Emkay Global Financial Services has retained `Hold` on Blue Star with a price target of Rs 185 as against the current market price (CMP) of Rs 171 in its report dated Jan. 31, 2012. The broking house gave the following rationale:
BLSR reports net loss of Rs 328 million - Along expected lines:
BLSR reported a net loss of Rs 328 million for the second consecutive quarter ��" along expected lines. The loss was attributed to (1) 4% y-o-y decline in revenues to Rs5.9 billion - led by 15% y-o-y fall in EMP&PAC segment (2) 680 bps y-o-y fall in gross margins to 17.6% - consequently, BLSR reported its maiden quarter with operating loss at Rs 31 million (3) forex loss of Rs 138 million - unrealized loss at Rs 60 million (4) continued high interest cost at Rs 83 million.
Segmental performance - EMP&PAC reports EBIT loss; Cooling Products and PEIS meet expectations:
> EMP&PAC - EMP&PAC segment performance continued to be impacted by execution and completion of old slow moving and low margin orders, cost over-runs in few projects and sharp rise in input prices. Consequently, revenues declined 15% y-o-y to Rs 3.7 billion while EBIT loss was at Rs 152 million - below expectations.
> Cooling Products - Revenues grew sharply by 28% y-o-y to Rs1.6 billion - led by (1) entry in room air-conditioners (2) expansion in Tier 2,3,4,5 cities (3) continued momentum in commercial refrigeration. However, EBIT margins declined 360 bps y-o-y to 4.4% due to high input costs (largely imported items), high inventory levels and increase in advertisement and dealer distribution costs.
> PEIS division - Performance met expectations with 16% revenue growth and 22.5% EBIT margins (down 360 bps y-o-y).
Order inflows decline 17% y-o-y to Rs5.9 billion ��" But YTD achieves 73% of
BLSR`s order inflows declined 17% y-o-y and 12% qoq to Rs 5.9 billion marginally below estimates. Order inflows were led by hospitals, education and hospitality sectors while contribution from commercial real estate and IT/ITES sector remained subdued. It has thus far secured 73% of FY12E target order inflows and the implied growth in Q4FY12E stands at an achievable -3% y-o-y or Rs 7.7 billion. BLSR`s order book increased 3% y-o-y to Rs 21.6 billion.
Key highlight - Working capital situation improves; Debt reduces by Rs 1.6
BLSR has reported sharp improvement in its balance sheet quality - in line with BLSR`s realigned business strategy (refer our management meet update dated 21 Dec’11) and addressing primary investor concern. Its net working capital has gone down from +200 days to 180 days - led by reduced inventory and debtors and increased payables. Correspondingly debt has also reduced sequentially by 26% to Rs 4.6 billion - key highlight of the quarter.
Downgrade FY12E earnings for FY12E - Expect loss of Rs 1.4 per share:
We downgrade our earnings estimates to factor (1) weaker then expected 9MFY12 performance (2) higher then expected cost over-runs on legacy orders of Rs 10 billion continuation in Q4FY12E and (3) rise in input costs and depreciation of INR/USS. We have downgraded our FY12E earnings - we now expect a loss of Rs1.4 per share Vs profit of Re0.6 per share previously. We have marginally downgraded our FY13E earnings by 3% to Rs14.5 per share. However, key upside risk to our earning estimates is benign commodity price environment ��" since the order book is largely comprised of fixed price projects.
…But retain Hold rating ��" amidst near term concerns:
We believe that above mentioned emerging positive catalysts coupled with the improvement in balance sheet reported far outweigh the dismal operational performance during Q3FY12. However, we believe that BLSR will continue to under-perform in the near term - given the pressure on profitability in the near term. We retain our Hold rating on the stock with price target of Rs185 per share, would review the rating in Q4FY12E on further improvement in balance sheet and business fundamentals.
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