Blue Star share price: Jefferies says BUY, Check target price

Jefferies says that Blue Star Management mentioned that by end May-early June most markets should reopen. Punjab and Haryana have issued a notification that air coolers are a part of essential goods in the lockdown and retail associations are putting pressure for incremental products also. Launch of mass premium AC products is targeted for North India and Tier II-V cities. Advertising strategy is centred on this with Virat Kohli’s (India’s national cricket team captain) contract expected to run for 3 years. Market share target is 14% for FY22E vs 13.25% exit run-rate in 4QFY21. Industry e-commerce sales have possibly risen to 16-18% from 10-12% YoY in FY21, though trends are being watched.

Blue Star’s 4QFY21 cooling segment margin was 7.9% and lower than 10.4% seen in 4QFY19. Energy rating upgrade is delayed to 1st Jan 2022 from 2021 and will need a 7% hike to pass on the associated cost increases. Commodity price rise will also need to be passed on. Management mentioned they are not concerned about taking hikes as the industry will need to do it since industry EBIT margins are less than 10%. Design initiatives are reducing costs. These include removing features which consumers don’t use or reducing material required through lower tube/pipe sizes. Operating leverage and costs could limit price hikes eventually needed to meet target margins. Jefferies FY22E-23E segment margin assumption is 8.5%. Every 50 bps margin change is 4% impact on EPS.

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Jefferies says that Blue Star’s 4QFY21 projects business margin was 6.2% vs 0.5% YoY. Management mentioned they are positively surprised with the momentum in order finalisation even with the COVID resurgence. Competitive intensity has not risen and Blue Star’s focus is to choose projects where cash flows are assured and not market share. Manufacturing, healthcare, process industries including F&B and infra is helping to offset the weakness in the commercial real estate segment.

Cash flow focus and incremental news on activity pick-up to drive upside:

Blue Star management is known for its Balance Sheet management, which Jefferies believe is important in the current environment. Jefferies price target of Rs 1000 is based on 35x FY23E PE - 14% premium to the 10-yr average.

Blue Star Key risks:

1) Weak AC season in 4QFY22 due to weather

2) Sizeable order book cancellations