2QFY2012 Result Update | Cons.

Durables
October 28, 2011

Blue Star
Performance Highlights
Y/E March (` cr) Net Sales EBITDA OPM (%) Adjusted PAT 2QFY12 604.7 13.6 2.3 (20.8) 1QFY12 704.7 27.6 3.9 9.8 % chg (qoq) (14.2) (50.6) (166)bp (312.5) 2QFY11 694.8 67.2 9.7 38.6 % chg (yoy) (13.0) (79.7) (742)bp (153.8)

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 1,902 0.7 0 21,164 2 17,805 5,361 BLUS.BO BLSTR@IN

`211 -

Source: Company, Angel Research

In 2QFY2012, Blue Star posted a 13.0% yoy decline in revenue to `605cr (`695cr). OPM fell by 742bp yoy and 166bp qoq to 2.3% due to higher raw-material cost and other expenditure. The company reported a loss of `21cr during the quarter. According to management, the current scenario is going to continue for the next five quarters owing to cost overruns. We continue to maintain our Neutral recommendation on the stock. Top line declines, margin dips significantly: Blue Star reported a 13.0% yoy decline in its top line to `605cr in 2QFY2012. The decline in revenue was on the back of a 19.1% yoy decline in its electromechanical projects and packaged air conditioning systems (EMPPACS) segment to `382cr (`473cr), which accounted for nearly 64% of the companys total revenue. The segment also reported an EBIT loss of `3cr vs. profit of `43cr in 2QFY2012, negatively affecting margins. Owing to losses in this segment, overall OPM declined by 742bp yoy to 2.3% (9.7%). The company also reported unrealized forex loss of `20cr during the quarter. The company reported loss of `21cr in 2QFY2012 vs. profit of `39cr in 2QFY2011. 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 five quarters. Management also expects margin to contract by 3-5% yoy until 1QFY2013. We have revised our estimates downwards and continue to maintain our Neutral recommendation on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 40.1 18.3 9.2 32.4

Abs.(%) Sensex Blue Star

3m

1yr

3yr 97.7 17.2

(2.2) (10.7) (27.2) (53.1)

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 9.0 3.9 49.3 53.8 0.7 8.6

2,976 17.9 157.9 (25.1) 8.5 17.6 12.0 3.7 31.5 30.6 0.6 9.4

3,304 11.0 78.6 (50.4) 4.9 8.7 24.2 3.7 15.3 13.2 0.6 11.8

3,667 11.0 147.7 88.0 6.4 16.4 12.9 3.2 26.7 20.0 0.5 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: 2QFY2012 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

2QFY12 605 433 71.6 50 8.3 108 17.9 591 14 2.3 31 8 1 (24) (24) (4.0) (3) 13.2 (20.8) (3.4) 9.0 (2.3) (20.8)

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 9.8

% chg (qoq) (14.2) 1.2 1.7 (45.9) (12.7) (50.6) (166)bp 304.2 12.2 1,516.7 (285.0) (285.0) (200.0) (312.5) (483)bp (312.5) (312.5)

2QFY11 695 455 65.5 51 7.3 122 17.5 628 67 9.7 5 8 2 56 56 8.1 17 31.1 38.6 5.6 9.0 4.3 38.6

% chg (yoy) (13.0) (4.9) (1.6) (11.1) (5.8) (79.7) (742)bp 527.5 1.4 (39.8) (142.8) (142.8) (118.2) (153.8) (900)bp (153.8) (153.8)

1HFY2012 1,309 860 65.7 99 7.6 309 23.6 1,268 41 3.1 38 15 1 (11) (11) (0.8) (11) (0.8) 9.0 (1.2) (11)

1HFY2011 1,360 901 66.3 98 7.2 232 17.1 1,231 128 9.4 7 15 2 108 108 8.0 32 30.0 75.8 5.6 9.0 8.4 75.3

% chg (3.7) (4.5) 1.0 32.9 3.0 (67.8) (627)bp 454.9 (2.0) (48.2) (110.2) (110.2) (100.0) (114.5) (641)bp (114.5) (114.6)

Segment-wise performance
The EMPPACS segment of the company posted a decline of 19.1% yoy to `382cr (`473cr), as debtor position remained challenging during the quarter as well. EBIT margin for the segment came in at negative 0.9% vs. positive 9.2% in 1QFY2011. The cooling products segment posted modest growth of 10.9% yoy to `157cr (`141cr), driven mainly by higher room AC and refrigeration product sales. However, EBIT margin contracted by 556bp yoy to 5.4% (11.0%). The professional electronics and industrial systems (PEIS) segment declined by 11.9% yoy during the quarter to `59cr (`67cr). EBIT margin of the segment came in at 29.2% (25.3%), up 388bp yoy.

