Blue Star Q4FY21 Con-call Analysis | Yadnya Investment Academy

Financial Highlights for Q4

• All business segments witnessed growth compared to Q4 levels last year. Cost rationalization  and capital preservation measures with addition to prudent working capital management resulted in healthy of cash from operations.
• This led company to close FY21 with strong balance sheet and healthy liquidity position.
• The company’s revenue from operation grew to Rs. 1611.56 crores for Q4FY21 as compared to Rs. 1299.36 crores in Q4FY20. A growth of almost 24% YoY.
• EBITDA stood at Rs. 101.81 crores which was 6.3% of revenue for Q4FY21 compared to Rs. 37.33 crores which was 2.9% of revenue for Q4FY20. EBITDA grew by 173% QoQ.
• Other income in Q4FY21 includes a sale of an office property in Mumbai for Rs. 32 crore.
• Profit Before Tax Before Exceptional Items was Rs. 103.34 crores for Q4FY21 as compared to Rs. 13.08 crores for Q4FY20.
• Net profit for Q4FY21 stood at Rs. 67.11 crores when compared to Q4FY20 net profit of Rs. 35.86 crore, a growth of 87%.
• Net Borrowings for Q4FY21 reduced by Rs. 282.46 crores due to healthy cash from operations and improvement in efficiency of working capital.

Financial Highlights for FY21

• Revenue from Operations stood at Rs. 4263.59 crores for FY21 on a consolidated basis, as compared to Rs. 5360.19 crores in FY20, a decline of (24.3)%.
• The EBITDA ( excluding other income and finance income ) for FY21 was Rs. 239.81 crores which is 5.6% of revenue as compared to Rs. 282.78 crores which is 5.3% of revenue in FY20. A decline of 15%.
• Improved profitability across business coupled with cost rationalization measures led to improved EBITDA margin.
• PBT before exceptional items stood at Rs.145.15 crore in FY21 as compared to Rs. 210 crore in FY20.
• Net Profit for FY21 was Rs. 100.35 crores, which is a de-growth of (30)% when compared to Rs 143.25 net profit in FY20.
• Capital Employed reduced to Rs. 736.41 crore on Mar 31 as compared to Rs. 948.6 crore on Dec 31, 20, and Rs. 951 crore on Mar 31, 20. This happened due to the company’s continued focus on working capital efficiencies.
• Finance Cost increased to Rs. 64.72 crores in FY21, when compared to finance, cost Rs. 29.47 crores in FY20. The increase in cost is due to the increased cost of funds and additional borrowings during FY21.
• Tax expense for FY21 was Rs. 47.09 crores as compared to tax expense of Rs. 65.32 crores in FY20.
• The Company had a Net Positive Cash Balance of Rs. 151.45 crores on March 31, 2021. There was a Net Borrowing of Rs. 131.01 crores as  31 Dec 2020. Net Borrowing of Rs. 155.00 crores is present of the balance sheet as on Mar 31 2020.
• Debt to equity ratio currently stands at 0.21.
• EPS for FY21 was Rs. 10.42 as compared to Rs. 14.87 in the FY20.
• Carried Forward Order Book on 31 March 2021 was Rs. 2952.42 crores when compared to Order Book of Rs 2946.59 crores as on 31 Mar 2020.

Business highlights for FY21

1. Electro-mechanical Projects & Commercial Air Conditioning Systems:

• The revenue grew by 18.1% from Rs. 660.39 crore in Q4FY20 to Rs. 779.96 crore in Q4FY21. The result for this segment stood at Rs. 48.5 which comes as 6.2% of segment’s revenue, the same margin was 0.5% in Q4FY20 with result of Rs. 3.17 crores.
• For the year FY21, the segment revenue was Rs. 2218.72 crore when compared to FY20 segment revenue of Rs. 2826.67 crores, a decline of (21.5)%. The result for the segment stood at Rs. 106.49 crore with a margin of 4.8% of the segment revenue in FY21. In FY20 the result for the segment was Rs. 120.26 crore with a margin of 4.3% of the segment revenue.
• The segment had an order inflow of Rs. 2244.84 crore in FY21 as compared to Rs. 3104.7 crore in FY20.

