Lockdown 1.0 in India began on 25 March 2020. AC demand slowed down from March 15, i.e. 17 days (19% of the quarter) and projects business (MEP) impact for 10-12 days (12%).
Blue Star’s Q4FY20 results were well below expectations: A 29% revenue miss and 72% Ebitda miss. Management estimates a Rs 600-crore (30%) revenue loss from seven days of lockdown (8% of quarter) points to bill acceptance delays affecting MEP revenue booking & no year-end channel stocking hurting cooling products (primarily AC). We have cut our FY21E-22E EPS sharply to account for this miss, but believe the 43% YTD correction factors the same.
Lockdown 1.0 in India began on 25 March 2020. AC demand slowed down from March 15, i.e. 17 days (19% of the quarter) and projects business (MEP) impact for 10-12 days (12%). However, the MEP segment impact particularly is disproportionate as client certifications are needed to book revenues, and the bulk of certifications/payments are done in the last two weeks of the financial year.
We believe Blue Star has done some margin kitchen-sinking in Q4 by accounting for higher ECL (expected credit losses). Segment margins were 0.5% after Rs 15-crore provision, on a 22% y-o-y revenue decline. The order book is up 21% y-o-y. Management highlighted that 10% of project sites have reopened & discussions are on for another 10-15%. However, ramp-up will be slow as client payments and safety are focus areas. We have reduced our MEP revenues by 31% in FY21E, to account for incremental 3-6 weeks of lockdown impact till end-May 2020 post-lockdown 1.0 ended on April 14.
March accounts for 50%+ of the quarter’s sales, and Q4 segment revenues were down 15% y-o-y. This is despite the 9% and 19% y-o-y growth in January and February. However, vs market concerns of 90-120 days inventory levels, supply disruptions from China, and no production in lockdown has led to lower system inventory. 3,000 of Blue Star’s 6,000 dealers have opened shop and they believe the industry might see 30-50% y-o-y decline in Q1FY21E as Tier 3-5 cities account for 60-65% of sales.
Given the poor performance in Q4 and also incremental lockdown, we have assumed a 70% y-o-y decline in Q1FY21E revenues vs 50% earlier and reduced our FY21E revenues by 15%. Our PT of Rs 630 (vs Rs 790) at 28x PE FY22E (in line with 10-year median PE) reflects the lowered FY22E EPS.