 "Blue Star may be a cooler pick than Voltas")
It is the season of smaller companies outperforming larger ones across sectors. The trend is visible in the air conditioning (AC) space as well. While Voltas (with market capitalisation of Rs 12,490 crore) has delivered better returns compared to BSE Sensex (17 per cent versus 10 per cent this year, respectively), Blue Star, with smaller market capitalisation of Rs 5,000 crore has delivered far superior gains (up 33 per cent this year). Both stocks are near their all-time highs. Analysts say outperformance of Blue Star over Voltas may continue, given the strong fundamentals and growth rates.
In June quarter, while domestic AC sector grew 27 per cent, both companies grew ahead of the market. But, Blue Star’s core room AC segment (61 per cent of total revenues) grew 38 per cent over year, while Voltas’s core vertical — unitary cooling products including room ACs, inverter ACs — grew 29 per cent over year. With sales volumes increasing rapidly for Blue Star, it widened its market share to 10.6 per cent in June quarter from less than 10 per cent a year ago. Voltas is the leader in ACs, with 22 per cent market share, and plans to maintain it at current levels in the medium term, the company said. On the other hand, Blue Star aims to grow ahead of the market by at least 10 percentage points, and this would result in further increase in its market share.
That apart, Blue Star’s higher penetration in the emerging inverter AC segment also bodes well. While inverter ACs account for only 16 per cent of Blue Star’s revenues, analysts expect this segment to gather more momentum due to shift in consumer preference towards inverter ACs. Blue Star’s market share in this space was 12.5 per cent in June quarter; ahead of Voltas, eight per cent. Blue Star’s continuous investment in research and development is paying off, helping it stay ahead of peers in the inverter AC segment. “Blue Star’s technology is superior to that of many Indian companies as it is gaining market share without compromising its pricing strategy," said an analyst from a domestic brokerage. On the other hand, Renjith Sivaram, analyst at Antique Stock Broking, said that Voltas was more of a price player and followed outsource and brand model and, hence, may not benefit much from change in market dynamics. “These factors would help Blue Star sustain its outperformance over Voltas,” he says.
On the financial front, Blue Star’s operating profit margin in room AC segment or unitary products category stood at 13.8 per cent and analysts expect margin to increase 100-150 basis points in FY17 with introduction of new models. This, along with an improvement in its institutional business, may lead to a sharp recovery in overall operating margin, which came in at nine per cent in June quarter.
In June quarter, while domestic AC sector grew 27 per cent, both companies grew ahead of the market. But, Blue Star’s core room AC segment (61 per cent of total revenues) grew 38 per cent over year, while Voltas’s core vertical — unitary cooling products including room ACs, inverter ACs — grew 29 per cent over year. With sales volumes increasing rapidly for Blue Star, it widened its market share to 10.6 per cent in June quarter from less than 10 per cent a year ago. Voltas is the leader in ACs, with 22 per cent market share, and plans to maintain it at current levels in the medium term, the company said. On the other hand, Blue Star aims to grow ahead of the market by at least 10 percentage points, and this would result in further increase in its market share.
That apart, Blue Star’s higher penetration in the emerging inverter AC segment also bodes well. While inverter ACs account for only 16 per cent of Blue Star’s revenues, analysts expect this segment to gather more momentum due to shift in consumer preference towards inverter ACs. Blue Star’s market share in this space was 12.5 per cent in June quarter; ahead of Voltas, eight per cent. Blue Star’s continuous investment in research and development is paying off, helping it stay ahead of peers in the inverter AC segment. “Blue Star’s technology is superior to that of many Indian companies as it is gaining market share without compromising its pricing strategy," said an analyst from a domestic brokerage. On the other hand, Renjith Sivaram, analyst at Antique Stock Broking, said that Voltas was more of a price player and followed outsource and brand model and, hence, may not benefit much from change in market dynamics. “These factors would help Blue Star sustain its outperformance over Voltas,” he says.
On the financial front, Blue Star’s operating profit margin in room AC segment or unitary products category stood at 13.8 per cent and analysts expect margin to increase 100-150 basis points in FY17 with introduction of new models. This, along with an improvement in its institutional business, may lead to a sharp recovery in overall operating margin, which came in at nine per cent in June quarter.
Electro-mechanical projects and packaged air conditioning systems (EMPs and PACS) and professional electronics and industrial systems (PEIS) are two key segments catering to corporate and institutional clients. The two segments account for over 35 per cent of total revenues. Order book of EMP and PACS segment grew 19 per cent over year to Rs 1,724 crore in June quarter and Blue Star is confident of sustaining the order win pace. Margins in EMP and PACS, too, are set to improve from the current one per cent. Orders are expected to catch up in FY17 for PEIS segment, too. With this, margins may inch back to the year-ago level of 16 per cent from the current 13 per cent.
The institutional business witnessed an improvement in order execution in June quarter and this momentum is likely to sustain. Analysts say strong recovery in institutional operations will further support Blue Star’s stock rally. With profit expected to grow at a fast pace, Blue Star’s stock should continue to do well. Analysts at Emkay Global have upgraded their FY17 and FY18 earnings per share estimates for Blue Star by 1.2 and 1.5 per cent, respectively, on the back of improving fundamentals.
