Neutral Blue Star; target of Rs 1510: Motilal Oswal

What happened

Motilal Oswal reported that Blue Star’s second-quarter revenue rose about 21% year over year to INR29.3 billion, while adjusted profit after tax increased 8% to INR1.1 billion. The broker reiterated its Neutral rating and set a target price of Rs 1510.

Confirmed

Global impact / market context

Higher revenue and adjusted profit indicate stronger reported sales and earnings than Motilal Oswal expected, but operating profit margin, the share of revenue left after operating costs, fell year over year. The broker’s Neutral view signals that it sees limited reason to favor the shares at current valuation.

Analyst inference

The broker described Blue Star shares as fairly valued and based its target price on valuing the company’s three business segments separately. Although reported revenue and adjusted profit exceeded its estimates, the Neutral rating indicates that the broker did not see enough reason to recommend buying the shares.

Analyst inference

What to watch

1. Check whether revenue growth continues across PES, UCP and EMPS, which grew about 51%, 29% and 16% respectively in the reported quarter. Analyst inference
2. Watch operating profit margin, which means operating profit as a share of revenue, for signs that it can recover from the reported 7% level. Analyst inference
3. Compare future results with the broker’s estimates and its Rs 1510 target; changes in earnings forecasts or segment valuations could alter its Neutral assessment. Analyst inference

Evidence

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