect it to generate positive free cash flow of Rs4.7bn over FY18-FY21E.

Exhibit 49: Cash flow metrics


Working capital cycle remains lean

The ex-cash net working capital cycle of BLSTR improved from 20.4% of sales in FY14 to 12.9% of sales in FY18. The reduction is owing to a healthy decline in debtor days from 104 in FY14 to 82 in FY18 and inventory days from 85 in FY14 to 75 in FY18, while creditor days remained constant at 144 days. This healthy reduction in debtor and inventory days, which led to the overall decline in the working capital cycle, is driven by its foray in the room AC segment in FY11, after which BLSTR’s revenue mix changed towards B2C products. Over FY18-FY21E, we expect the ex-cash working capital cycle to further moderate to 9.7% of sales, despite 14% revenue CAGR and capex outlay for two plants.

Exhibit 50: Debtor and inventory days declined over FY14-FY18 Exhibit 51: Lean working capital cycle


(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


(Rsmn)

10493

78 7582 84 82 81

8578

7266

75 79 77 75

143 142 141133

144 142 141 140

0

20

40

60

80

100

120

140

160


Debtor Days Inventory Days Creditor Days

(Days)

20.4

15.0

8.5

8.4

12.9

11.110.2 9.7

0

5

10

15

20

25

0

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200


Ex-cash net working capital As a % of sales

(Rsmn) (%)


Blue Star

High fixed-asset turnover and low leverage position

BLSTR enjoys a high fixed-asset turnover of ~11x. With a gross block of Rs4.3bn as of FY18-end, BLSTR achieved a turnover of Rs47.4bn in FY18. However, with rising capex on capacity expansion as well as a greenfield manufacturing plant at Sri City, we expect the fixed-asset turnover to reduce to 7.1x in FY21E, although it will still be a very healthy level. Despite the capex outlay, BLSTR is likely to keep the leverage position low. BLSTR’s debt-equity ratio has reduced from 1x in FY14 to 0.4 in FY18. Owing to the capex plan and resultant increase in debt in FY19E, the debt-equity ratio will marginally increase to 0.6x in FY19E but is likely to again decline to 0.4x in FY21E owing to the rise in net worth. The management has indicated that 0.5x is the optimum debt-equity ratio, beyond which the company would not like to operate.

Exhibit 52: Healthy fixed-asset turnover Exhibit 53: Leverage to remain low despite capex


11.7 11.9

10.8

8.47.5

7.1

0

2

4

6

8

10

12

14

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

FY16 FY17 FY18 FY19E FY20E FY21E

Gross block Fixed asset turnover

(Rsmn) (x)

1.0

0.9

0.6

0.3

0.4

0.6

0.5

0.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500


Total debt Debt/equity

(Rsmn) (x)


Blue Star

3QFY19 quarterly result summary

Exhibit 54: Financial snapshot - consolidated

Y/E March (Rsmn) 3QFY18 2QFY19 3QFY19 YoY % QoQ % 9MFY18 9MFY19 YoY %

Revenues 9,320 10,322 10,990 17.9 6.5 32,926 36,390 10.5

Raw material 6,778 7,710 8,377 23.6 8.6 24,505 27,328 11.5

Staff costs 1,014 1,058 1,066 5.2 0.7 2,899 3,123 7.7

Other expenses 1,105 973 1,124 1.8 15.5 3,503 3,568 1.8

Total expenditure 8,896 9,741 10,566 18.8 8.5 30,907 34,019 10.1

EBITDA 424 581 423 (0.2) (27.1) 2,020 2,371 17.4

EBITDA margin (%) 4.6 5.6 3.9 - - 6.1 6.5 -

Interest 74 117 131 78.2 12.3 180 369 104.5

Depreciation 172 169 183 5.9 7.9 455 512 12.5

Other income 36 49 104 191.3 110.3 167 186 11.7

Exceptional items - (27) (72)

