Your success is our success

Operating metrics reloaded, Retain BUY

n Strong operational performance driven by (a) 19% YoY

July 25, 2013

Rating Buy CMP Rs156

Previous Reco Buy Target Price Rs200

-1/0 NA 5,991 20,091

revenue growth in cooling products (b) 250bps YoY improvement in EMP&PAC margins to 5.9%

n Debt reduction further by Rs250 mn (at Rs3.5 bn). Interest

expense declines 6% QoQ and 7% YoY to Rs117 mn Market expected to remain flat YoY for FY14E key operating metrics

EPS Chg FY14E/FY15E (%) Target Price change (%) Nifty Sensex

n Healthy order inflow at Rs7.9 bn but challenges persists. n Continue to maintain BUY with continuous improvement in

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

Results enthuse confidence payoffs of efforts are visible

3M -4 -8 6M 12M -7 -8 -15 -29

1M -1 -8

Relative price chart

225 Rs % 10 210 0

BLSR delivers all round strong performance in Q1FY14 with (1) Growth in cooling products segment at 19% YoY, which was ahead of industry growth rate of 15% for the quarter (2) EMP&PAC margins improved 250bps YoY to 5.9% for the quarter. Consequently overall EBITDA margin improved 40bps YoY to 5% and (3) clocks order inflow of Rs7.9 bn, up 19% YoY. The headline nos were on strong note (a) revenue Rs7.7 bn, up +5.4% yoy (b) Apat is Rs228 mn, up 10.9% and (c) Ebidta margin improvement despite currency depreciation and employee cost provision.

195

-10

180

-20

Debt reduced by Rs250 mn, but working capital still remain tough
BLSR has further reduced its debt levels to Rs3.5 bn (down by Rs250 mn sequentially). Consequently, interest cost for the quarter at Rs117 mn declined 6% QoQ and 7% YoY. However the management indicated that working capital scenario continues to remain tough on the back of tight liquidity environment. Hence, the reduction of debt to targeted levels of Rs3 bn by FY14 end could be an uphill task.

165

-30

150 Jul-12

Sep-12

Nov-12 Blue Star (LHS)

Jan-13

Mar-13

May-13

-40 Jul-13

Rel to Nifty (RHS)

Source: Bloomber g

Stock Details
Sector
Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn)

Engineering & Capital Goods BLSTR IB 180 2 90 230/ 151 14/ 237 19,044 0.1

Holding fort; Reiterate BUY

BLSRs strategy to pursue profitability over growth is already reaping rich dividends (amongst the few companies to pursue this strategy). Retention of market shares in projects business and commercial refrigeration in a competitive environment is quite commendable. Whereas, market share expansion in RAC is positive surprise. We retain Blue Star as a preferred pick in our capital goods universe. We have a Buy rating on Blue Star with a revised price target of Rs200 (@14X FY15E earnings)

Shareholding Pattern (%)

Jun'13 Mar'13 Dec'12 Promoters FII/NRI Institutions Private Corp Public
Source: Bloomberg

40.1 8.7 16.2 2.3 32.7

40.1 8.8 15.9 2.4 32.9

40.1 8.4 16.3 2.5 32.9

Financial Snapshot (Standalone)

YEMar FY12A FY13A FY14E FY15E Net Sales 27,008 27,671 29,841 33,723 EBITDA (Core) -167 1,314 1,945 2,426 (%) APAT EPS (Rs) EPS RoE P/E EV/ EBITDA -101.8 13.4 8.0 5.7

(Rsmn)
% chg (%) P/BV 3.0 2.8 2.5 2.2

Pritesh Chheda pritesh.chheda@emkayglobal.com +91-22-66121273 Pawan Parakh pawan.parakh@emkayglobal.com +91-22-66121285

-0.6 -1,120 4.7 6.5 7.2 563 938 1,261

-12.5 -169.5 -21.4 -12.5 6.3 10.4 14.0 0.0 66.7 34.4 11.6 17.9 21.1 24.9 15.0 11.1

Emkay Global Financial Services Ltd.

Result Update

Emkay

Blue Star

Blue Star
Exhibit 1: Quarterly summary Rs mn Revenue Expenditure Consumption of RM as % of sales Employee Cost as % of sales Other expenditure as % of sales EBITDA Depreciation EBIT Other Income Interest PBT Total Tax Adjusted PAT Extra ordinary items Reported PAT Adjusted EPS Margins (%) EBIDTA EBIT EBT PAT Effective Tax rate
Source: Company, Emkay Research

Result Update

Q1FY13 7,314 6,979 5,392 73.7 528 7.2 1,059 14.5 335 75 261 70 125 205 0 205 0 205 2.3

Q2FY13 5,786 5,585 4,151 71.7 537 9.3 897 15.5 202 82 120 65 112 73 0 73 0 73 0.8

Q3FY13 5,988 5,734 4,268 71.3 512 8.5 954 15.9 254 84 170 21 137 54 0 54 0 54 0.6

Q4FY13 8,582 8,383 6,567 76.5 578 6.7 1,237 14.4 199 89 110 208 124 194 9 185 0 185 2.1

Q1FY14 7,708 7,324 5,509 71.5 582 7.6 1,233 16.0 384 83 301 44 117 228 0 228 0 228 2.5

YoY (%) 5.4 4.9 2.2 10.2 16.5 14.6 11.5 15.5 -37.5 -6.6 10.9 NA 10.9 NA 10.9 10.9 (bps)

