The Hindu Business Line : Blue Star sees record growth in FY-08

Powered by the boom in the construction sector, Blue Star has come up with a record top line growth. For the year ended March 2008, the company witnessed 40 per cent growth in sales and 108 per cent growth in net profits (adjusted for other income through sale of shares). The quarterly numbers also reflected over 30-per cent growth in sales and net profits.

Rapid growth in cooling system segment

While central air conditioning systems continued to dominate the revenue scene with a contribution of 70 per cent, the cooling systems segment (consisting of cold chain equipment, super market refrigeration and room AC) doubled its profits. The return (before interest and tax) on capital employed in this segment also rose to 40 per cent from 23 per cent a year earlier. Significant orders in the cold chain segment and demand for split ACs led to this improved performance.

Margins to see pressure

Improved realisations, volumes as well as benefits from the new plant in Himachal Pradesh contributed to a 300-basis point increase in OPMs to 10.5 per cent. While this may have been a watershed year for Blue Star in terms of jump in operating margins, we expect margin pressure from the steep increase in raw material costs such as steel, copper and aluminium. The company has to some extent benefited from the depreciating dollar last year for its imports. The present rupee depreciation, if persistent, can steal this benefit. Blue Star has so far been a price leader and commanded a premium. With more players especially in the split AC segment, the company may find it increasingly difficult to pass on increasing costs through price hikes.

While the company managed to keep interest costs at bay despite the harsh interest rate scenario, tax incidence rose 5 percentage points to 28 per cent. This could partly be explained by capital gains on sales of investment in shares. The rise was despite the company partly receiving tax benefits from the Himachal plant. While this plant currently makes room ACs, other products such as deep freezers and water coolers once manufactured from the site, could increase tax benefits. If this does not happen, the company is likely to retain the present tax incidence in future.

Blue Star’s carry forward order book stood at Rs 1,135 crore. National Capital Region remains the major market for Blue Star. With the order flow for the Common Wealth Games likely to flow in by the middle of 2008, the company is likely to see increased growth in order flows. Similarly, metro rails could throw up big opportunities, what with very few players pre-qualified for the same.

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