- 53

PBT 214 317 142 (33.7) (55.2) 1,551 1,729 11.5

Tax 58 78 10 (83.0) (87.4) 412 413 0.4

Net profit 156 239 132 (15.3) (44.7) 1,139 1,316 15.5

Add: Share of profits in associates (21) (42) (141)

(14) (211)

Less: Minority interest (1) (1) (1)

(2) (2)

PAT 134 195 (9) NA NA 1,123 1,102 (1.8)

PAT margin (%) 1.4 1.9 (0.1)

3.4 2.9

EPS (Rs) 1.4 2.0 (0.1) NA NA 58.5 54.6 (6.8)


Exhibit 55: Segment-wise performance - consolidated

Y/E March 3QFY18 2QFY19 3QFY19 YoY % QoQ % 9MFY18 9MFY19 YoY %

Revenues (Rsmn)

EMPS and packaged AC systems 5,661 6,310 6,555 15.8 3.9 16,624 19,058 14.6

Unitary products 3,210 3,431 3,915 22.0 14.1 14,974 15,653 4.5

PE & IS 450 582 520 15.6 (10.6) 1,420 1,679 18.2

Revenue mix (%)

EMPS and packaged AC systems 60.7 61.1 59.6 - - 50.3 52.4 -

Unitary products 34.4 33.2 35.6 - - 45.4 43.0 -

PE & IS 4.8 5.6 4.7 - - 4.3 4.6 -

EBIT (Rsmn)

EMPS and packaged AC systems 305 448 301 (1.2) (32.7) 902 1,146 27.1

Unitary products 158 82 94 (40.5) 14.5 1,273 1,126 (11.5)

PE & IS 44 126 69 54.5 (45.4) 168 277 65.4

EBIT margin (%)

EMPS and packaged AC systems 5.4 7.1 4.6 - - 5.4 6.0 -

Unitary products 4.9 2.4 2.4 - - 8.5 7.2 -

PE & IS 9.9 21.6 13.2 - - 11.8 16.5 -



Blue Star

Key takeaways from 3QFY19 conference call

Unitary products segment:

The 22% growth in 3QFY19 was driven by commercial air-cooling products, water purifier and air-cooler.

BLSTR made a conscious decision to liquidate majority of unsold AC inventory in 3QFY19 by giving higher discounts to trade channel, as a result of which its AC sales grew 8% YoY and market share expanded 50bps YoY to 12.5%, but margin fell 200bps YoY. It is now carrying negligible unsold AC inventory in 4QFY19.

In 9MFY19, AC industry was flat-to-negative value-wise and in FY19E it is likely to witness 0% to 5% growth. If the industry grows 5%, BLSTR aims to register 8% to 10% growth.

At the AC manufacturer level, on an aggregate basis, AC inventory is down to 0.15mn to 0.2mn units versus 0.7mn to 0.8mn units a quarter ago (end-2QFY19). While the trade channel may be carrying some more inventory, it is unlikely to be abnormally high.

Water purifier sales of BLSTR doubled YoY to Rs200mn in 3QFY19, market share rose to 2.5% and distribution reach enhanced to 2,000 outlets. The focus continues on digital outreach, where BLSTR is doing better than its peers. However, water purifier will suppress cooling product segment’s margin by 150bps in FY19E.

For the cooling product segment, BLSTR expects FY19 margin of 8% to 8.5% (after considering 150bps impact of water purifier), which would translate to 10% margin in 4QFY19.

BLSTR had gone for a 5% price hike at the end of 2QFY19, the benefits of which will largely flow through in 4QFY19. BLSTR is not planning to go for any further price hike in 4QFY19.

EMPS and packaged AC segment:

BLSTR continued to gain market share in VRF and chillers. In 9MFY19, VRF market grew 11% while BLSTR grew 25%. Also, chiller market grew 15%-18% while BLSTR grew 25%-30%.

EMPS order inflow rose 21% YoY to Rs6.8bn, aided by sectors such as offices, malls and healthcare. Metro rail and airport sector also has a healthy order pipeline and currently accounts for 12% to 15% of total EMPS order book.

EMPS order book stood at Rs15.7bn while total order book of the segment stood at Rs22.8bn, a growth of 5% YoY.