October 28, 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-Segmental Rev. Net Sales EBIT A) EMPPACS B) Cooling Products C) PEIS EBIT Margin (%) A) EMPPACS B) Cooling Products C) PEIS
Source: Company, Angel Research

2QFY2012 1QFY2012 2QFY2011 % chg (qoq) % chg (yoy) 382 157 59 599 599 (3) 8 17 (0.9) 5.4 29.2 342 328 33 703 703 (9) 44 8 (2.6) 13.5 23.9 473 141 67 682 682 43 16 17 9.2 11.0 25.3 (14.9) (61.6) (80.8) 117.3 170 (805) 525 (12.2) (107.9) (45.3) 1.6 (1,006) (556) 388 11.9 (52.2) 78.2 (14.9) (19.1) 10.9 (11.9) (12.2)

Sales decline by 13.0% yoy

In 2QFY2012, the company posted a 13.0% yoy decline in its top line 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 0 863 665 695 613 916 705 605 30 25 20 15 5 0 (5) (10) (15)
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 (%)

596

(` cr)

10

Sales (LHS)
Source: Company, Angel Research

yoy Growth (RHS)

OPM declines significantly on the back of cost overruns

Blue Star reported a 742bp yoy decline in OPM to 2.3%, mainly due to higher staff and raw-material costs, which increased to 71.6% of sales compared to 65.5% in 2QFY2012. Management expects this scenario to improve only after 5-6 quarters. Margins are expected to come down by 3-5% on a yoy basis on the back of project delays, cost overruns and higher raw-material prices.

October 28, 2011

Blue Star | 1QFY2012 Result Update

Exhibit 4: OPM trend

120 100 80
(` cr)

13.0 11.2 9.5 9.2 9.7 7.7

14 12 10
(%)

60 40 20 0
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11

8 6 3.9 4 2.3 2 0
4QFY11 1QFY12 2QFY12
10 -21

EBITDA (LHS)
Source: Company, Angel Research

OPM (RHS)

Bottom line turns negative on the back of forex loss

Blue Star reported a loss of `21cr during in 2QFY2012 on the back of lower OPM and unrealized forex loss of `20cr. PAT margin declined by 900bp yoy to negative 3.4% vs. positive 5.6% in 2QFY2011.

Exhibit 5: PAT trend

100 80 60 42 40 20 0 37 39 22 79 57

(` cr)

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

(20) (40)

Source: Company, Angel Research

October 28, 2011

2QFY12

Blue Star | 1QFY2012 Result Update

Outlook and valuation

There are still no signs of any pick-up in demand from the commercial real estate market. Consequently, the company continues to witness a challenging environment, as reflected by weak top-line growth in 1QFY2012. Overall, management is not very optimistic and expects the current scenario to continue over the next five quarters. Management also expects OPM to contract by 3-5% on a yoy basis until 1QFY2013. New orders are being accepted at higher margins of 10-11%, but will reflect post 1QFY2013. Owing to the weak outlook and expected margin erosion, we have revised our estimates downwards and continue to maintain our Neutral recommendation on the stock.

October 28, 2011

Blue Star | 1QFY2012 Result Update

Profit and loss statement (Consolidated)

Y/E March (` Cr) Gross sales Less: Excise duty 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 associate Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY08 39.3 FY09 49.7 12.7 FY10 2,558 32.6 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 3,006 29.2 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 FY13E 3,337 3,703 32.7 11.0 36 11.0 3,304 3,667 3,141 3,431 2,627 2,878 100 239 175 163 (35.8) 4.9 37 127 (43.1) 3.8 36 34 27.1 125 (45.9) 3.8 20 105 26 25.0 79 79 79 (50.2) 2.4 8.7 8.7 (50.4) 111 265 176 236 44.7 6.4 41 195 53.9 5.3 32 34 17.1 197 57.8 5.4 197 49 25.0 148 148 148 88.0 4.0 16.4 16.4 88.0 2,222 2,552 2,222 2,503 1,999 2,243 1,691 1,874 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 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

October 28, 2011

Blue Star | 1QFY2012 Result Update

Balance sheet (Consolidated)

Y/E March (` Cr) 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 2,005 3 165 449 826 562 1,321 683 960 526 290 236 37 27 2,223 14 183 485 917 623 1,538 684 984 18 246 264 37 4 304 18 349 367 24 1 391 18 474 492 9 (1) 499 18 493 511 445 (1) 955 18 498 516 445 (1) 960 18 572 590 395 (1) 984 FY08 FY09 FY10 FY11E FY12E FY13E

October 28, 2011

Blue Star | 1QFY2012 Result Update

Cash flow statement (Consolidated)

Y/E March (` Cr) 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 FY11E 231 32 (370) 34 73 (214) (55) (23) 34 (44) 436 74 (64.9) 297 39 13 52 FY12E FY13E 105 37 (28) 34 26 54 (64) 34 (30) 74 0.5 (73) (50) 52 3 (124) 12 3 14 197 41 11 34 49 166 (64) 34 (30) (50) 74

October 28, 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 (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value ROE Decomposition (%) 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 0.9 0.1 2.7 3.6 0.7 0.1 1.6 6.2 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 7.6 16.1 3.7 47 91 134 74 7.4 16.2 3.9 46 87 132 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 13.2 14.1 15.3 20.0 21.0 26.7 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 3.8 75.0 3.6 10.2 6.0 1.2 15.2 5.3 75.0 3.8 15.2 5.6 1.1 25.3 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 8.7 8.7 12.8 7.0 57.4 16.4 16.4 21.0 7.0 65.6
10.9 10.9 9.7 7.2 3.3 0.9 0.9 8.7 6.4 10.3 10.3 9.1 5.2 3.3 0.8 0.8 7.4 4.9 9.0 9.0 7.7 3.9 3.8 0.8 0.7 6.9 3.8 12.0 12.0 10.0 3.7 3.3 0.6 0.6 7.5 2.4 24.2 24.2 16.5 3.7 3.3 0.6 0.6 11.7 2.4 12.9 12.9 10.1 3.2 3.3 0.5 0.5 8.1 2.3

FY08

FY09

FY10 FY11E FY12E FY13E

October 28, 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%)

October 28, 2011

10