1QFY2012 Result Update | Cons.

Durables
August 2, 2011

Blue Star
Performance Highlights
Y/E March (` cr) Net Sales EBITDA OPM (%) Adjusted PAT 1QFY12 705 28 3.9 10 4QFY11 916 103 11.2 57 % chg (qoq) (23.0) (73.1) (730)bp (82.8) 1QFY11 665 61 9.2 37 % chg (yoy) 6.0 (54.7) (524)bp (73.6)

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Cons. Durable 19,457 0.7 544 / 263 23,587 2 18,110 5,457 BLUS.BO BLSTR@IN

`265 -

Source: Company, Angel Research

In 1QFY2012, Blue Star posted 6.0% yoy growth to `705cr (`665cr). OPM fell by 524bp yoy and 730bp qoq to 3.9% due to higher raw-material and other expenditure. Consequently, PAT declined by 73.6% yoy to `10cr (`37cr). According to management, the current scenario is going to continue for the next six quarters owing to cost overruns. Hence, we change our recommendation to Neutral on the stock. Weak top-line growth, margin dips significantly: Blue Star reported 6.0% yoy top-line growth in 1QFY2012 to `705cr. The companys growth was muted on the back of an 8.7% yoy decline in its electromechanical projects and packaged air conditioning systems (EMPPACS) segment to `342cr (`374cr), which accounted for nearly 49% of the total revenue. The segment also reported an EBIT loss of `9cr vs. profit of `34cr in 1QFY2012, negatively affecting margins. Owing to the losses in this segment, overall OPM declined by 524bp yoy to 3.9% (9.2%). Consequently, PAT and PAT margin also declined to `10cr and 1.4%, respectively. Outlook and valuation: Demand from the key market segments has still not picked up. However, growth in the cooling products segment and DS Gupta remains strong. Overall, management is not very optimistic and expects the current scenario to continue over the next six quarters. Management also expects margin to contract by 35% on a yoy basis going ahead until 1QFY2013. We have revised our estimates downwards and changed our recommendation to Neutral.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 40.1 18.1 9.4 32.4

Abs.(%) Sensex Blue Star

3m (4.7)

1yr 0.2

3yr 23.6

(27.5) (39.3) (30.3)

Key financials (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E

Net sales % chg Net profit % chg EBITDA margin (%) FDEPS (`) P/E (x) P/BV (x) RoE (%) RoACE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

2,525 0.9 211.5 15.0 10.9 23.5 11.3 4.8 49.3 53.8 0.9 8.6

2,976 17.9 157.9 (25.1) 8.5 17.6 15.0 4.7 31.5 30.6 0.8 9.4

3,406 14.5 130.4 (17.6) 5.9 14.5 18.3 4.2 24.2 16.8 0.7 11.8

3,972 16.6 198.9 52.5 7.4 22.1 12.0 3.4 31.5 24.2 0.6 8.1 Sharan Lillaney
+91 22 3935 7800 Ext: 6811 Sharanb.lillaney@angeltrade.com

Please refer to important disclosures at the end of this report

Blue Star | 1QFY2012 Result Update

Exhibit 1: 1QFY2012 performance (Standalone)

Y/E March (` cr) Net Sales Consumption of RM (% of Sales) Staff Costs (% of Sales) Other Expenses (% of Sales) Total Expenditure Operating Profit OPM Interest Depreciation Other Income PBT (excl. Extr. Items) Extr. Income/(Expense) PBT (incl. Extr. Items) (% of Sales) Provision for Taxation (% of PBT) Reported PAT PATM Equity shares (cr) EPS (`) Adjusted PAT
Source: Company, Angel Research

