From THE HINDU group of publications
Sunday, July 08, 2001


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Blue Star: Buy

Recommendation: Buy

Suresh Krishnamurthy

Blue Star is one of the leading players in the market for air-conditioning systems in India. The market for air-conditioners can broadly be divided into central plants and unitary products. Blue Star is one of the two big manufacturers of central plants, though one of the smaller players in the unitary product market.

Given that it derives a substantial portion of its revenues from central plants, the demand for Blue Star's products is derived from the state of industrial investment in the country. In this backdrop, the beleaguered state of investments does not augur well in the near term. In addition, competition has heated up significantly in the past few years, depressing margins in the process.

On the other hand, Blue Star, along with Voltas, maintains a premier position in the market for central plants. Blue Star's collaboration with York Air-conditioning of US is also a positive factor. Overall, Blue Star's position in the industry indicates that a revival in industrial activity could very likely reflect in the company's improved financial performance. On average, the potential for the company's earnings to grow in line with that of the economy is very high.

With respect to financial parameters, Blue Star, at its prevailing market price of Rs.37.50, now trades at a price to earnings multiple of around three times its earnings for the year ended March 2001. The company declared a dividend of Rs 5.50 for the year ended March 2001. The dividend history of Blue Star has also been quite stable over a long period. The company is also not highly leveraged.

The high dividend yield of around 15 per cent offered by the stock and its dividend track record is a comfort factor for the investors. On the other side, the high dividend yield may also indicate the high risk involved in investing in the stock, or the possibility that the dividends may be cut in the event of a decline in earnings in the ensuing financial year. Still, for investors with the ability to hold over a reasonably long period in the future, the returns could be good.

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