Blue Star Ltd. share price target

We recommend a BUY on the stock with a target price of Rs 1,930/share, implying an upside of 10% from the CMP

We met with the management of Blue Star (BLSTR) to understand recent trends in the AC industry and mgmt outlook for FY26. BLSTR expects ~20- 25% YoY revenue drop in RAC in Q1FY26 due to a high base and unseasonal rains, partly offset by steady growth in CACs (~10-12%, led by data centers) and Commercial Refrigeration (~15-20%, led by visi coolers/freezers).

Major player in MEP (Mechanical, Electrical, Plumbing, and Firefighting) solutions.

Topline jumps 20.4% in Q2, with gross margin rising 170bps due to better product mix and material cost reductions

Q1FY25 revenues grew by 28.7% to Rs 2,865 crore in line with our estimate of Rs 2,895 crore.
Unitary products segment (room ACs and commercial refrigeration) grew by 44% to Rs 1,729 crore
on increased demand due to soaring temperatures and a harsh summer

Monthly Economic Buffet: Economic Round-up April 2024. ACC: Healthy performance largely priced in; maintain HOLD. KEII: Addressing capacity limitations; maintain HOLD. AJP: Strong margins; growth momentum to continue. BLSTR: UCP growth strong, margin outlook healthy. DABUR: Steady performance during the quarter. Metals & Mining: Steel margin pick-up beyond Q2CY24: ArcelorMittal

Blue Star’s consolidated revenues came in marginally higher than consensus estimates, led by strong growth in unitary products. OPM marginally lagged, while net earnings came in better than expectations.

MSIL: Healthy all-round performance raise to BUY. DRRD: Buoyant US sales drive performance. VOLT: UCP improving, Qatar business a dampener. DIXON: Mobile business dials up growth; maintain BUY. KJC: Soft demand, intense competition mar quarter. BLSTR: Purple patch continues; maintain BUY. KECI: Pipeline robust, margin improvement delayed. ABSLAMC: Double-digit growth but market share bleed continues. Metals & Mining: Jindal Stainless: Management meet takeaways

Strong topline growth of 25% YoY in Q3 aided by festive season sales; margin expansion continues

We remain enthused by Bluestar’s strong performance given (1) market share gains in RAC amidst steep competitive pressures and (2) margin expansion led by lower commodity prices and cost-saving initiatives. We believe there is strong earnings visibility over H2FY24-FY25 led by (1) Increase in utilisation at Sri city plant, (2) revival in industrial capex leading to higher growth of commercial air conditioning and commercial refrigeration, (3) strong order book (up 44% YoY), (4) margin tailwinds due to PLI benefits and freight cost reduction.

Sustained, strong performance marked by above-industry growth of 39% YoY in UCP segment along with higher margins in Q2

Blue Star’s Q1FY24 performance was driven largely by better performance in its: (1) electro-mechanical projects (EMP) business (+19.1% YoY), and (2) professional electronics and industrial systems (+48.9% YoY). Unseasonal rains, primarily in North India, hit the unitary cooling product (UCP) business though it managed to grow 6.3% YoY.

Blue Star has reported strong performance compared to peers. While it has maintained strong revenue growth and likely gained market share (in our view), it has been able to maintain healthy profitability.

UCP business shines in Q4, delivering 20% YoY growth and an 8.4% EBIT margin

UCP EBIT margin expands further to 7.4% (+100bps YoY) in Q3; outlook remains positive for Q4

Blue Star has delivered a strong revenue growth of 27.1% YoY in Q2FY23 (vs Voltas: 4.1%, Lloyd: 21.2%). The company has maintained its market share in RAC category at 13.25%.