Rating Rationale
June 28, 2024 | Mumbai
Blue Star Limited
Rating reaffirmed at 'CRISIL A1+'
 
Rating Action
Rs.700 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

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 (EMP) and unitary products (UP) segments. The rating factors in the strong market position of BSL in the EMP segment, with a healthy order book and gradually increasing market share in the UP segment. Financial risk profile is also 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.

 

Operating income increased ~22% (on-year), led by growth of ~27% in the UP segment and ~17% in the EMP segment. Rise in the UP segment was driven by strong festive season (third quarter) and further high demand in the fourth quarter of fiscal 2024. Growth in the EMP segment was aided by strong demand from the manufacturing, data centre and infrastructure segments along with healthy order book of Rs 5,697 crore as of March 2024. The operating margin improved ~1% to 6.9% in fiscal 2024 due to reduction in logistics cost, cost management program and economies of scale.

 

The financial risk profile is marked by high networth and strong capital structure. Networth increased to ~Rs 2,500 crore as of March 2024 compared to Rs 1,252 crore as of March 2023 owing to equity raised through the qualified institutional placement of Rs 1,000 crore. Debt reduced to Rs 167 crore as of March 2024 from Rs 578 crore in March 2023. Debt protection metrics remain strong, with interest coverage ratio above 10 times for fiscal 2024. The liquidity remains strong with cash and cash equivalents of Rs 626 crore as on 31st March, 2024. Further supported by unutilised bank limit, the fund-based bank limit (Rs 665 crore) was utilised at ~9% during the 12 months through March 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 to 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, as one of the top two players, along with Voltas Ltd. 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. The widespread distribution network of over 4,100 channel partners and 8,800 outlets across the country supports the strong market position.

 

  • Healthy financial risk profile: Financial risk profile is marked by strong networth of ~Rs 2500 crore and low gearing of 0.1 time as on March 31, 2024, supported by steady growth in cash accrual. Debt reduced to Rs 167 crore as of March 2024 compared to Rs 578 crore as of March 2023. Debt protection metrics remain strong, with interest coverage ratio above 10 times in fiscal 2024; the metrics are expected to remain healthy over the medium term.

 

The company has modest capital expenditure (capex) for capacity expansion apart from the regular maintenance capex, which is expected to be mainly funded by internal accruals. The debt protections metrics are expected to remain strong in 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 downturn, leading to lower order inflow and thereby impact operating performance.

 

  • Large working capital requirement: 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 186 days as on March 31, 2024. However, majority of the working capital is financed through creditors, given the back-to-back arrangements and advances received from customers.

Liquidity: Strong

Liquidity has been healthy, marked by cash and cash equivalents of Rs 626 crore as on March 31, 2024. The fund-based facility of Rs 665 crore was utilised at ~9% during the 12 months through March 2024. Cash accrual of Rs 500-600 crore per annum is expected to be sufficient to meet capex as well as incremental working capital requirements.

 

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 2023 stood at ~6%. 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 ~8% in fiscal 2023 as compared ~6% in fiscal 2022.
  • 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 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

Unit

2024

2023

Revenue

Rs crore

9685

7958

Profit after tax (PAT)

Rs crore

414

397

PAT margin

%

4.3

5.0

Adjusted debt/adjusted networth

Times

0.1

0.5

Interest coverage

Times

12.3

8.4

Note: These are CRISIL Ratings-adjusted figures

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Commercial paper NA NA 7-365 days 700 Simple CRISIL A1+

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

Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper ST 700.0 CRISIL A1+   -- 19-07-23 CRISIL A1+ 25-04-22 CRISIL A1+ 29-05-21 CRISIL A1+ CRISIL A1+
      --   -- 25-04-23 CRISIL A1+   --   -- --
All amounts are in Rs.Cr.
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Consumer Durable Industry
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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