Mixed set of numbers; post the recent correction, upgrade to BUY
- Lower than expected revenue booking from EMP&PACS segment mainly led to the Q1FY20 revenue and EBITDA miss. Despite EBITDA miss, lower finance costs & higher other income than our estimates, led to slightly higher than expected PAT.
- Bluestar reported the largest Metro order worth Rs2.53bn (from Mumbai Metro), thereby taking the total OB to Rs28.4bn (sitting on highest ever OB) at Q1FY20-end from Rs21.2bn a year ago. Weak economy and management precedence to focus on balance sheet over P&L restricted the EMP&PACS segment (39.6% of Q1FY20 revenues) revenue growth on YoY basis to 0.7% in Q1FY20. Slow-down in execution and completion of high margin order (resulted in Q1FY19 EBIT% at 6.4%) led to decline in Q1FY20 EBIT% at 5.4%.
- UP segment (57.6% of Q1FY20 revenues) reported 9.2% YoY revenue growth in Q1FY20. 70% of segment revenues were from RAC’s, which grew 25% YoY (v/s 22% YoY industry growth). Owing to inventory liquidation (new age products with non-ozone depleting refrigerants were launched in Q1FY20), Commercial Refrigeration products (account for 30% of segment revenues) reported 30% YoY de-growth. Segment margins declined from 11.4% a year ago to 10.9% in Q1FY20, mainly owing to higher share of II & III star rated RAC’s. Notably, share of Inverter RAC’s to total AC for Bluestar declined to 52% (v/s industry mix of 60% for Q1FY20).
- In Q1FY19, CT scanner order was executed. In absence of such large order getting executed in Q1FY20, revenues declined 22.7% YoY to Rs446mn. After Q3FY18, segment margins for the first time were below 10% levels at 9.9%.
- Consol. revenues grew 4.5% YoY (driven by 9.2% growth in the UP segment) to Rs15.75bn. Gross margin compression (declined from 25.6% a year ago to 24.8% in Q1FY20) and 11.7% increase in employee expenses led to decline in YoY EBITDA margins (from 9.1% a year ago to 7.3% in Q1FY20). Fall in interest expenses (net cash in Q1FY20 was at 7.4mn v/s net debt of Rs4.03bn in in Q1FY19) and higher other income (includes Rs140mn received as subsidy for Wada plant) led to 4.9% PAT margins in Q1FY20 versus 6.1% reported in Q1FY19.
Valuation: At the CMP of Rs709, BLSTR is trading at FY21E P/E multiple of 26x. On considering BLSTR’s healthy financials with 17.4% earnings CAGR during FY19-FY21E, rising return ratios, healthy cash generating potential and comfortable leverage position, we assign 31x FY21E earnings to our EPS estimate of Rs27.3 to arrive at target price of Rs846. Post the recent correction in stock price, given the 19% upside from current levels, we upgrade to BUY on the stock.