Blue Star: Focused on capability and capacity building

18 Jul 2023 , 10:58 AM

Blue Star’s FY23 annual report highlights the gains from the more affordable product range, expanding distribution and also the commissioning of the new SriCity plant which is expected to improve competitiveness in the domestic RAC market. R&D focus will receive a boost from the Rs1bn promoter grant and a new subsidiary in Japan as the company looks to grow exports as an OEM/ODM. Return ratio and FCF was healthy and should see further uptick in a normalised demand scenario.

Product portfolio, distribution and A&P supported FY23: 

Blue Star continued with steady market share gains in the domestic RAC market to 13.5% supported by a more affordable product range (introduced in 2020), strong focus on distribution expansion especially in North (90 new channel partners, 500 new retailers) and uptick in A&P spends. Incrementally, company would gain from the first South port based RAC plant in Sricity which would shorten supply chain/logistics and lower costs. Products business would also see gains from recently commissioned deep freezer plant in Wada which opens up the sub 300ltr market with an indigenous product.

Focus on R&D to boost capabilities, expand market: 

R&D expense grew 10% YoY in FY23 to Rs740m. At 0.93% of sales, it was low but the focus is bearing fruits with 10 new patents (vs. 5 and 3 in FY22/21). The company is now launching the Ashok M Advani Innovation Mission (supported by Rs1bn no obligation grant over five years by promoter) to fast track the R&D focus. It has incorporated a new subsidiary in Japan to focus on refrigeration cycles, control algorithms and control boards for Residential and commercial AC to cater to both Indian and export markets (new subsidiaries in NA/EU) as an OEM/ODM.

FY23 saw healthy FCF and return ratios: 

At 25.7%, Blue Star reported its highest ROCE in past decade backed by recovery in products and a strong revival in projects business with 6.9% margin. FCF at Rs653m was impacted by Sri City capex and Rs3bn increase in WC even as cycle was stable. A more efficient supply chain domestically and normalised logistics for imports should aid FCF and return ratios incrementally in analysts of IIFL Capital Services view.