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Key Takeaways
- Strong growth in residential and commercial air conditioning sectors highlighted by development initiatives and AI-enabled models driving potential revenue and margin expansion.
- Strategic international market efforts and supply chain optimization suggest sustained revenue and margin improvement through efficiency and market stabilization.
``` - Reliance on room air conditioners growth faces sustainability challenges amid sector slowdowns, regulatory risks, supply disruptions, and sluggish international markets impacting overall revenue.
Catalysts
About Blue Star- Operates as a heating, ventilation, air conditioning, and commercial refrigeration (HVAC&R) company in India.
- The room air conditioners segment showed remarkable growth with October volume growth of 30% and revenue growth of 28%, indicating continued strong demand and potential future revenue increases.
- The commercial air conditioning segment exhibited strong revenue growth, driven by developments in data centers and manufacturing, likely contributing to improved margins and earnings.
- The international market efforts, specifically US shipments and ongoing product testing for Europe, suggest potential for future revenue expansion as these markets stabilize.
- The focus on new product development in commercial air conditioning and room ACs, including AI-enabled models, positions Blue Star for enhanced revenue growth and margin expansion.
- Investments in manufacturing capacity and supply chain optimization are expected to support revenue growth and improve net margins by achieving greater efficiency and reducing costs.
Blue Star Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Blue Star's revenue will grow by 16.7% annually over the next 3 years.
- Analysts assume that profit margins will increase from 4.9% today to 5.5% in 3 years time.
- Analysts expect earnings to reach ₹9.3 billion (and earnings per share of ₹45.44) by about December 2027, up from ₹5.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹11.3 billion in earnings, and the most bearish expecting ₹7.8 billion.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 62.3x on those 2027 earnings, down from 79.7x today. This future PE is greater than the current PE for the IN Building industry at 21.9x.
- Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 14.21%, as per the Simply Wall St company report.
Blue Star Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- The company emphasizes strong growth in the room air conditioners segment, but acknowledges the concern over slowdowns in other sectors like FMCG and automobiles, raising questions about the sustainability of its revenue growth.
- There is regulatory risk impacting the commercial refrigeration business, such as BIS specification changes disrupting supply chains, that could negatively affect net margins in this high-margin segment.
- Segment 2 growth has been limited due to export declines and commercial refrigeration challenges, which may put pressure on overall earnings despite significant growth in the room air conditioners segment.
- The international market, particularly in Europe, remains sluggish with uncertainties beyond Blue Star's control, potentially impacting revenue growth from international operations.
- Ongoing supply chain disruptions and dependency on non-domestic components create uncertainty around production costs and inventory levels, which could affect future net margins.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of ₹1901.28 for Blue Star based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2260.0, and the most bearish reporting a price target of just ₹1380.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹170.3 billion, earnings will come to ₹9.3 billion, and it would be trading on a PE ratio of 62.3x, assuming you use a discount rate of 14.2%.
- Given the current share price of ₹2038.75, the analyst's price target of ₹1901.28 is 7.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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