Blue Star: Stepping up capex; R&D to grow profitably

8 May 2023 , 10:51 AM

Recommendation: Buy

Target Price: Rs. 1,447

Larger scale, higher backward integration and cost benefits from Sricity should help sustain margins; despite competition. Projects business is on a strong footing, led by a large order book and timely execution. Banking on its innovation and R&D credo, the company aims to be a meaningful global HVACR player with a foray in US/EU for B2B product sales. Overall, the company is targeting 20% revenue CAGR and faster earnings CAGR over the medium term.

Products – targeting higher market share with better profitability

Blue Star management is targeting faster-than-market growth across RAC, Commercial Refrigeration and AC through a well-spread affordable product range, led by enhanced focus on R&D. Scale benefits from this volume growth and cost benefits from Sricity plant should aid margin expansion for products. This is despite expectation of intense competition to continue amid the PLI scheme. Expanding distribution and brand spends would be key supports, for this as well. 

Projects on strong footing; foraying into International B2B segment

Focus on diversifying end markets has played out well with FY23 order book of ~Rs. 50 billion (up 55% YoY) spread across various Infra-led segments. Strong execution and cost optimization has driven margin improvements, which should sustain with cash-flow being the key priority. The company is increasing focus on International business with new subsidiaries in US and Europe to target B2B business through distributors. It is looking to offer competitive and innovative products through its enhanced R&D focus in the next few years.

Stepping up investments; expects ROCEs to sustain

With an eye on expanding scale across domestic RAC, Commercial Refrigeration and international B2B businesses, the company has enhanced its annual capex to Rs. 2.5-3 billion p.a., over the medium term. However, return ratios should be healthy with margins expected to improve due to operating leverage, focus on TCM, product and process innovation through R&D and increased backward integration.