The Hindu Business Line : Blue Star: Buy

INVESTORS can accumulate the stock of Blue Star with a one/two-year perspective. The stock trades at eight times its expected 2005 per share earnings of Rs 21. It has scope for appreciation, given Blue Star's leadership position in the central air-conditioning market (which is expected to grow at 30 per cent per annum), export push and the attractive dividend yield. The dividend yield works out to five per cent on the current market price of Rs 182.

Business profile

Blue Star operates mainly in three segments — central air-conditioning system, cooling products, and electronics and industrial equipment. Central air-conditioning systems is its bread-and-butter-business, which contributes 62 per cent of its revenues and over 80 per cent of profits. It provides air-conditioning solutions for large commercial spaces. Its target customers include institutional and industrial companies, government organisations, showrooms, restaurants, banks, hospitals, theatres, shopping malls, and small commercial establishments such as clinics, and boutiques. Blue Star has a strong presence in the commercial segment and does not focus on the home segment.

The cooling products division caters mainly to the food processing industry. The products include water-coolers, display refrigerators, bottled water refrigerators, mineral water dispensers and freezers for storing processed foods. Margins are low in this business due to intense competition. This segment has been a drag on profitability over the past couple of quarters.

The electronics and industrial equipment division is a lucrative trading business. Blue Star undertakes turnkey engineering solutions by sourcing equipment from global players.

Growth drivers

Over the past couple of years, there has been a boom in services such as information technology, telecom, IT-enabled services, insurance and banking. These businesses are expected to add office space at a rapid rate and also expected to fuel the retailing business.

The additional office space required and the upcoming multiplexes and retail stores being planned is expected to create demand for central air-conditioning systems. This segment has been growing at a fast clip and is expected to grow at an annual rate of 30 per cent in the next two/three years. Blue Star has a strong position in this segment with a market share of over 50 per cent. A few of its clients includes Infosys, Reliance, Airtel and ING Vysya Life Insurance.

The next big growth area is in commercial refrigeration and cold storages. Food and processed foods segment accounts for 80 per cent of the Rs 850-900 crore market. The expanding business of hotels, restaurants, fast-

food chains, supermarkets and shopping malls is expected to keep the industry growing at over 20 per cent.

The thrust on developing the food-processing segment in the recent Budget is expected to create demand for cold storages, which now account for 12 per cent of the Rs 850 crore commercial refrigeration market. Formation of agri export zones and food parks by the Ministry of Food Processing is expected to fuel a 25 per cent growth in this segment.

To arrest margin erosion in the cooling product segment, Blue Star is looking at West Asian and the European market for water coolers, where the product has been received well.

Thrust on exports

The company is adding a separate assembly line for exports to meet overseas demand. Exports increased four-fold in 2003-04 but contributes only 5 per cent of the turnover. Blue Star is targeting the central air-conditioning market in West Asia and Malaysia, where it has received orders.

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Blue Star: Buy