1QFY12 705 428 60.7 49 7.0 200 28.4 677 28 3.9 8 7 0 13 13 1.8 3 24.5 9.8 1.4 9.0 1.1 10

4QFY11 916 584 63.8 56 6.1 173 18.8 813 103 11.2 10 8 3 87 87 9.5 31 35.0 56.8 6.2 9.0 6.3 57

% chg (qoq) (23.0) (26.8) (12.4) 16.0 (16.7) (73.1) (730) (21.3) (13.3) (97.7) (85.2) (85.2) (89.6) (82.8) (482)bp (82.8) (82.8)

1QFY11 665 446 67.1 47 7.1 110 16.6 604 61 9.2 2 8 0 52 0 52 7.8 15 28.7 37.2 5.6 9.0 4.1 37

% chg (yoy) 6.0 (4.2) 3.8 81.6 12.1 (54.7) (524) 278.0 (5.6) (84.2) (74.9) (75.1) (78.9) (73.6) (420)bp (73.6) (73.3)

FY2011 2,976 2,287 76.8 215 7.2 220 7.4 2,722 254 8.5 26 32 34 231 0 231 7.8 73 31.5 158 5.3 9.0 17.6 158

FY2010 2,525 1,882 74.5 185 7.3 183 7.3 2,250 275 10.9 8 35 31 263 14 277 11.0 65 23.5 211 8.4 10.0 21.2 198

% chg 17.9 21.5 16.3 19.8 20.9 (7.4) (233) 202.6 (8.1) 8.4 (12.2) (16.4) 11.8 (25.1) (306) (16.8) (20.1)

Segment-wise performance
The EMPPACS segment of the company posted a decline of 8.7% yoy to `342cr (`374cr), as the debtor position remained challenging during the quarter as well. EBIT margin for the segment came in at negative 2.6% vs. positive 9.0% in 1QFY2011. The cooling products segment posted strong growth of 29.5% yoy to `328cr (`253cr), driven mainly by higher room AC and refrigeration product sales. However, EBIT margin contracted by 64bp yoy to 13.5% (14.1%). The professional electronics and industrial systems (PEIS) segment grew by 3.2% yoy during the quarter to `33cr (`32cr). EBIT margin for the segment came in at 23.9% (16.9%), up 704bp yoy.

August 2, 2011

Blue Star | 1QFY2012 Result Update

Exhibit 2: Segment-wise performance

Y/E March (` cr) Total Revenue A) EMPPACS B) Cooling Products C) PEIS Total Less: Inter-Seg. Revenue Net Sales EBIT A) EMPPACS B) Cooling Products C) PEIS EBIT Margin (%) A) EMPPACS B) Cooling Products C) PEIS
Source: Company, Angel Research

1QFY2012 4QFY2011 1QFY2011 % chg (qoq) % chg (yoy) 342 328 33 703 703 (9) 44 8 (2.6) 13.5 23.9 580 266 62 908 908 70 29 20 12.0 10.8 32.9 374 253 32 660 660 34 36 5 9.0 14.1 16.9 (22.6) (112.7) 54.2 (61.1) (1,465)bp 268bp (898)bp 6.6 (126.4) 23.6 46.2 (1,157)bp (64)bp 704bp (41.1) 23.5 (46.5) (22.6) (8.7) 29.5 3.2 6.6

Sales growth at 6.0% yoy

In 1QFY2012, the company posted weak top-line growth of 6% yoy mainly due to weak demand and issues on the execution side. Going ahead, we expect the scenario to improve slightly in the second half of FY2012.

Exhibit 3: Sales trend

1000 900 800 700 600 500 400 300 200 100 0 863 665 695 613 916 705 30.0 25.0 20.0 15.0 5.0 0.0 -5.0 -10.0 -15.0
2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 (%)

564

596

(` cr)

10.0

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

OPM declines significantly on the back of cost overruns

Blue Star reported a 524bp yoy decline in OPM to 3.9%, mainly due to higher raw-material cost and other expenditure, including purchase of traded goods, which increased to 28.4% of sales compared to 16.6% in 1QFY2012. Going ahead, management expects the scenario to improve only after 56 quarters. Margins are expected to come down by 35% on a yoy basis on the back of project delays, cost overruns and higher raw-material prices.