Sustainable margin profile in the segment is 5.5% to 6%. In 3QFY19, margin was low (4.6%) owing to closure of certain large but low-margin jobs.

Owing to cost overrun in Oman projects as well as an unfavourable future market outlook, BLSTR decided to exit its JV in Oman. The company has fully provided for its exposure by making a provision of Rs140mn in 3QFY19.

.


Blue Star

Outlook and Valuation

Since entering the room AC category in FY11, BLSTR has made rapid progress and outperformed the industry as well as peers. We are highly optimistic on growth prospects of the AC industry in India led by low penetration level (6%), hot weather conditions, rising affordability, growing disposable income as well as availability of consumer durable finance. We expect BLSTR to outperform industry growth driven by strengthening distribution network, rising market share and improving product mix (higher proportion of inverter ACs). Besides, scale-up in commercial refrigeration products and water purifier will also aid growth. Similarly, EMPS segment’s growth prospects are brighter led by a strong pipeline of infrastructure, building and industrial projects as well as BLSTR’s healthy order book and plan to tap large-value contracts. We expect BLSTR to post 14% net revenue CAGR over FY18-FY21E. Along with operating leverage benefit (with rising scale), in-house manufacturing of room ACs, turnaround in water purifier business and improving revenue mix of EMPS segment (higher share of product and service business) will lead to improvement in the margin profile. We expect EBITDA margin to improve 190bps over FY18-FY21E from 5.7% to 7.6%. This will translate to 25% EBITDA CAGR and 30% adjusted PAT CAGR over FY18-FY21E. Over the next five years, BLSTR’s management has ambitious growth plan of increasing revenues by 20% CAGR and profitability by 25% CAGR.

With rising return ratios, healthy cash flow, lean working capital cycle and a comfortable leverage position, BLSTR is a healthy financial franchise. As seen in Exhibits 57 and 58, BLSTR is placed favourably compared to listed brands in terms of its valuation vis-à-vis RoE and EPS growth prospects. We have valued BLSTR on SOTP methodology, assigning a P/E of 35x FY21E earnings to its unitary product segment (Rs595/share) and 15x FY21E earnings to its project business (Rs220/share) to arrive at a target price of Rs815. We initiate coverage on BLSTR with a Buy rating and an upside potential of 22% from the current market price.

Exhibit 56: P/E charts

Source: Bombay Stock Exchange, Nirmal Bang Institutional Equities Research

Exhibit 57: Peer comparison – FY21E P/E versus EPS growth Exhibit 58: Peer comparison – FY21E P/E versus RoE

Note: Bloomberg consensus numbers for all companies, Source: Bloomberg, Nirmal Bang Institutional Equities Research

0

200

400

600

800

1,000

1,200

Ap

r-1

5

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ma

r-1

7

Au

g-1

7

Jan

-18

Jun

-18

Oct

-18

Ma

r-1

9

25x 30x 35x 40x 45x stock price

(Rs)

0

10

20

30

40

50

60

Ap

r-1

5

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ma

r-1

7

Au

g-1

7

Jan

-18

Jun

-18

Oct

-18

Ma

r-1

9

P/E 4 year Median P/E SD +1 SD +2 SD -1

(x)

Hitachi

Blue StarVoltas

Whirlpool

IFB

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30 35 40 45

(PE,x)

(FY21E EPS growth YoY, %)

Hitachi

Blue StarVoltas

Whirlpool

IFB

0

5

10

15

20

25

30

35

40

45

50

15 17 19 21 23 25 27

(PE,x)

( FY21E RoE, %)


Blue Star

Exhibit 59: Peer comparison

Financial comparison Blue Star Voltas Whirlpool of India IFB Industries

Y/E March, Rsmn FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E

Revenues 46,390 51,240 59,574 68,641 64,044 72,042 79,527 88,169 48,319 54,781 64,254 75,191 21,485 25,176 29,870 34,849

Revenue growth (%) 5.8 10.5 16.3 15.2 6.2 12.5 10.4 10.9 22.6 13.4 17.3 17.0 23.4 17.2 18.6 16.7

