Near term demand and margin concerns weigh on Blue Star

The early onset of summers and channel stocking ahead of peak sales season is expected to have helped the company’s Q4 performance. The same helped lift Q4 revenue growth of 24% year-on-year (y-o-y) and 43.4% sequentially.Premium
The early onset of summers and channel stocking ahead of peak sales season is expected to have helped the company’s Q4 performance. The same helped lift Q4 revenue growth of 24% year-on-year (y-o-y) and 43.4% sequentially.
 2 min read . Updated: 11 May 2021, 10:34 AM IST Ujjval Jauhari

Blue Star Ltd's decent Q4 show has not been a reason for rejoicing among investors. The reason being an uncertain near-term outlook. The lockdowns in many parts of the country during the peak summer add to concerns on the sales growth during FY22. June quarter sales remain important to drive overall growth during the financial year. The rising commodity prices, too, remain a cause for worry and can put pressure on margins.

“We believe, the second wave of the pandemic will impact the overall growth recovery in both project and cooling product segments" said analysts at ICICI Securities Ltd in a note.

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The company in the meanwhile had reported decent growth during the March quarter. The unitary cooling products segment registered 31% year-on-year growth in revenues during the quarter. Electro-mechanical projects and commercial air conditioning systems too had seen 18% year-on-year growth. The growth recovery in Q4 after the demand seeing impact during the first half of FY21 had remained encouraging. The early onset of summers and channel stocking ahead of peak sales season is expected to have helped the company’s Q4 performance. The same helped lift Q4 revenue growth of 24% year-on-year (y-o-y) and 43.4% sequentially.

On the positive side, the room air-conditioning market grew by 27% y-o-y in Q4FY21 and Blue Star was able to beat this growth, say analysts. Blue Star grew by 33% and increased its market share to 13.2% (compared with 13% in 9MFY21) suggests analysts’ data. Growth opportunities remain strong looking at a strong brand name and underpenetrated AC market in the country.

Even April saw a good start and sales remained strong during the first half of April say analysts. The lockdowns thereafter have played a spoilsport. “State lockdowns impacted demand for room ACs in April 2021, with sales for Blue Star down 20% y-o-y versus April 2019 sales," said analysts at Motilal Oswal Financial Services Ltd (MOFL).

The impact on the sales during first half remains uncertain, feel analysts.

Meanwhile, rising commodity costs remain a matter of concern, too. The company’s Ebitda margins during Q4FY21 at 6.3% came lower than 7.3% in Q3FY21. This was despite some price hikes during January. The company has taken another price hike of 3-5% from 1 April and the impact will be watched for.

Analysts at MOFL in their note also said that the delay in the scaling up of water purifier division is also adversely affecting the overall margins and returns on capital employed.

Not surprising, analysts are cutting their forward estimates. Those at Jefferies India Pvt. Ltd said that "Q1FY22 AC revenues should see some impact of state lockdowns. We reduce FY22-23 estimated earnings per share by 5-8% to reflect this and the lower margins".

The stock was trading more than 1% down in morning trades of Tuesday.

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