Electro-mechanical Projects Business

• As the commercial buildings sector which is yet to recover, slow order inflow was expected in the segment.
• Order inflows were also impacted as govt expenditure in infrastructure was muted.
• Due to Make in India initiatives of the government, order inflows from the factories and light industrial sector improved when compared to last year.
• The company continued to moderate the pace of execution, basis assessment of customer profile and operating cash flow visibility for the ongoing jobs helped company to improve margins for the business.
• The infrastructure sector is expected to offer immediate growth opportunities. Hence, the company continues to focus on metro railways, electrical substations and water distribution.
• Good opportunities in coming quarter are also expected from factories, data centres and warehousing sectors.
• Carry forward order book for this business was Rs. 2149 crore on Mar 31, 21 against Rs. 2039 crore on Mar 31, 20 which is a growth of 5.4%.
• Segment wise breakup for the carry forward book of this business is

Commercial Air Conditioning System

• The business increased by 19% during the quarter. The order inflows continued to be low from IT, Offices, Marriage Halls and Auditoriums, hence the company focused more on the emerging sectors like healthcare, pharma and light industrial.
• The company continued to be 1^st position in Ducted Air Conditioning, 2^nd in VRF and 3^rd in Chiller product categories.
• Some of the major orders bagged by the company in Q4FY21  were from Birla Cement (Nagpur), Avenue Supermarts (Vijaywada/Surat), ISRO (Bangalore), Flextronics (Chennai), Gujarat Biotechnology (Ahmedabad) and West Coast Pharmaceuticals (Ahmedabad).

International Business

• As business activities normalised, the company saw growth in revenue during the quarter. Company saw improved demand for air conditioning and refrigeration products across SAARC and ASEAN markets as channels stocked up for upcoming summer sales.
• Growth opportunities are expected from upcoming EXPO 2020 in Dubai and FIFA tournament in Qatar. Macro-economic environment can improve due to establishment of trade relations between Israel and UAE and thawing of ties between Qatar and GCC countries.
• Project business continued to face impacts due to COVID, while the company’s subsidiary at Qatar received orders in the end of the year which will be billed in FY22.

2. Unitary Products

• The segment revenue grew by 31.1% from Rs. 596.3 crore to Rs. 781.8 crore inFY21. The result for this segment was Rs. 62.06 crore which was at a margin of 7.9% of the revenue as compared to 7.3% margin for Rs. 43.75 crore segment result in Q4FY20.
• The revenue for FY21 stood at Rs. 1859.28 crore as compared to Rs. 2300.61 crore in FY20, a decline of (19.2%). The segment result was Rs. 108.82 crore which was 5.8% of the segment revenue in FY21 as compared to Rs. 162.27 crore in FY20, making 7.1% of the revenue of segment.
• The prices of various SKUs were increased from Jan 1, 21 between 5% and 8% due increase in raw material costs including steek, copper and ABS plastics as well as ocean freight.

Cooling and Purification Products Business

• Inventory stocking by channels before the selling peak season improved share of billing from e-commerce.
• A general business sentiment improvement enable growth in revenue for the room air conditioner business in Q4FY21 when compared to Q4FY20.
• The market for Room Air Conditioner grew by 27%, the company grew by 33% and it expects to have improved market share upto 13.25% in Q4FY21.
• Company continues to gain market share as products like Water Purifiers, Air Purifiers and Air coolers are performing well.
• Company achieved market share of 3% in water purifiers with a major share of billing to e-commerce. As the company has breakeven level in the same, Water purifiers will be an e-commerce centric product in the future.