QoQ (%) -10.2 -12.6 -16.1 0.6 -0.4 92.9 -6.1 172.3 -78.9 -5.6 17.3 -100.0 22.7 NA 22.7 22.7 (bps) 270 20 70 80 -440

4.6 3.6 2.8 2.8 -

3.5 2.1 1.3 1.3 -

4.2 2.8 0.9 0.9 -

2.3 3.7 2.3 2.2 4.4

5.0 3.9 3.0 3.0 -

40 30 10 10 0

Order inflow robust at Rs7.9 bn BLSR continues to be selective

BLSR recorded robust order inflows of Rs7.9 bn for the quarter. However the management highlighted that the macro environment continues to be challenging and the market for projects would hold ground in FY14 in best case. Maintaining its profitability over growth strategy, BLSR continues to remain selective in bidding for orders.
Exhibit 2: Order Backlog Details Rs mn Order Inflows Order Backlog
Source: Company, Emkay Research

Q1FY13 6,624 18,480

Q2FY13 4,092 16,786

Q3FY13 5,482 16,280

Q4FY13 6,482 14,180

Q1FY14 7,908 14,380

YoY (%) 19.4 -22.2

QoQ (%) 22.0 1.4

EMP&PAC segment margins improve 250bps to 5.9%

Revenues for the EMP&PAC segment declined 7% YoY, on expected line. However the 250bps margin improvement has been the key highlight for the quarter. Given that EMP&PAC segment constitutes ~45% of BLSR revenues, overall EBITDA margins for BLSR also improved 40bps YoY for the quarter.

Cooling products strong performance continues

BLSR recorded 19% YoY growth in the cooling product segment as against industry growth of 15% growth for the quarter. During the quarter, BLSR took at 6% price hike for Room Air-conditioners on the back of USD appreciation. EBIT margins for the quarter declined by 60bps YoY to 10.7%. While margins would be protected on the back of price hike, volume growth would be the key monitorable going ahead for this segment.

Emkay Research

July 25, 2013

Blue Star

Result Update

PEIS segment impacted by USD appreciation

Even though PEIS revenues grew 4% YoY, the profitability was negatively impacted by sharp USD appreciation during the quarter. Consequently EBIT margins contracted 1280 bps YoY and 440 QoQ. Given the weak industrial capex, the revenue growth in the segment is expected to be muted for FY14E.
Exhibit 3: Segmental performance Rs mn Segment Revenues EMP & PA C Cooling Products PEIS Less: Intersegment Revenues Total Segment Results EMP & PAC Cooling Products PEIS Total Add- Unall Income / (Exp) Less- Interest Exp PBT Segment Capital Employed EMP & PAC Cooling Products PEIS Unallocated Total Segment Margins (%) EMP & PAC Cooling Products PEIS Average
Source: Company, Emkay Research

Q1FY13 3,671 3,336 308 0 7,314 124 376 72 571 -240 125 205 4,059 2,165 716 -1,996 4,944 3.4 11.3 23.3 7.8

Q2FY13 3,759 1,686 341 0 5,786 264 79 26 370 -185 112 73 4,235 2,375 672 -2,262 5,020 7.0 4.7 7.7 6.4

Q3FY13 3,960 1,557 471 0 5,988 229 38 96 363 -172 137 54 4,777 2,168 683 -2,554 5,074 5.8 2.4 20.3 6.1

Q4FY13 4,807 3,072 704 0 8,582 106 311 105 522 -204 124 194 4,009 2,195 630 -1,890 4,944 2.2 10.1 14.9 6.1

Q1FY14 3,425 3,963 321 0 7,708 202 423 34 658 -314 117 228 4,664 1,297 717 -1,507 5,171 5.9 10.7 10.5 8.5

YoY (%) -6.7 18.8 4.3 5.4 63.0 12.7 -53.1 15.3 -6.6 10.9 14.9 -40.1 0.2 -24.5 4.6 (bps) 250 -60 -1,280 70

QoQ (%) -28.7 29.0 -54.4 -10.2 90.0 36.0 -67.8 26.2 -5.6 17.3 16.3 -40.9 13.8 -20.3 4.6 (bps) 370 60 -440 250

Revision in estimates
We have marginally revised our estimates for FY14E to factor in lower earnings in the PEIS segment and lower tax rate (attributed to carry forward of losses). Our revised EPS estimate stands at Rs10.4 per share (-0.5%).
Exhibit 4: Revision in Earning Estimates FY14E Y/E, Mar (Rs. mn) Revenues EBITDA EBITDA Margin (%) APAT EPS (Rs) Order Inflows Order Backlog
Source: Emkay Research