August 2, 2011

Blue Star | 1QFY2012 Result Update

Exhibit 4: OPM trend

120 100 80 14.0 12.0 10.0 6.0 4.0 2.0 0.0 8.0

(` cr)

60 40 20 0

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

EBITDA (LHS)
Source: Company, Angel Research

OPM (RHS)

PAT declines on lower OPM

Adjusted PAT declined by 73.3% yoy to `10cr (`37cr) during the quarter on the back of lower OPM. PAT margin declined by 420bp yoy to 1.4% (5.6%), which got some relief on the back of lower tax rate during the quarter. Tax rate stood at 24.5% of PBT in 1QFY2012 vs. 28.7% in 1QFY2011.

Exhibit 5: PAT trend

90 80 70 60 50 40 30 20 10 0

(` cr)

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

Source: Company, Angel Research

August 2, 2011

1QFY12

(%)

Blue Star | 1QFY2012 Result Update

Outlook and valuation

There are still no signs of pick-up in demand from the commercial real estate market. Consequently, the company continues to witness a challenging environment, as reflected by the weak top-line growth in 1QFY2012. Overall, management is not very optimistic and expects the current scenario to continue over the next six quarters. Management also expects OPM to contract by 35% on a yoy basis going ahead until 1QFY2013. New orders are being accepted at higher margins of 1011%, but will reflect post 1QFY2013. Owing to the weak outlook and expected margin erosion, we have revised our estimates downwards and changed our recommendation to Neutral.

August 2, 2011

Blue Star | 1QFY2012 Result Update

Profit and loss statement (Consolidated)

Y/E March Net Sales % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg % of Income Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) % chg FY08 2,222 39.3 1,999 1,691 68 145 95 223 102.4 10.0 22 201 125.2 9.0 8 49 20.0 242 161.5 10.9 25 217 68 31.3 149 149 149 111.7 6.7 19.4 19.4 144.6 FY09 2,503 12.7 2,243 1,874 50 182 136 260 16.4 10.4 26 234 16.3 9.3 10 22 8.9 246 1.5 9.8 246 58 23.6 188 188 188 26.0 7.5 20.5 20.5 5.7 FY10 2,525 0.9 2,250 1,882 50 185 133 275 5.8 10.9 35 240 2.7 9.5 8 45 16.3 277 12.6 11.0 277 65 23.5 211 211 211 12.7 8.4 23.5 23.5 15.0 FY11 2,976 17.9 2,722 2,287 92 215 128 254 (7.4) 8.5 32 223 (7.3) 7.5 26 34 14.6 231 (16.6) 7.8 231 73 31.6 158 158 158 (25.4) 5.3 17.6 17.6 (25.1) FY12E 3,406 14.5 3,204 2,674 103 246 181 202 (20.5) 5.9 37 166 (25.5) 4.9 23 34 19.1 177 (23.4) 5.2 177 44 25.0 133 133 133 (16.0) 3.9 14.7 14.7 (16.3) FY13E 3,972 16.6 3,677 3,079 120 287 191 296 46.1 7.4 41 254 53.4 6.4 20 34 12.6 268 51.7 6.7 268 67 25.0 201 201 201 51.7 5.1 22.4 22.4 51.7

August 2, 2011

Blue Star | 1QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability (Net) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Cash Loans & Advances Inventories Debtors Other Current liabilities Net Current Assets Mis. Exp. not written off Total Assets 273 135 138 18 5 1,034 3 257 290 484 892 142 1 304 333 145 188 25 4 1,149 6 293 207 643 975 174 1 391 351 180 171 28 4 1,393 13 132 258 628 361 1,097 296 499 406 212 194 28 27 1,957 52 146 404 821 533 1,252 705 1 955 466 248 217 33 27 2,108 44 170 463 852 579 1,373 735 1,012 526 290 236 37 27 2,413 21 199 525 993 675 1,626 787 1,087 18 246 264 37 4 304 18 349 367 24 1 391 18 474 492 9 (1) 499 18 493 511 445 (1) 955 18 550 568 445 (1) 1,012 18 675 693 395 (1) 1,087 FY08 FY09 FY10 FY11 FY12E FY13E

