Blue Star Q1 Results Review - Continues To Positively Surprise Us: Nirmal Bang

Nirmal Bang Report

While Blue Star Ltd.'s topline was below our estimate by 7.6% due to lower-than-expected growth in electromechanical projects, Ebitda margin was above our estimate by 88 basis points due to higher-than anticipated margin growth in EMPS.

Blue Star maintained its room AC market share in Q1 FY25 at 13.75%. Volume growth in RAC ranged from 70% YoY in April, ~65% YoY in May and close to ~20% in June (on account of shortage). Industry volume growth was ~50-60%. Blue Star took a price hike of ~3% in RAC in June’24 – mainly a commodity cost + ocean freight cost pass through. Channel inventory remains under 30 days.

Under EMPS, Upward traction in factories and data centre plus pick up in infra cycle are expected to pump up order book growth in FY25. Currently, the company is focused on free cash flow generation and profitability, by expediting the speed of execution of its order book and collection of dues.

We draw high comfort in Blue Star’s business model due to its strategy of chasing profitability and FCF, presence in high growth Comm. Ref. and high-quality order booking from EMPS.

While we remain structurally positive on long term prospects, the stock has run up ~65%+ year CY24. As a result, we maintain Accumulate with SOTP-based target price of Rs 1,550.

This implies a blended PE of 42 itimes on June-26E EPS and it is at ~10% discount to the five-year historical average PE multiple on one-year forward basis.

We believe that the multiple is fair and adequately captures:

1. ~30% EPS CAGR over FY24-FY26E, and

2. post-tax RoCE of ~22% in FY26E.

Nonetheless, we believe it is a long term compounder, and therefore, it should be accumulated at every dip.

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