EBITDA 2,659 3,193 4,181 5,210 6,626 7,017 8,122 9,264 5,600 6,124 7,582 9,249 1,566 1,544 2,356 3,013

Adjusted PAT 1,387 1,437 2,340 3,052 5,828 5,578 6,507 7,533 3,507 4,190 5,206 6,335 833 915 1,341 1,806

Adjusted EPS (Rs) 14.4 14.9 24.3 31.7 17.6 16.9 19.7 22.8 27.6 33.0 41.0 49.9 20.2 22.2 32.5 43.7

EPS growth (%) 12.7 3.6 62.8 30.4 11.8 (4.3) 16.7 15.8 12.9 19.5 24.2 21.7 51.0 9.9 46.6 34.6

Dividend Yield (%) 1.5 1.3 1.6 1.7 0.6 0.6 0.8 1.0 0.3 0.4 0.5 0.7 - - - -

Book value (Rs) 86.3 90.9 102.6 120.4 118.1 129.4 142.6 157.5 141.6 167.4 198.8 236.7 133.3 155.5 188.0 231.7

EV 67,419 67,758 68,022 67,764 205,305 201,455 199,076 196,545 181,377 179,057 176,023 171,887 40,129 40,193 39,596 38,444

Valuation (x)

CMP (Rs)

670

625

1,507

984

P/E 46.5 44.9 27.6 21.1 35.5 37.1 31.8 27.4 54.5 45.6 36.7 30.2 48.8 44.4 30.3 22.5

P/BV 7.8 7.4 6.5 5.6 5.3 4.8 4.4 4.0 10.6 9.0 7.6 6.4 7.4 6.3 5.2 4.2

EV/EBITDA 25.4 21.2 16.3 13.0 31.0 28.7 24.5 21.2 32.4 29.2 23.2 18.6 25.6 26.0 16.8 12.8

EV/Sales 1.5 1.3 1.1 1.0 3.2 2.8 2.5 2.2 3.8 3.3 2.7 2.3 1.9 1.6 1.3 1.1

Return ratio (%)

RoCE 18.6 19.2 24.1 28.7 16.8 15.4 16.0 16.9 28.3 26.2 28.1 29.3 19.9 15.7 23.2 26.3

RoE 18.1 17.4 25.1 28.4 15.9 13.3 14.5 15.2 21.4 21.4 22.4 22.9 16.3 15.3 18.9 20.8

RoIC 20.5 21.7 27.6 31.9 68.7 56.4 53.7 56.0 150.6 133.8 136.3 144.5 27.7 23.3 34.4 40.7

Profitability ratio (%)

Gross margin 25.5 27.0 28.4 29.0 28.7 28.0 28.3 28.5 37.9 37.7 37.8 38.0 43.9 43.0 43.4 43.7

EBITDA margin 5.7 6.2 7.0 7.6 10.3 9.7 10.2 10.5 11.6 11.2 11.8 12.3 7.3 6.1 7.9 8.6

PAT margin 3.0 2.8 3.9 4.4 9.1 7.7 8.2 8.5 7.3 7.6 8.1 8.4 3.9 3.6 4.5 5.2

Free cash flow yield (%) (1.1) 1.9 2.3 3.2 2.1 0.9 2.7 3.0 1.5 1.7 2.3 3.0 2.3 (0.5) 1.6 2.9

Free cash flow / Revenue (%) (1.5) 2.4 2.4 3.0 6.9 2.6 6.9 7.0 6.0 6.1 6.7 7.6 4.3 (0.8) 2.2 3.4

Turnover ratio

Total-asset turnover ratio (x) 4.3 3.9 4.1 4.4 1.7 1.6 1.6 1.7 2.7 2.6 2.6 2.5 3.8 3.6 3.6 3.5

Debtor days (on sales) 82 84 82 81 86 88 86 85 18 19 19 19 29 34 32 31

Inventory days (on direct costs) 75 79 77 75 69 75 73 71 99 103 105 107 94 95 93 92

Creditor days (on direct costs) 144 142 141 140 167 148 146 145 141 137 136 135 111 115 110 105

Source: Nirmal Bang Institutional Equities Research


Blue Star

Key risks

Significant slowdown in consumer spending could impact industry demand and affect BLSTR’s revenue growth.

