Blue Star

Today I am discussing about the 2nd stock in my portfolio. I bought the stock around 9-12 months back at an average price of 260. The price has moved significantly since then but I think it is one of best stock ideas I have for long term perspective.

Blue Star is a leading player in centralized air conditioning, Electro Mechanical Projects and has grown 5 times over last decade as IT/ITES companies expended their operation significantly. IT/ITES companies’ growth have slowed down in the last 2-3 years and are likely to remain in single digit or low double digit over next few years. Blue Star has to depend on investment on other industry sectors to grow at the rate it has been growing over last few years. Fortunately, many sectors in India are the cusp of breaking out which should help Blue Star to maintain its growth at around 20-25% over next 5 years.
Management has also been trying – organically and in-organically – to expand the portfolio of services to become one-stop stop for all contractual works related to Air-conditioning and MEP. They bought Nasser Electrical in early 2008 to gain competency in electrical contracting and have now bought a company to gain expertise in plumbing.
Industry Segment
Electro Mechanical Project and Packaged Air-conditioning System
Estimate market size is around 10,500 Cr of which room air-conditioning share is at around 5500 Cr. IT/ITES and retail has seen slowdown in the investment whereas many other sectors such as hospitality, airport, education etc have picked up.
Cooling products
It is fastest growing segment and has potential to grow at fast clip in coming years.
Professional Electronics and Industrial System
It is very small part of business and will not have significant impact on overall performance.
Financial Performance
Company has performed well on all the financial parameters. Revenue has grown from 1179 Cr to 2556 Cr, profit from 48.90 Cr to 211.49 Cr, operating cash flow from 18Cr to 115 Cr. It has consistently returned more than 30% on capital, equity employed. More importantly, it has also improved its operating margin by over 300 basis points over last 5 years.
Their ability to manage cost coupled with lower cost of financing helped in improving the operating margin in a very difficult year.
Management
Blue Star is run by professional management and board. The management has been very transparent in reporting correctly and accurately. Management compensation is reasonable with respect to the revenue and profit of the company.
Conclusion
The company will ride on infrastructure development in the country. There are few irreversible trends such as organized retaining, organized hospitality business, organized education infrastructure building, renovation and upgrade of major airport etc will help Blue Star in growing top line. The company has been very conscious of ensuring that they don’t compromise on profitability resulting in operating margin expansion year-on-year over last 10 years. I don’t see a region why it will not continue going forward.

At around Rs 450 is trading at PE of 19-20 which is fairly valued. I had started buying the stock when it was trading at around 220 and continue to build position for some time. My average buying price is around Rs 260. I don’t plan to sell it for next 5 years unless some exceptional event changes the course of the company.