August 2, 2011

Blue Star | 1QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March Profit before tax Depreciation (Inc.)/ Dec. in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/ Dec. in Fixed Assets (Inc.)/ Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY08 242 22 41 49 68 188 (57) 1 49 (8) (53) 74 (55.8) (182) (2) 5 3 FY09 242 26 (29) 22 58 159 (67) 0 22 (45) (13) 74 (24.7) (111) 3 3 6 FY10 277 35 (114) 45 65 87 (22) 0 45 24 (15) 84 (4.3) (103) 8 6 13 FY11 231 32 (370) 34 73 (214) (55) (23) 34 (44) 436 74 (64.9) 297 39 13 52 FY12E FY13E 174 37 (38) 34 43 95 (64) 34 (30) 74 0.5 (73) (8) 52 44 (124) (23) 44 21 265 41 (75) 34 66 131 (64) 34 (30) (50) 74

August 2, 2011

Blue Star | 1QFY2012 Result Update

Key ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/E (on basic, reported EPS) P/CEPS P/BV Dividend yield (%) Market cap. / Sales EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio Asset turnover (x) ROCE (Post Tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC ROE Turnover ratios (x) Asset Turnover (Gross Block) Asset Turnover (Net Block) Operating Income / Invested Capital Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Gross debt to equity Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.1 0.0 0.1 26.6 0.1 0.0 0.1 23.7 0.0 28.4 0.9 0.1 1.5 8.7 0.8 0.1 2.0 6.5 0.6 0.1 1.3 11.2 8.8 17.6 7.7 41 69 100 26 8.3 15.4 7.8 36 82 108 22 7.4 14.1 6.2 34 92 134 33 7.9 16.3 4.5 41 89 143 57 7.8 16.6 3.8 46 90 132 72 8.0 17.5 4.0 45 85 127 67 65.7 69.3 62.5 67.3 73.0 59.5 53.8 58.7 49.3 30.6 33.4 31.5 16.8 18.3 24.2 24.2 25.9 31.5 9.0 71.9 7.4 48.1 8.7 0.4 62.8 9.3 76.1 7.3 52.0 24.9 0.1 55.0 9.5 76.5 5.8 42.2 39.7 0.0 42.2 7.5 68.5 4.3 22.0 7.7 0.4 27.2 4.9 75.0 3.6 13.3 4.3 1.0 22.6 6.4 75.0 3.9 18.8 4.1 0.8 31.2 19.4 19.4 21.8 7.0 29.3 20.5 20.5 23.3 7.0 40.8 23.5 23.5 27.4 8.0 54.7 17.6 17.6 21.2 7.0 56.8 14.5 14.5 18.6 7.0 63.2 22.1 22.1 26.7 7.0 77.1 13.7 13.7 12.1 9.0 2.6 1.1 1.1 10.8 7.9 12.9 12.9 11.3 6.5 2.6 1.0 1.0 9.2 6.1 11.3 11.3 9.7 4.8 3.0 0.9 0.9 8.6 4.7 15.0 15.0 12.5 4.7 2.6 0.8 0.8 9.4 2.9 18.3 18.3 14.2 4.2 2.6 0.7 0.7 11.8 2.7 12.0 12.0 9.9 3.4 2.6 0.6 0.6 8.1 2.5 FY08 FY09 FY10 FY11 FY12E FY13E

August 2, 2011

Blue Star | 1QFY2012 Result Update

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Blue Star No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 2, 2011

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