Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Blue Star Ltd (BSL).

 

The rating continues to reflect the strong business risk profile of BSL, driven by diversity in revenue from Electromechanical projects & commercial air conditioning (EMP) and unitary products (UP) segments. The rating factors in the strong market position of BSL in the EMP segment, with healthy order book and gradually increasing market share in the UP segment. The financial risk profile is strong, marked by high networth and strong capital structure. These strengths are partially offset by large working capital requirement and susceptibility to cyclicality in demand from end-user industries.

 

The operating income grew by ~25% in the first half of fiscal 2025. While all key businesses contributed to growth, UP segment benefited significantly on back of strong summer season demand and healthy festive sales, supported by consumer finance schemes (more than 50% sales through consumer finance schemes). The company has a healthy order book of around Rs 6598 crores as of Sept, 2024. The operating margins have improved by ~1% in first half of fiscal 2025 due to operating leverage as room air conditioning business performed significantly better in summer season and cost optimisation measures taken by the company.

 

In fiscal 2024, the operating income increased ~22% (on-year), led by growth of ~27% in the UP segment and ~17% in the EMP segment. The operating margin improved to 6% in fiscal 2024 as compared to 5.6% in fiscal 2023 due to reduction in logistics cost, cost management program and economies of scale.

 

The financial risk profile is marked by strong networth of ~Rs 2765 crore and low gearing of 0.1 time as on Sept 30, 2024, supported by steady growth in cash accrual. Debt protection metrics remain strong, with interest coverage ratio above 15 times in first half fiscal 2025; the metrics are expected to remain healthy over the medium term. The liquidity remains strong with cash and cash equivalents of Rs 436 crore as on Sept, 2024. Further supported by unutilised bank limit, the fund-based bank limit (Rs 665 crore) was utilised at below 10% on average during the 12 months through Oct, 2024.

Analytical Approach

CRISIL Ratings has consolidated the business and financial risk profiles of BSL and its subsidiaries -- Blue Star Engineering and Electronics Ltd, Blue Star Climatech Ltd, Blue Star International FZCO, Blue Star Systems and Solutions LLC, BSL AC&R (Singapore) Pte Ltd, Blue Star North America Inc, Blue Star Europe B V, Blue Star Innovation Japan LLC, Blue Star Qatar WLL, Blue Star Oman Electro-Mechanical Co LLC (joint venture [JV]) and Blue Star M&E Engineering Sdn Bhd (JV) -- due to the similar nature of their operations

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Diversified revenue profile: Presence in industrial (EMP) and consumer (UP) segments mitigates the risk of slowdown in any one segment or industry. BSL relies almost equally on both these segments, in terms of revenue and profitability. The UP segment contributed around 47% of revenue in fiscal 2024, with earnings before interest and taxes (Ebit) margin of around 8%; contribution of the EMP segment was higher at 49% with Ebit margins of ~7%.

 

• Healthy market position across business segments: BSL has an established track record and strong market position in the EMP segment & commercial AC business. The company is also the largest player in the commercial refrigeration business in the UP segment and has increased its market share in the room air-conditioning business to 13.75% in fiscal 2024 from 10% in fiscal 2016. Its widespread distribution network of over 4,100 channel partners and 8,800 outlets across the country supports the strong market position.

 

• Strong financial risk profile: Financial risk profile is marked by strong networth of ~Rs 2765 crore and low gearing of 0.1 time as on Sept 30, 2024, supported by steady growth in cash accrual. The debt remains low at ~Rs 247 crores as on Sept 30, 2024 majorly for the working capital requirement. Debt protection metrics remain strong, with interest coverage ratio above 15 times in first half fiscal 2025; the metrics are expected to remain healthy over the medium term.

 

The company has modest capital expenditure (capex) for capacity expansion apart from regular maintenance capex, which is expected to be mainly funded by internal accrual. The debt protections metrics are expected to remain strong over the medium term.