Commercial Refrigeration Business

• The business received good traction across all products during the quarter. Improvement in demand across all customer segments and aggressive stocking by channel enabled a growth in revenue during Q4FY21 as compared to Q4FY20.
• There was a continued demand from healthcare, pharma and food processing and food delivery segments and order inflows improved from restaurants and the government sector.
• The company has launched a new range of pharma cold rooms, medical freezers, ice lined refrigerators and vaccine transporters by which the company offers end to end solution for vaccine distributors. These products are accepted by govt, vaccine manufacturers and private distributors.
• The company continues to be a market leader in health care and pharmaceutical sector.
• Major orders were bagged by the company from Dr. Reddy’s Labs, Apollo, Aurorbindo Pharma, Zydus Cadilla, Rebel Foods, Swiggy and Reliance Retail.

3. Professional Electronics and Industrial Systems

• The segment revenue stood at Rs. 49,79 crore in Q4FY21, a growth of 16.6% as compared to Rs. 42.69 crore in Q4FY20. The result for the segment was at Rs. 7.22 crore (14.5% of the revenue for the segment) in Q4FY21 as compared to Rs. 7.50 crore in Q4FY20 (17.6% of the segment revenue).
• The segment revenue for FY21 was at Rs. 176.59 crore, a decline of (24.2%) when compared to Rs. 232.91 crore. The segment result stood at Rs. 33.81 crore with a margin of 19.1% of the revenue in FY21 as compared to margin of 23.3% and result of Rs. 54.34 crore.
• The numbers were higher in FY20 due to few large orders in Data Security Solutions business.
• The revenue for this segment currently is driven from the opportunities in BFSI sector for Data Security Solutions Business, order inflows from the healthcare sector and orders from the essential services of the govt sector.
• Major orders were received in Q4FY21 from FIS Payment Solutions and Services, Navodaya Education Trust, Jio Platforms Limited, IndusInd Bank and ICICI Bank.

Business Outlook

• Robust business recovery in second half of the year helped the company with a strong quarter.
• In Electro-Mechanical projects business, the company continues to prioritize project execution based on assessment on customer credit profile and operating cash flow visibility. The govt’s focus on localisation as brought good opportunities in manufacturing sector.
• The company has strengthened the portfolio in all categories.
• The restrictions due to lockdown in varying degrees in various parts of the country may impact the planned revenue growth for April and May.
• Company is focusing on maximizing the revenue from the markets which are open while also moderating the inventory levels and operating costs.
• Factories at Himachal Pradesh, Dadra and Ahmedabad are operational Wada plant is operational for executing export orders and domestic pharma and healthcare contracts.

Impact of localised lockdowns on air conditioner market

• Business activities were normal till middle of April. Second week of April onwards the impact of lockdown was felt. The overall impact in April was around 20% compared to performance in April 2019.
• Impact on May would depend on the states action of relaxing the lockdown restrictions. There is going to be impact in Q1. The company will respond to the changing circumstances.
• Because of the good sales in March and good first half in April, the inventory levels are normal at this point.
• The company does not expect the inventory levels to rise compared to normal levels at the end of quarter.
• The levels also depends on the time taken for the business activities to get back to normal. The company has put in place necessary course correction levels for production.

Competitive measures

• The intensity of competitiveness stays similar to the previous levels. The intensity also got increased by the increase in the input and ocean freight costs.
• Company will continue to respond to such competitive measures as done in past.

Gross Margins

• The increase in input cost was a primary trigger for gross margins in Q4FY21. It started in Nov-Dec and the intensity increased in Q4.
• Hence the company did course corrections. The company had implemented price increases from 5%-8% in Q4FY21 and that impact was visible in margins for the same quarter.
• Company has also taken a further price increase in April in range of 3%-5%.
• The company expects commodity prices to cool off as when the market conditions normalize.

Other Costs

• The other costs include SG&A and overall reduction was at 36% for FY21. The company had implemented a set of incisive cost rationalization measures from April 20. These cost elements reduced were such as travel, renegotiated rentals with warehouse owners and office premises.
• Product launches happened virtual in FY21 also added in reduction of costs.
• Some part of operating cost reduction achieved last year will continue while some part may come to normal levels as the business starts to normalize.