AC is a seasonal product and has high dependence on the summer season. Any permanent shift in the weather pattern that reduced the intensity of the summer season in India can impact the growth prospects of AC industry.

Any unforeseen rise in competitive intensity could impact the margins.

Any adverse change in terms of trade could lead to elongation in the working capital cycle.

Any disruption in manufacturing plants of BLSTR could impact the availability of products.

Wild fluctuations in commodity prices, if they cannot be passed on to the consumers, could impact profitability.

Any adverse government policies that may favour imports instead of local manufacturing could impact BLSTR’s competitive position.

Any execution challenges in existing EMPS projects could affect the revenue growth and margin profile.

Any slowdown in capex from government-funded infrastructure projects, commercial building construction and industrial projects could impact the order inflow traction.

Company background

BLSTR was founded during World War II on 27 September 1943 by Mr. Mohan T. Advani as a three-member team repairing and reconditioning air-conditioners and refrigerators. Today, it is a prominent player in the air-conditioning and commercial refrigeration industry in India with a strong foothold in international markets. Its integrated business model of being a manufacturer, installer and after-sales service provider, offering comprehensive solutions for the residential, commercial and infrastructure segments has proved to be a significant differentiator in the market place. The traditional central air-conditioning business has successfully morphed into a full-fledged electro-mechanical turnkey solutions provider delivering superior project delivery. This leading B2B firm has, in recent years, acquired a prominent B2C profile as Blue Star has become a brand to reckon with in the residential segment after its foray into the room air-conditioner in FY11. It is further diversifying and entering new consumer durable categories such as air coolers, water purifiers and air purifiers. With a turnover of over Rs46bn, it has a network of 32 offices, five modern manufacturing facilities, over 2,800 employees, and a robust channel management system comprising 3,000 channel partners and 1,000 retailers as well as 800 service associates reaching out to customers in over 800 towns. It exports to 19 countries across the Middle East, Africa, SAARC and ASEAN regions. BLSTR was listed on the Bombay Stock Exchange on 18 September 1969, and over the last 49 years has ensured dividend pay-out every year. The current year marks the platinum jubilee year for BLSTR as it has successfully completed 75 years of existence.

Exhibit 60: Company evolution timeline



Blue Star

Exhibit 61: Key management personnel

Name Profile

Mr. Suneel Advani – Chairman

Mr. Suneel Advani is a double graduate in Electrical Engineering and Economics from MIT, USA. He also holds an LLB degree from Mumbai University. He has spent his entire working career in BLSTR, joining as a management trainee in 1969 and moving up steadily to president and vice chairman levels in 1984. He retired from his executive position in 2014, and was designated vice chairman of the board. He was elevated to chairman of the board in December 2016. Out of his 50 years in BLSTR, he has been on the board of directors for 36 years. He has served on the managing councils of several industry and trade bodies, such as CII, and is the founder and past President of Refrigeration and Air Conditioning Manufacturers’ Association (RAMA).

Mr. Vir Advani – Vice Chairman and Managing Director

Mr. Vir Advani holds bachelor degrees in Systems Engineering and in Economics from the University of Pennsylvania. He has also completed a comprehensive Executive Management Program in Leadership Development at Harvard Business School. After a two-year stint in private equity in New York, he joined Blue Star Infotech in 2000 and then founded Blue Star Design and Engineering in 2003, designated as its chief executive officer. In 2007, he moved to BLSTR as vice president - corporate affairs, where he made valuable contribution in a profit improvement programme as well as in electro-mechanical projects. He rose through the ranks over the years to become the vice chairman and managing director. He is also an elected member of the CII National Council and a member of various national committees including International, Future Businesses, Artificial Intelligence and India@75.