FY15E Earlier 33,755 2,421 7.2 1,262 14.0 33,710 14,303 Revised % Change 33,723 2,426 7.2 1,261 14.0 33,710 14,390 -0.1 0.2 0 bps -0.1 -0.1 0.0 0.6 -0.2 -0.6 0 bps -0.5 -0.5 0.0 0.4

Earlier 29,895 1,958 6.5 943 10.5 30,063 14,348

Revised % Change 29,841 1,945 6.5 938 10.4 30,063 14,403

Emkay Research

July 25, 2013

Blue Star

Result Update

Key Financials (Standalone) Income Statement

Y/E Mar (Rsmn) Net Sales Growth (%) Expenditure Raw Materials Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adj. PAT After JVs/Ass/MI E/O items Reported PAT PAT after MI Growth (%) FY12A 27,008 -5.5 27,175 20,858 2,070 3,985 -167 -105.9 -0.6 314 -481 -1.8 70 703 -1,113 7 -0.6 -1,120 -169.5 -4.1 0 -1,120 -2 -1,122 -1,120 -169.5 FY13A 27,671 2.5 26,356 20,378 2,156 3,883 1,314 0.0 4.7 329 985 3.6 76 499 563 0 0.0 563 0.0 2.0 0 563 13 576 563 0.0 FY14E 29,841 7.8 27,895 21,277 2,325 4,259 1,945 48.0 6.5 347 1,598 5.4 145 432 1,312 374 28.5 938 66.7 3.1 0 938 0 938 938 66.7 FY15E 33,723 13.0 31,297 23,944 2,627 4,689 2,426 24.7 7.2 364 2,062 6.1 145 352 1,855 593 32.0 1,261 34.4 3.7 0 1,261 0 1,261 1,261 34.4

Balance Sheet
Y/E Mar (Rsmn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Misc. exp Total Assets FY12A 180 4,559 4,739 0 1,152 2,280 3,432 0 8,171 4,146 2,088 2,058 315 1,214 16,919 4,372 6,935 508 1,693 3,412 12,335 11,803 533 4,584 0 8,171 FY13A 180 4,764 4,944 0 1,735 1,992 3,727 0 8,670 4,620 2,391 2,230 77 1,214 17,479 5,088 7,296 110 2,034 2,950 12,328 11,662 666 5,151 0 8,670 FY14E 180 5,386 5,566 0 1,235 1,492 2,727 0 8,293 5,120 2,737 2,383 77 1,214 17,124 4,110 7,102 1,290 2,009 2,613 12,504 11,838 666 4,620 0 8,293 FY15E 180 6,227 6,406 0 735 992 1,727 0 8,133 5,620 3,101 2,519 77 1,214 17,671 4,156 7,379 1,837 2,271 2,029 13,348 12,681 666 4,324 0 8,133

Cash Flow
Y/E Mar (Rsmn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY12A -1,184 314 703 395 2,175 -321 2,307 -504 1,803 70 -195 -628 0 -752 -703 -729 0 0 -2,183 -505 465 508 FY13A 487 329 499 147 -965 -287 96 -262 -166 76 0 -185 0 295 -499 -105 0 0 -309 -398 508 110 FY14E 1,167 347 432 0 1,711 -374 3,282 -500 2,782 145 0 -355 0 -1,000 -432 -316 0 0 -1,747 1,180 110 1,290 FY15E 1,709 364 352 0 843 -593 2,676 -500 2,176 145 0 -355 0 -1,000 -352 -421 0 0 -1,773 547 1,290 1,837

Key Ratios
Y/E Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) -0.6 -4.1 -4.5 -21.4 -6.7 -12.5 -9.0 52.7 1.0 -12.5 -17.4 3.0 0.6 -101.8 0.6 0.6 -17.6 55.1 4.7 2.0 12.6 11.6 14.7 6.3 9.9 55.0 2.0 24.9 15.7 2.8 0.6 13.4 1.3 0.7 2.8 66.5 6.5 3.1 20.6 17.9 24.6 10.4 14.3 61.9 3.0 15.0 10.9 2.5 0.5 8.0 1.9 0.3 0.7 40.7 7.2 3.7 26.9 21.1 38.5 14.0 18.1 71.2 4.0 11.1 8.6 2.2 0.4 5.7 2.6 0.0 0.0 26.9 FY12A FY13A FY14E FY15E

Emkay Research

July 25, 2013

Blue Star

Result Update

Emkay Global Financial Services Ltd. 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India Tel: +91 22 66121212 Fax: +91 22 66121299 Web: www.emkayglobal.com DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates
are participants in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Investors may assume that Emkay Global Financial Services Limited and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may participate in the solicitation of such business. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Emkay Global Financial Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. No part of this document may be distributed in Canada or used by private customers in United Kingdom. All material presented in this report, unless specifically indicated otherwise, is under copyright to Emkay. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, witho ut the prior express written permission of Emkay. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of Emkay or its Group Companies. The information contained herein is not intended for publication or distr ibution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for C apital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Emkay Research

July 25, 2013

www.emkayglobal.com 5