Buy Blue Star Ltd.

Target Price:- Rs433.95                                                       CM Price:- Rs345.05

Blue Star-Star with a silver lining

Sector- Diversified Large

We rate Blue Star Limited (Blue Star) a BUY. Blue Star is India’s leading central airconditioning and commercial refrigeration company. The company primarily operates in three segments – Central & Packaged Air-conditioning systems, Cooling Products and Professional Electronics & Applied Industrial systems. The company currently has five modern state of the art manufacturing facilities in Thane, Bharuch, Dadra, Kala Amb (Himachal Pradesh), and at Wada in Thane district of Maharashtra. Blue Star primarily focuses on corporate, commercial and institutional customers.

Investment Highlights

Brand Value- The Company made substantial investments in building brand value over the last few years. In FY09, the value proposition of Blue Star as ‘Experts in cooling’, the corporate image building campaign, the room air conditioners and refrigeration products campaign, as well as a packaged air-conditioning capabilities campaign, all continued. The Company also made investments in field marketing. These activities helped the company in strengthening its brand value.

Healthy Order Book- Blue Star’s order book as on June 30, 2009 stood at INR17,170 million, increasing by 21.0%, compared with INR14,100 million as on June 30, 2008. The order book is executable over a period of approximately 9-12 months. The order book continues to be good with a number of newly booked large infrastructure related jobs, providing visibility of earnings in the future.

Acquisition of Naseer Electricals to widen business scope- The acquisition of Naseer Electricals is likely to help the company expand into MEP (mechanical, electrical and plumbing) projects space in the air-conditioning business. This may also increase Blue Star’s market share going forward. Further, the acquisition is likely to enable the company tap the electrical projects opportunity.

Domestic Player-Blue Star is prominently a domestic player, with more than 90% order book coming from the domestic market. Hence international turmoil may not have a severe impact on the growth prospects of the company.

Key Management

• Mr. Ashok M. Advani -Executive Chairman

• Mr. Suneel M. Advani -Vice Chairman & Managing Director

• Mr. Satish Jamdar- Managing Director

• Mr. T.G.S. Babu – Deputy Managing Director

Industry Overview

The estimated total market size for air-conditioning in India in FY09, was at INR102,500 million. Of this, the market for central air-conditioning, including central plants, packaged systems and VRF systems, was approximately INR57,500 million while the market for room air conditioners was INR 45,000 million. The commercial air- conditioning segment catering to corporate and commercial customers was approximately INR80,000 million. The economic slowdown coupled with the liquidity crunch affected certain segments such as retail and builders. Project expansion plans in the IT segment were also delayed mainly due to the uncertain impact of the US recession. However, the air-conditioning market witnessed significant growth in segments such as hospitality, healthcare and education.

In addition, infrastructure segments such as airports, power plants and metro rail were unaffected by the economic downturn and project plans were on track. The market for commercial refrigeration equipment and systems was estimated at INR20,000 million. The commercial refrigeration segment includes a wide range of products such as cold storages, supermarket refrigeration equipment, water coolers, bottled water dispensers, deep freezers, milk coolers, bottle coolers and ice cubers. In the present scenario, the major constraints on the development of the cold chain industry are high capital cost, electricity bills, low rental revenues, and inadequate availability of concessional finance. The task force initiatives, constituted by the Confederation of Indian Industry jointly with the Department of Agriculture and Co-operation (Government of India) in ‘Cold Chain Summit 2007’, are at an advanced stage. With the introduction of structured fiscal incentives and fast track clearance for economically viable proposals, the size of the cold chain industry could increase substantially in the next few years.

Key Risks

Due to slowdown in the economy, there has been slowdown in order inflow. Blue Star has not witnessed any major cancellations of order, but any slowdown in execution of retail expansion plans, IT parks, infrastructure spending and corporate spending could affect the order inflow. Further, depreciation of Indian Rupee against U.S. Dollar is likely to have negative impact on the company as its imports some part of its raw materials. The company could also face pricing pressure due to increased competition from existing players.

Report card

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