11 May 2017
4QFY17 Results Update | Sector: Others
Blue Star
Neutral
BSE SENSEX
30,251
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
9,422
BLSTR IN
96
67.8 / 1.0
724 / 408
-1/20/40
35
60.9
CMP: INR676
TP: INR650(-2%)
Results below estimates, UCP segment disappoints
4QFY17 performance below expectations:
Revenue increased by 18% YoY
to INR13.8b (est. of INR14.5b) and EBIDTA by 2% YoY to INR0.8b (est. of
INR0.9b). Adj. net profit fell 6.5% YoY to INR372m (est. of INR547m).
UCP
segment’s revenue rose 20% YoY to INR6.5b, below our estimate of
INR7.8b, led by sluggish secondary sales due to continued impact of
demonetization in Jan-17 and weak summer in south India. EBIT margin
shrunk to 10.5% from 10.7% in the year-ago period. BLSTR’s market share in
the Room AC segment expanded 100bp to 11.5% in FY17, which the
company intends to grow by 100bp annually. In the Water Purifier segment,
BLSTR established 135 channel distributors in 80 towns, with a target to
reach 100 towns in FY18. In FY17, the company incurred INR0.3b on brand
building exercise for the Water and Air Purifier segments.
EMP
segment’s revenue grew 18% YoY to INR6.8b, led by improved pace of
execution of projects in hand. Traction was witnessed in the Buildings (IT,
ITES, hotels and hospitality) and Infrastructure (power, metro, healthcare)
segments. EBIT margin expanded to 4.8% from 3.1% in 4QFY16.
Valuation and view:
We maintain our
Neutral
rating, with a revised SOTP-based
price target of INR650 (UCP business at 25x FY19E EPS, MEP at 15x, and
Professional Electronics at 20x). We lower FY18/19 estimates by 5%/6% to factor
in higher ad spend on the Water and Air Purifier segments. Current valuations of
36x FY18E/24x FY19E fully capture strong growth over FY18/19.
FY16
FY17
3QE
4Q
1Q
7,875 11,674 12,168
NA
NA
19.3
352
602
765
NA
NA
1.6
4.5
5.2
6.3
156
177
135
108
108
92
81
107
112
0
0
0
169
424
649
11
34
145
6.4
7.9
22.3
159
390
504
NA
NA
35.7
156
398
514
NA
NA
38.3
2Q
8,890
6.0
405
-8.4
4.6
150
88
98
0
266
73
27.6
193
-1.3
200
-4.6
FY16
FY17E
(INR Million)
FY17
Var.
Vs Est
-5
-12
Financials & Valuations (INR b)
2017
2018E
Y/E Mar
44.0
52.4
Net Sales
2.4
3.2
EBITDA
1.2
1.8
PAT
12.9
19.0
EPS (INR)
-0.7
47.5
Gr. (%)
79.2
84.7
BV/Sh (INR)
18.0
23.2
RoE (%)
15.5
20.4
RoCE (%)
52.4
35.5
P/E (x)
8.5
8.0
P/BV (x)
2019E
61.8
4.4
2.7
28.0
47.6
92.7
31.6
29.1
24.1
7.3
Estimate change
TP change
Rating change
Quarterly Performance (Consolidated)
Y/E March
Sales
Change (%)
EBITDA
Change (%)
As of % Sales
Depreciation
Interest
Other Income
Extra-ordinary Items
PBT
Tax
Effective Tax Rate (%)
Reported PAT
Change (%)
Adj PAT
Change (%)
1Q
10,203
NA
753
NA
8.2
115
103
60
0
594
222
37.4
372
NA
372
NA
2Q
8,391
NA
442
NA
5.3
173
113
49
0
206
10
5.0
196
NA
210
NA
3QE
4Q
4Q
9,178 13,756 38,138 44,008 14,537
16.5
17.8
19.9
15.4
24.5
351
756 2,308
2,355
863
-0.3
25.6
38.0
2.0
43.5
3.8
5.5
6.1
5.4
5.9
155
166
571
606
151
85
114
432
378
112
46
37
138
215
44
0
0
-119
0
0
157
514 1,563
1,586
644
15
133
277
367
97
9.7
25.9
17.7
23.1
15.0
142
381 1,048
1,231
547
-10.6
-2.5
22.0
5.5
40.3
146
372 1,167
1,231
547
-6.1
-6.5
22.0
5.5
40.3
-20
-30
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ankur Sharma
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543

