Record-high Order Book Sets Strong Foundation For Future Success

Key Takeaways

• Blue Star's expansion and innovation efforts, alongside strong demand, set the stage for increased revenue and market share growth.
  
• Strategic international market entry and record order backlog strengthen future revenue and earnings stability potential.
  
• Supply chain issues, exchange rate fluctuations, and regulatory changes could increase costs, compress margins, and hinder Blue Star's revenue and earnings growth.

Catalysts

Operates as a heating, ventilation, air conditioning, and commercial refrigeration (HVAC&R) company in India.

• Blue Star is seeing strong demand for its room air conditioners, with dealers stocking up and new product launches planned for the forthcoming season. This could boost future revenue and market share.
  
• The company is expanding its distribution footprint and investing in innovation, R&D, and digitalization, which could result in increased operational efficiency and revenue growth in the long term.
  
• The upcoming summer season and anticipated revival in government and private sector CapEx spending provide an opportunity for future revenue and profit growth.
  
• Blue Star's international business is positioning itself for growth in European and North American markets, with initial product shipments having commenced, which could expand future revenue sources.
  
• There is a robust carryforward order book that's at a record high, setting a strong foundation for future revenue growth and earnings stability.

Blue Star Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Blue Star's revenue will grow by 14.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.9% today to 5.3% in 3 years time.
• Analysts expect earnings to reach ₹8.9 billion (and earnings per share of ₹43.54) by about March 2028, up from ₹5.6 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 ₹7.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 68.3x on those 2028 earnings, down from 75.4x today. This future PE is greater than the current PE for the IN Building industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.83%, as per the Simply Wall St company report.

Blue Star Future Earnings Per Share Growth

Risks

• Supply chain restrictions and escalating raw material costs, particularly influenced by global uncertainties and U.S. trade policies, could increase operational costs and compress net margins.
  
• Liquidity crises in certain market segments and delayed order finalizations due to cash flow issues may slow revenue growth and strain working capital.
  
• Depreciation of the Indian rupee and fluctuations in exchange rates could impact the cost of imports, affecting profitability and leading to volatile earnings.
  
• The recent regulatory changes and setbacks in segments like commercial refrigeration could hinder revenue growth and depress net margins until resolved.
  
• Weakness in the Professional Electronics and Industrial Systems segment, due to muted demand and slow revival of the CapEx cycle, may negatively impact revenue growth and earnings recovery in the near term.

Valuation

• The analysts have a consensus price target of ₹1958.5 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 ₹2300.0, and the most bearish reporting a price target of just ₹1363.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹169.3 billion, earnings will come to ₹8.9 billion, and it would be trading on a PE ratio of 68.3x, assuming you use a discount rate of 14.8%.
  
• Given the current share price of ₹2046.85, the analyst price target of ₹1958.5 is 4.5% 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.