Blue Star – This Company is cool!

Blue Star (CMP Rs 137) is India's largest central air-conditioning and commercial refrigeration company, The Company’s strategy had been to focus on the corporate and commercial establishments rather then to get into the crowded domestic homes segment (this is now being slowly targeted). The major growth drivers for the company have been from the various segments of the service sector like Shopping malls, IT and ITES space, Restaurants, multiplexes, office and commercial establishments, airports, banks, hospitals, and boutiques.

Blue Star has business alliances with world renowned technology leaders such as Rheem Mfg Co, USA; Hitachi, Japan; Eaton Williams, UK; Thales –Security, UK; Jeol, Japan and many others,

The major customers of the company include names like Pantaloon, Vishal Mega Mart, ICICI Bank, ING Vysya, Centurion Bank, Kotak Mahindra and ACC. During the last quarter the company signed companies like Reliance Retail, Levi’s Strauss, Gitanjali Jewelers and Glaxo Smithkline

Blue Star manufactures a number of cooling products like water coolers, bottled water dispensers, deep freezers, cold storages, bottle coolers and ice cube machines. 
 

In addition to this Blue Star engaged in the import and distribution cum maintenance of professional electronic and industrial equipment and systems. These include turnkey engineered solutions in the areas of banking, telecom, healthcare, defense, pharmaceuticals, manufacturing and R&D. 

Considering the sustained growth in business, capital expenditure is expected to increase in order to expand and upgrade manufacturing and R&D capabilities.

The Company appears adequately priced but the high RoE would make it possible for the company to maintain its high growth rate. The company has increased its revenues from Rs 504 crores to Rs 1171 crores in the past 4 years at CAGR of 23.46%. I would think that the company could continue with this pace of growth at least till 2010.

Normally the centralized air-conditioner business segment makes up for a major chunk of the company’s revenues. (Evident from the sales break up for FY 07 Q1given below) followed by the cooling products division which is growing at a much faster rate.

During the last quarter the company launched the “Hiper Split air conditioners”- energy efficient equipment.  The Himachal facility shall be manufacturing room air conditioners and the company expects the cooling products business to contribute significantly to the overall results for the year.

Blue Star also deals with a range of cold chain equipment which should benefit from the ongoing boom in the segment, Blue Star is well positioned to leverage on the upcoming opportunities.

The company has also started exporting to countries in North America Middle East and Japan. While this activity is expected to grow the main driver would come from the domestic market.

Recommendation: I have a personal liking for the pick axe industry when the public is busy digging for gold. Whether Reliance succeeds or Pantaloon is an answer we can only debate but irrespective of that Blue Star is a huge play on the growing consumerisation and off shoring capabilities of India. While the stock is not a multibagger from these levels it should easily outperform the market. One unique quality of the stock is to hold itself when the market declines so it acts as a defensive in that case.

Source: Company feedback and media reports

1. Blue Star listed on BSE in 1969.
2. Blue Star Infotech was spun-off in 2000.
3. They also had JV with Yokogawa (one of the giants in process instrumentation). Blue Star exited from this JV few years ago.  Yokogawa is a listed company on BSE.