 

Weaknesses:

• Susceptibility to downturns in end-user industries: Demand for the EMP segment depends on capex in end-user industries, which is further corelated with the macroeconomic environment. Consequently, the amount of capex reduces during economic downturn, leading to lower order inflow impacting operating performance.

 

• Working capital intensive operations: Operations are working capital intensive, given the engineering, procurement and construction nature of operations in the EMP segment. As a result, gross current assets were around 177 days as on March 31, 2024. However, majority of the working capital financed through advances from customers and payables, thus mitigating the risk.

Liquidity: Strong

Liquidity has been healthy, as indicated by cash and cash equivalents of Rs 436 crore as on Sept 30, 2024. The fund-based facility of Rs 665 crore was utilised at below 10% on average during the 12 months through Sept, 2024. Cash accrual of Rs 500-600 crore per annum is expected to be sufficient to meet capex as well as incremental working capital requirement.

 

Environment, social and governance profile

The environment, social and governance (ESG) profile of BSL supports its already strong credit risk profile. The sector has moderate environmental and social impact, driven by its raw material sourcing strategies, waste-intensive processes and direct impact on the health and wellbeing of customers.

 

Key ESG highlights

• BSL’s share of renewables in total energy consumption during fiscal 2024 stood at ~9%. All its manufacturing sites have installed effluent and sewage treatment plants.
• Its facilities in Thane, Maharashtra, have received IGBC Green Building Certificate under the Platinum category.
• Share of female employees increased to ~9% in fiscal 2024 as compared ~8% in fiscal 2023.
• The governance structure is characterised by ~55% of its board being independent directors, ~18% women board directors and extensive financial disclosures.

 

ESG is gaining importance among investors and lenders. The commitment of BSL to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

Rating sensitivity factors

Downward factors

• Sustained decline in operating performance, leading to return on capital employed ratio to below 15% on a sustainable basis
• Significant debt funded capex leading to decline in financial risk profile

About the Company

BSL was established in 1943 by late Mr Mohan T Advani. It is India’s leading central air-conditioning and commercial refrigeration company. Its manufacturing facilities are spread across India including Ahmedabad, Dadra, Thane, Himachal Pradesh and Sricity (Andhra Pradesh). Operations can be classified into three segments -- EMP and packaged air conditioning systems, UP and professional electronics and industrial systems business -- which contributed 49%, 47% and 4%, respectively, to the consolidated sales of the company in fiscal 2023. It has presence in more than 18 international markets in the Middle East, Africa and South Asia. BSL has started new subsidiaries in North America and Europe to further expand its international business.

Key Financial Indicators

As on/for the period ended March 31		2024	2023
Revenue	Rs crore	9632	7958
Profit after tax (PAT)	Rs crore	409	397
PAT margin	%	4.2	5.0
Adjusted debt/adjusted networth	Times	0.1	0.5
Interest coverage	Times	10.6	8.4

Note: These are CRISIL Ratings-adjusted figures

Any other information: Not Applicable

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Blue Star Engineering and Electronics Ltd	Full consolidation	Wholly owned subsidiary
Blue Star Climatech Ltd		Wholly owned subsidiary
Blue Star International FZCO		Wholly owned subsidiary
Blue Star Systems and Solutions LLC (Wholly owned subsidiary of Blue Star International FZCO)		Step down subsidiary
BSL AC&R (Singapore) Pte Ltd (Wholly owned subsidiary of Blue Star International FZCO)		Step down subsidiary
Blue Star Qatar WLL*		Subsidiary (49%-ownership)
Blue Star North America INC		Wholly owned subsidiary
Blue Star Europe BV		Wholly owned subsidiary
Blue Star Japan LLC		Wholly owned subsidiary
JV Blue Star M&E Engineering (Sdn) Bhd (Malaysia)	Proportionate consolidation	JV
Blue Star Oman Electro-Mechanical Co. LLC	Proportionate consolidation	JV

*Management control is with BSL, hence considered as subsidiary