Blue Star: Cooling times

The company has a few advantages over its competitors that could yield better results in future

After a painful 2009-10, cooling products and packaged electro-mechanical engineering companies are expecting an improved outlook. While analysts are positive about both the major players — Voltas and Blue Star — the latter seems to be better placed.

Since Voltas has a broader set of operations, its revenues recorded a double-digit growth to touch Rs 4,824 crore in FY10, while Blue Star posted a rather dismal single-digit growth rate. Analysts like the improved profitability at Blue Star and its dependence on the domestic market. Voltas saw its margins improve substantially; operating profit margins grew 258 basis points to 9.9 per cent and net profit margin rose 222 bps to 7.4 per cent. This was mainly due to better top-line growth and a 700 bps decline in raw material to sales (at 47 per cent). On the other hand, Blue Star’s margins improved at a lower rate, but remained higher than that of Voltas. Operating margins and profit margins stood at 11.7 per cent and 7.7 per cent, respectively.

Blue Star is predominantly focused on the domestic market, whereas 70 per cent of Voltas’ order book comprises international projects. So, Voltas may be vulnerable to higher margin contraction, as international operations are still not out of the woods. The outlook for its business in West Asia is still cautiously optimistic despite signs of recovery.

Blue Star has shifted its focus to sectors with high-gestation periods, like hospitals, hotels, education centres and power. The company is eyeing segments creating more stability in the revenue stream, reckon analysts. However, in case of Voltas, air conditioning and related businesses contribute around 60 per cent to profits. Mining, construction, material handling and textile machine accounts for 19 per cent of profits and room air conditioners, freezers and water coolers contribute the remaining 21 per cent. Hence, operations may remain volatile.