Blue Star
Consolidated Performance below estimates; UCP segment disappoints
UCP
segment reported revenue registered growth of 20.0% YoY to INR6.5b;
below our estimate of INR7.8b. Sluggish secondary sales and weak summer in
southern region impacted the UCP segment revenue growth. EBIT margins stood
at 10.5% v/s 10.7% in 4QFY16. In the water purifier segment Blue star has
established 135 channel distributors in 80 towns and target is to reach 100
towns. For FY17 INR300m has been spent on the brand building exercise for the
water purifier segment. Blue star’s market share in the room AC segment for
FY17 increased by 100bps to 11.5%
EMP
segment reported revenue of INR6.8b, improvement of 18% YoY—led by
improvement in pace of execution of projects in hand. Growth was led by
government investment in the infrastructure segment. Traction was witnessed
in the buildings segment (IT, ITES, hotels and hospitality) and infrastructure
segment (power, metro, healthcare) EBIT margins stood at 4.8% as against 3.1%
in 4QFY16. Capital employed stood INR3.8b in 4QFY17 as compared to INR5.8b
in 4QFY16
Professional electronics
reported revenue improvement of 8% YoY driven by
execution of large projects
Tax rates
have increased to 26% in 4QFY17, vs 8% YoY and for FY18
management has guided for 27-30% tax rate.
Q4FY17 earnings call highlights
UCP segment to see 20-25% growth in FY18 – increasing share in North India
+17% growth in room air conditioner in Q417 vs. 10% industry growth in Q417,
Sluggish industry growth as lower temp YoY in south India, demonetization
impact till January
Blue Star share at 11.5% vs. 10.5% earlier on better penetration and better
product range
FY18 seeing early onset of summer and good monsoon should drive growth
momentum; FY18 industry growth at 15% and 20-22% for Blue Star
Want to increase share in North India and gained 100-150bps in North India and
initiatives are showing results - still most dominated in South
Selling prices under pressure due to higher competitive intensity - Blue Star
maintained its pricing strategy as it differentiates on quality and service
Inverters will continue to grow faster than fixed speed compressor, Volumes
have doubled for Blue Star
Margins under pressure on rising commodity prices and higher ad spends
Room Aircon Margins:
Commodity prices saw an upswing for 5-6 months but
since Q4 volumes were ordered by Sep-Oct, were protected from rise. However,
from Q1 will see impact of increasing commodity prices
Brand Spending:
Stated intent from sale corpus of Blue Star Infotech was to
increase brand building - done in FY17 and will continue to build the brand.
Rs0.1b additional spend on water purifiers in Q317/ Q417 and FY17 saw
INR0.3b of spending, FY18 will see an 100-150bps impact due to this ad spend
INR1.33b of Unallocable expenses in FY18 - Higher on increased ad spending, IT
spending, Office renovation - will continue to grow at rate of inflation
11 May 2017
2

Blue Star
Projects business growth at 12-15% in FY18
MEP industry growth depends on turnaround in private and corporate capex -
still in wait mode, Infra, Metro, Developer driven IT doing well. Blue Star will
focus on commercially viable projects - maintain dominant position in MEP
segment
Sales growth of 12-15% in FY18 and margin in 4.5-5% for FY18
Execution of infra and building segment (IT/ITES) have seen good growth and
Q417 saw better liquidity in this segment
Margins still under pressure due to execution delay, inflation and labor costs
INR19b of order book vs. INR16b as of Mar16, +23% YoY,
Want to be an integrated company which can offer mechanical, electrical and
plumbing together
Valuation and view
We model PAT CAGR of 48% over FY17-19e, largely led by gross margin
improvement and strong sales growth (19% sales CAGR). This is driven by a 28%
EBIT CAGR in UCP business and 11% EBIT CAGR in Engineering Products
business.
We maintain Neutral with a revised SOTP-based price target of INR650 (UCP
business at 25x FY19E EPS, MEP at 15x, and professional electronics at 20x). We
revise down our FY18/19 estimates by 5%/6% to factor in higher ad spends on
the water/air purifier segments. The current valuations of 36x FY18e/24x FY19e
fully capture the strong growth over FY18/19 leading to our Neutral stance.
Exhibit 1: Change in estimate table
Description
Sales
EBITDA
Margin (%)
PAT
New Estimate
FY17
FY18
44,008
2,355
5.4%
1,231
52,410
3,213
6.1%
1,815
FY19
61,764
4,369
7.1%
2,679
Old Estimate
FY18
52,792
3282
6.2%
1,935
FY19
61,828
4430
7.2%
2,813
Change in estimate
FY18
FY19
-1%
-2%
-0.1%
-6%
0%
-1%
-0.1%
-5%
Source:
Exhibit 2: Government spending in infrastructure segment
led to 18% growth in the MEP segment
MEP Revenue (INR m)
5,745
4,396
5,599
5,546
6,797
Exhibit 3: EBIT margin improved 170bps YoY to 4.8%
EBIT Margin
6.0
5.6
3.1
1.2
5.4
5.2
4.8
4,916
3,517
4,583
2.3
Source: MOSL, Company
Source: MOSL, Company
11 May 2017
3

