Q2FY24 Review: Blue Star: Stepping up capex, R&D to grow profitably

1 Nov 2023 , 01:15 PM

Blue Star’s Q2 product business growth at 39% and margin of 8.4% surprised led by gains from affordable product range, design optimisation, logistics savings and strong commercial refrigeration business demand. Post the Rs10bn QIP, focus is on capacity expansion in RAC and CR as well as R&D to drive domestic mkt share gains and push CR in EU/NA markets. Projects business remains well placed with a strong Rs60bn order book despite continued focus on project CF and risk control. Analysts of IIFL Capital Services retain estimates and BUY. Stock is now richly valued at 40x FY25 PER. 

Strong product business performance: 

Blue Star reported strong Q2 revenue growth of 39% YoY for products with 8.4% segment Ebit margin (highest Q2 margin in many years). This was supported by demand recovery during festive season, gains from shift to mass market product portfolio in RAC (helped drive market share gain to 13.5%), robust demand for commercial refrigeration products, and design optimisation to lower costs and logistics benefits from the new Sri City facility in south India. Lower ad expenses also helped. Outperformance should continue at least for a few more quarters before intense competition becomes a factor for Blue Star as well. 

Rs10bn fund raise to support expansion capex: 

Blue Star raised Rs10bn in Sep-23 at Rs770/share. Over Rs6.5bn of this is intended for expansion capex for RAC (Sri City phase II- 0.6m units) and commercial refrigeration (CR) businesses over FY24-25. Balance would be for R&D, digitalisation and funding WC needs for growth. CR business should see healthy 25% Cagr over medium term driven by strong end market demand and import substitution on increasing duties. Blue Star would also target exports for CR to EU/NA markets. 

Projects business growth on track: 

Projects business is well poised to sustain healthy growth with Rs17.65bn OI in Q2 driving 44%/12% YoY/QoQ growth in OB to Rs60bn. Mgmt is confident on 6.5% segment margin with upside risk from faster execution and strong cost focus. Baring commercial buildings, all other infra/private capex led segments continue to drive healthy demand pipeline for Blue Star.