Mr. B. Thiagarajan – Managing Director

Mr B. Thiagarajan holds a Bachelor of Engineering degree in Electrical and Electronics from Madurai University. He has also completed the Senior Executive Program of London Business School. He has around four decades of experience, having worked for reputed companies such as Larsen& Toubro, BPL Systems, and Voltas, prior to joining Blue Star in 1998. He has handled various assignments in the service business, corporate communications & marketing and corporate affairs & planning before he was promoted as president - AC&R products group in 2009. He was elevated to the board in 2013. He was appointed as joint managing director in 2016, and currently oversees sales and marketing, supply chain and service operations pertaining to the products business, manufacturing and R&D, corporate communications, public relations, corporate marketing services as well as human resources. He plays an active role in various industry forums, and is the past president of Refrigeration and Air Conditioning Manufacturers Association (RAMA). He is a nominated member of the CII National Council, co-chairperson of CII National Agriculture Council, and chairman of CII Maharashtra State Council.


Exhibit 62: Plant location

Plant location State Key products

Kala Amb – 1 Himachal Pradesh Air-conditioner

Kala Amb – 2 Himachal Pradesh Air-conditioner

Wada Maharashtra Chiller, cold-room products, water cooler, deep freezer

Dadra Dadra & Nagar Haveli Ducted AC, VRF system

Ahmedabad Gujarat Commercial refrigeration products like chest freezer & chest cooler

Sri City Andhra Pradesh Air-conditioner (at proposal stage)


Exhibit 63: Shareholding pattern

Shareholding pattern (%)

