Stock Review: Blue Star Limited (BSL)

 

Blue Star Limited (BSL) is a leading central air conditioning and commercial refrigeration company. Its other businesses include marketing and maintenance of imported professional electronic and industrial systems and execution of industrial projects. The company has three business segments: electro-mechanical products and packaged air conditioning systems, cooling products, and professional electronics and industrial systems.

 

Strengths

Preferred vendor: The company's strength lies in its superior execution skills compared to that of its competitors. According to a recent Angel Broking report, "With a 30 per cent market share in the central air-conditioning systems segment, the company is the preferred vendor for institutional clients. Its list of national account customers provides repeat businesses."
Healthy order book: BSL's order book on September 30, 2010 increased to Rs 1,998 crore compared to Rs 1,815 crore on September 30, 2009, a growth of 10 per cent. Order inflow increased from Rs 642 crore in Q2FY10 to Rs 715 crore in Q2FY11, representing an increase of 11 per cent.
Presence in high-margin segments: BSL is a diversified player in the air-conditioning industry. However, it focuses on high-margin segments such as commercial refrigeration, cold storage and central air-conditioning. Its margins have improved following an increase in the average ticket size of orders.

 

Concerns

The company is exposed to operating risks arising out of rising input costs, changes in technology and customer preferences, increasing size and complexity of contracts, and growing competitive pressures within the industry. BSL's borrowings have gone up three times during the course of the first half of FY11, owing to an acquisition and the stretching of its working capital cycle. Hence its interest costs have gone up four times.

 

Opportunities

The company has received orders from sectors such as healthcare, education, hospitality, power, steel and transportation. It has also witnessed some revival in the flow of orders from real estate. According to the Angel Broking report mentioned earlier, "The company expects the information technology segment to revive from Q2FY12."

The report further adds that the surge in demand for commercial space and increasing corporate and government thrust on setting up an efficient cold chain infrastructure in the country will trigger demand for centralised air-conditioning and cold storage systems in India. BSL's cold storage division too has high growth potential with the aggregate cost of providing a nation-wide cold chain infrastructure estimated at more than Rs 15,000 crore.

 

Valuations

Over a period of five years, Blue Star has registered a robust average return on net worth of nearly 44 per cent. The stock is currently trading at a 12-month trailing price-to-earnings (PE) ratio of 20.58 (December 14, 2010). This is slightly lower than its five-year median PE of 22.05 times. It has posted a five-year earnings per share (EPS) CAGR of 34 per cent. This translates into a price-earnings to growth (PEG) ratio of 0.61. Given the strong growth prospects across the three segments and a healthy order book you may buy this stock with at least a three-year investment horizon.