We recently met with the management of Blue Star (BSL) for an update on business. The overall macro-environment view was that of continuing sluggishness as new orders remain elusive in electromechanical projects and packaged airconditioning (EMPS) business. It continues towards closure of low margin orders in a bid to improve overall EMPS margins.
With Blue Star facing challenges across business segments, we believe revival is likely to be time consuming with positive results expected only from FY15. The stock is trading at 16.4x and 11.9x consensus earnings for FY14e and FY15e, respectively. We do not have a recommendation on the stock as it is currently not under our coverage.
Sluggish market continues to hurt EMPS business as project finalisation are getting delayed. Further deterioration unlikely but project-awards could stall 3-4 months prior to polls. It plans to cut workforce by 8-10% in EMPS during FY14.
In AC business, while volume pickup has helped improve margins, competitive intensity continues to remain high, putting margins under pressure. The new energy efficiency norms, expected to kick in from January 2014, is likely to see price hikes of 10%. While BSL?s strategy to improve overall profitability remains intact, weak macros/ uncertainties are likely to delay turnaround to FY15.