Promoters 38.8

Mutual funds 20.5

Aditya Birla MF 4.4

HDFC MF 4.4

SBI MF 2.9

Sundaram MF 2.3

ICICI Prudential MF 2.1

UTI MF 1.4

Franklin Templeton MF 1.2

Foreign portfolio investors 8.5

First State Indian Subcontinent Fund 2.0

Scottish Oriental Smaller Companies Trust PLC 1.5

Caisse De Depot Et Placement Du Quebec 1.1

Alternate Investment Funds 1.5

Non-institutions (including retail) 30.6

Note: Data as on 31 December 2018, Source: Bombay Stock Exchange

Promoters, 38.8

Mutual funds, 20.5

Foreign portfolio investors, 8.5

AIF, 1.5

Non-institutions (including retail),

30.6


Blue Star

Consolidated financial statements

Exhibit 1: Exhibit 64: Income statement


Net sales 43,852 46,390 51,240 59,574 68,641

% growth 15.5 5.8 10.5 16.3 15.2

Raw material costs 31,123 34,550 37,405 42,655 48,735

Staff costs 3,390 3,977 4,253 5,064 5,629

Other overheads 7,116 5,204 6,389 7,675 9,068

Total expenditure 41,628 43,731 48,047 55,393 63,432

EBITDA 2,224 2,659 3,193 4,181 5,210

% growth 3.5 19.6 20.1 30.9 24.6

EBITDA margin (%) 5.1 5.7 6.2 7.0 7.6

Other income 346 170 250 279 303

Interest costs 378 287 510 504 479

Depreciation 606 638 703 715 745

Exceptional items - 53 50 - -

Profit before tax 1,586 1,956 2,280 3,240 4,289

Tax 367 494 570 907 1,244

Share of profit in associates 13 (19) (220) 10 10

Adjusted net profit 1,230 1,387 1,437 2,340 3,052

% growth 5.5 12.7 3.6 62.8 30.4

Adjusted PAT margin (%) 2.8 3.0 2.8 3.9 4.4

Adjusted EPS (Rs) 12.8 14.4 14.9 24.3 31.7

% growth 5.5 12.7 3.6 62.8 30.4


Exhibit 2: Exhibit 66: Balance sheet


Share capital 191 192 193 193 193

Reserves & surplus 7,380 8,121 8,563 9,684 11,401

Net worth 7,571 8,313 8,756 9,877 11,594

Minority interest 12 15 15 15 15

Short-term loans 1,959 3,448 4,948 4,698 4,448

Long-term loans 202 259 219 219 219

Total loans 2,161 3,707 5,167 4,917 4,667

Total liabilities 9,745 12,035 13,938 14,809 16,276

Gross block 3,696 4,297 6,111 7,911 9,611

Depreciation 572 938 1,640 2,355 3,100

Net block 3,124 3,359 4,471 5,556 6,511

Capital WIP & intangible assets 773 815 800 700 600

Investments 110 132 132 132 132

Inventories 5,956 8,331 7,787 8,445 9,389

Debtors 9,693 11,251 11,234 12,448 14,227

Cash & bank 966 809 1,930 1,416 1,423

Other current assets 4,804 6,195 5,614 6,261 7,052

Total current assets 21,419 26,586 26,565 28,569 32,091

Creditors 11,772 15,487 13,997 15,464 17,527

Other current liabilities & provisions 4,985 4,310 4,973 5,625 6,472

Total current liabilities 16,757 19,796 18,970 21,088 23,998

Net current assets 4,662 6,789 7,595 7,481 8,093

Deferred tax asset (net) 1,077 940 940 940 940

Total assets 9,745 12,035 13,938 14,809 16,276


Exhibit 3: Exhibit 65: Cash flow


EBIT 1,618 2,021 2,491 3,466 4,465

(Inc.)/dec. in working capital (460) (2,285) 316 (400) (605)

Cash flow from operations 1,158 (264) 2,806 3,065 3,861

Other income 346 170 250 279 303

Depreciation 606 691 753 715 745

Tax paid (-) (364) (357) (570) (907) (1,244)

Income from associates 11 (22) (223) 7 7

Net cash from operations 1,756 217 3,016 3,159 3,672

Capital expenditure (-) (1,011) (914) (1,800) (1,700) (1,600)

Net cash after capex 746 (697) 1,216 1,459 2,072

Interest paid (-) (378) (287) (510) (504) (479)

Dividends paid (-) (865) (1,157) (1,045) (1,219) (1,335)

Inc./(dec.) in short-term borrowing (1,487) 1,489 1,500 (250) (250)

Inc./(dec.) in long-term borrowing 19 57 (40) - -

Inc./(dec.) in total borrowings (1,468) 1,546 1,460 (250) (250)

(Inc.)/Dec. in investments 1,572 (23) - - -

Minority interest 2 3 - - -

Equity issue/(buyback) 11 1 1 - -

Cash from financial activities (1,125) 82 (94) (1,973) (2,064)

Others 890 458 - - - (0) Opening cash balance 455 966 809 1,930 1,416

Closing cash balance 966 809 1,930 1,416 1,423

Change in cash 511 (157) 1,121 (514) 7


Exhibit 4: Exhibit 67: Key ratios

Y/E March FY17 FY18 FY19E FY20E FY21E

Per share (Rs)

Adjusted EPS 12.8 14.4 14.9 24.3 31.7

Book value 78.6 86.3 90.9 102.6 120.4

Valuation (x)

P/E 52.4 46.5 44.9 27.6 21.1

P/BV 8.5 7.8 7.4 6.5 5.6

EV/EBITDA 29.5 25.4 21.2 16.3 13.0

EV/sales 1.5 1.5 1.3 1.1 1.0

Return ratios (%)

RoCE 16.4 18.6 19.2 24.1 28.7

RoE 17.7 18.1 17.4 25.1 28.4

RoIC 19.6 20.5 21.7 27.6 31.9

Profitability ratios (%)

EBITDA margin 5.1 5.7 6.2 7.0 7.6

EBIT margin 3.7 4.4 4.9 5.8 6.5

PAT margin 2.8 3.0 2.8 3.9 4.4

Turnover ratios

Total asset turnover (x) 4.5 4.3 3.9 4.1 4.4

Debtor days 75 82 84 82 81

Inventory days 66 75 79 77 75

Creditor days 133 144 142 141 140

Solvency ratio (x)

Debt-equity 0.3 0.4 0.6 0.5 0.4



Blue Star

DISCLOSURES

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