Non AC Unitary Products

• The non AC room Unitary products largely include Commercial Refrigeration. The company continues to see positive response for this products across customer categories like healthcare, pharma, food processing and food delivery segment.
• Traditional customers like ice cream manufacturers continue to be challenged.
• The range of pharma and healthcare cold rooms and medical freezers which are specialized equipment are in good demand due to ongoing situation. Company also launched new line refrigerators which are also needed for vaccine transportation.
• Though this opportunity might seem short term, the prospects for pharma and healthcare are encouraging. As the overall situation normalizes, the company expects traditional customers in commercial refrigeration to regain growth.
• The company also has water coolers and water purifiers in Unitary Products. The company has made water purifiers an ecommerce distribution play which is working well. Any product which is suitable for ecommerce distribution has a good prospect in current environment.
• Water coolers sales have been slower than expected because key customers like govt institutions and educational institution are yet to recover fully.
• The impact on construction in not as large as it was in last year. As large year there was a large scale migration of labour, this year the impact is more state specific.

Commodities

• The inventory building for quarter one which is the selling season typically start in Q4 or around Q4 of previous year for which the procurement happens a couple of months ahead from it.
• In that extent, the impact of commodity price increases and ocean freight have already been loaded in raw material inventory cost.
• The company is also going to moderate the pace of production for the next two or three months as it has sufficient stocks to sell in the background of the current wave of disruption.
• The company took price increase of 3%-5% additionally from 1^st April. This price increase is on top of 5%-8% price increase that was taken in Q4FY21 and the slower pace of procurement over the next few months will relatively lower further price increase pressure.
• This challenge will be faced by all players since cost of raw materials and inputs is one major issue to be addressed in order to protect/preserve margins.

Unitary Products Margin

• For two successive quarters, company is around 8% margin in the Unitary Products segment. In Q4FY21 it was 7.9% and in a similar range in Q3. The company is holding their margin profile at around 8% which is in line with its expectations after counterbalancing the impact of increase in commodity prices and ocean freight.
• Operating costs have been relatively low, increase in raw material cost has been significant. The margin of 8% is after absorbing these increases in raw material input costs.
• The company wants to maintain this margin profile and price increases in Q4FY21 and Q1FY22 are with the same intent.

Unitary Products

• Unit 3-4 years ago, room ACs contributed highest market share in this segment. The share of commercial refrigerators is now roughly 40% compared to 30% few years ago.
• The mix is shifting in a healthy way in terms of overall room AC and non-room AC products.
• In commercial refrigeration, the company has a complete new range of cold rooms for the pharma sector.
• The Unitary product share stands 60% with room ACs. In 40%, the largest share is from commercial refrigeration products, and new products like pharma cold rooms, medical freezers and the entire range of vaccine supply equipment.
• Company also offers supermarket refrigeration equipment in which company experiencing good traction from several players.

Water purifier

• The company has 3% market share in water purifiers and the company has achieved break-even for this business in FY21.
• The company feels this category can be distributed well over eCommerce channel till the company hits 5% or 6% market share, after that they will foray into traditional retail stores.

Product margins

• The company is now focusing on the mass premium category.  The customers associate the brand with quality and performance reliability.
• The company tries to maintain price points at which these products can be offered in terms of mass appeal is something we will keep working out.
• Launches in Q4 got good traction. The focus on this segment will continue and the company believes the next wave of growth would come from the mass premium segment for them.
• If there was no sharp rise in raw material costs, the margin of these products would have been compared well with the company’s target margin profile.

Project prices

• The MEP projects are fixed price contracts.
• When company bids for projects and does its costing, it tries to get some back-to-back suppliers commitment for period of time in the same stage.
• If project gets delayed beyond committed period, it creates price issue for the company.
• But there is element of price protection for period of time. Some projects have index linked price variation clause.