Blue Star
Exhibit 4: UCP revenue growth of 20% YoY
UCP Revenue (INR m)
1024
784
577
129
161
218
145
682
5.2
Exhibit 5: EBIT margin stood stable at 10.5%
14.2
EBIT Margin
13.8
10.7
6.8
7.5
4.6
10.5
Source: MoSL, Company
Source: MoSL, Company
Exhibit 6: Order backlog provides decent medium term
revenue visibility
Order book (INRm)
Exhibit 7: Order inflow supported by government spending
in infrastructure segment
Order (INRm)
Source: MoSL, Company
Source: MoSL, Company
Exhibit 8: Revenue growth driven by strong growth in MEP
and UCP segment
Revenue (INR m)
10,203
11,674 12,168
8,391
7,875
8,890
9,178
13,756
Exhibit 9: EBIDTA margin on sequential basis by 170bps
7.4
5.3
4.5
EBIDTA margin (%)
6.3
5.2
4.6
3.8
5.5
Source: MoSL, Company
Source: MoSL, Company
11 May 2017
4

Blue Star
Financials and Valuations
Income Statement
Y/E March
Total Revenues
Change (%)
Raw Materials
Staff Cost
Other Expenses
EBITDA
% of Total Revenues
Other Income
Depreciation
Interest
Exceptional Items
PBT
Tax
Rate (%)
Reported PAT
Change (%)
Adj. Consolidated PAT
Change (%)
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Minority Intetest
Loans
Deferred Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Current Liab. & Prov.
Creditors
Other Liabilities
Net Current Assets
Application of Funds
2012
28,204
-5.2
21,996
2,207
4,223
-222
-0.8
226
318
721
0
-1,034
11
-1.1
-1,046
-166.0
-1,051
-165.5
2013
29,240
3.7
21,837
2,300
4,199
904
3.1
365
334
528
0
407
25
6.3
381
-136.5
391
-137.2
2014
29,343
0.4
20,865
2,476
4,496
1,505
5.1
179
378
542
1
764
22
2.9
742
94.4
777
98.8
2015
31,819
8.4
22,143
2,675
5,329
1,673
5.3
85
431
485
0
841
-79
-9.4
920
24.1
956
23.1
2016
38,138
19.9
25,541
3,986
6,303
2,308
6.1
138
571
432
0
1,444
277
19.2
1,167
26.9
1,167
22.0
2017
44,008
15.4
31,125
3,390
7,138
2,355
5.4
215
606
378
0
1,586
367
23.1
1,220
4.5
1,231
5.5
(INR Million)
2018E
2019E
52,410
61,764
19.1
17.8
36,660
42,619
4,038
4,758
8,500
10,017
3,213
4,369
6.1
7.1
215
215
702
753
221
127
0
0
2,506
3,705
701
1,037
28.0
28.0
1,804
2,668
47.9
47.9
1,815
2,679
47.5
47.6
(INR Million)
2018E
2019E
191
191
7,899
8,665
8,090
8,856
12
12
1,515
590
-1,464
-1,465
8,154
7,993
8,605
5,007
3,598
215
110
24,127
7,093
10,826
978
5,231
19,908
14,020
5,888
4,219
8,142
9,205
5,759
3,445
215
110
27,663
8,359
12,758
382
6,164
23,461
16,522
6,939
4,202
7,972
2012
180
3,773
3,953
0
3,670
-2
7,621
4,176
2,106
2,070
315
275
18,184
4,467
7,676
537
5,505
13,224
7,359
5,865
4,960
7,621
2013
180
3,827
4,007
0
4,215
-4
8,218
4,692
2,419
2,273
77
272
18,971
5,098
8,351
165
5,356
13,374
8,036
5,338
5,596
8,219
2014
180
4,605
4,785
0
4,944
-14
9,715
5,309
2,755
2,555
155
333
20,307
4,656
8,332
684
6,634
13,634
8,314
5,320
6,673
9,715
2015
180
4,376
4,556
0
3,967
-165
8,358
5,694
3,128
2,566
224
363
18,431
4,785
7,948
443
5,254
13,227
8,860
4,367
5,204
8,358
2016
180
6,124
6,304
10
3,629
-1,860
8,084
7,152
3,699
3,453
63
1,681
18,196
5,348
8,341
454
4,052
15,309
10,820
4,489
2,887
8,084
2017
191
7,380
7,571
12
2,161
-1,430
8,315
8,005
4,305
3,700
215
110
21,007
5,956
9,693
966
4,392
16,716
11,772
4,944
4,290
8,315
11 May 2017
5

Blue Star
Financials and Valuations
Ratios
Y/E March
Basic (INR)
Adj EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
Cash Flow Statement
Y/E March
PBT before EO Items
Add : Depreciation
Interest
Less : Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(Inc)/Dec in FA
Free Cash Flow
Investment in liquid assets
CF from Investments
(Inc)/Dec in Debt
(Inc)/Dec in Equity
Less : Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2012
(11.7)
(8.2)
44.0
1.0
-8.6
2013
4.3
8.1
44.6
3.0
69.1
2014
8.6
12.8
53.2
4.0
46.4
2015
10.6
15.4
50.7
5.0
83.0
2016
13.0
19.3
70.1
6.5
50.1
2017
12.9
19.2
79.2
7.5
60.0
2018E
19.0
26.3
84.7
11.4
60.0
2019E
28.0
35.9
92.7
16.8
60.0
31.4
21.6
20.1
1.1
6.6
1.5
30.8
20.7
18.1
1.0
5.7
1.6
52.4
35.1
27.9
1.5
8.5
1.1
35.5
25.6
20.2
1.2
8.0
1.7
24.1
18.8
14.8
1.0
7.3
2.5
-23.2
-3.7
9.8
11.2
17.7
14.5
20.5
16.3
21.5
16.4
18.0
15.5
23.2
20.4
31.6
29.1
99
58
95
3.7
104
64
100
3.6
104
58
103
3.0
91
55
102
3.8
80
51
104
4.7
80
49
98
5.3
75
49
98
6.4
75
49
98
7.7
0.9
2012
-1,034
318
0
-7
2,105
1,382
-478
904
-3
-481
-775
-4
0
-105
-883
18
524
537
1.1
2013
407
334
0
-27
-1,008
-294
-298
-592
3
-295
545
-68
0
-270
207
-382
537
165
1.0
2014
763
378
0
-22
-557
562
-103
459
-60
-164
729
424
0
-421
732
1,130
165
684
0.9
2015
841
431
0
79
1,228
2,579
-103
2,476
-31
-134
-977
-245
0
-526
-1,748
697
684
443
0.6
2016
1,444
571
0
-277
2,328
4,066
-725
3,340
98
-627
-279
0
-657
-1,293
-2,228
1,210
443
1,653
0.3
2017
1,586
606
0
-367
-892
934
-600
334
0
-600
-1,468
11
0
-853
-2,310
-1,976
454
-1,522
0.2
0.1
(INR Million)
2018E
2019E
2,505
3,705
702
753
0
0
-701
-1,037
83
-578
2,589
2,842
-600
1,989
0
-600
-646
0
0
-1,296
-1,942
47
966
1,013
-600
2,242
0
-600
-925
0
0
-1,913
-2,838
-596
978
382
11 May 2017
6

Blue Star
Corporate profile
Company description
Blue Star is India's leading air conditioning company and
is one of the leading engineering solution provider across
GCC nations as well. Blue Star’s business portfolio
comprises of providing HVaC & MEP solutions. Blue Star
has a proven track record of delivering MEP / HVaC
solution. Blue Star’s product business comprises of
unitary cooling division, in which Blue Star is gaining
market leader with ~11.5% market share.
Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Mar-17
Promoter
DII
FII
Others
39.1
20.6
9.9
30.5
Dec-16
39.1
19.7
10.3
30.9
Mar-16
39.5
19.1
9.8
31.6
Source: Capitaline
Exhibit 3: Top holders
Holder Name
HDFC TRUSTEE COMPANY LIMITED
SAIF ADVISORS MAURITIUS LIMITED
ICICI PRUDENTIAL VALUE DISCOVERY
FIRST STATE INVESTMENT HONGKONG
THE SCOTISH ORIENTAL SMALLER
COMPANIES TRUST PLC
% Holding
5.0
5.0
2.0
1.6
1.3
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
Suneel M Advani
Ashok M Advani
Vir S Advani
B Thiagarajan
Vijay Devadiga
Designation
Chairman
Chairman Emeritus
Managing Director
Joint
Managing
Director
Company Secretary
Exhibit 5: Directors
Name
Gurdeep Singh
Pradeep Mallick
Shobana Kamineni
Rajiv Lulla
Name
M K Sharma
Shailesh Haribhakti
Dinesti Vaswani
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
S R B C & Co LLP
Type
Statutory
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
FY19
MOSL
forecast
12.9
19.0
28.0
Consensus
forecast
14.1
18.6
26.1
Variation (%)
-8.6
2.0
7.5
Source: Bloomberg
Source: Capitaline
11 May 2017
7

Disclosures
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on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur.
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In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
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