Thursday, July 10, 2008

Blue Star - Shinning Star

I was reading the Blue Star balance sheet and it was a breath of fresh air. I was pleasantly surprised by the candidness and the clarity of management thought process.

Enclosing a few excerpts of the Chairman’s speech

“Actually we have been successful in controlling expenses for a number of years with a conceptually simple yet effective approach. Basically, we ensure that the increase in total expenses is significantly less than the increase in Gross Margin.

Blue Stars operating managers are well versed in a culture of accountability and cost consciousness and are entrusted to deliver business results while managing costs and cash flow. They did a excellent job last year. For ex, while Operating Income grew by 39% and Gross Margin by 51%, total expenses grew by only 24%. The difference flowed straight into PBT which grew by 137%. The mathematics is simple, but the results dramatic.”

Some more

“Capital turnover improved dramatically from 5.32 to 7.48. Borrowing reduced from 89 crores to 37 crores and debt/equit ratio reduced from 0.42 to only 0.14. This was a encouraging development because we clearly have proven a self financing business model. At a time when capital is likely to become scarce and more expensive, it is reassuring to have good internal cash generation and a strong balnce sheet”.

I just love the focus on costs in a year where the company increase topline from 1607 crores to 2270 cores and net profit showed a dramatic 145% jump from 71 crores to 174 crores. There is clarity of thought and the orientation to focus on profitable growth and not just growth.

I have experienced that in most balance sheets the “ management discussion & analysis” part is really given lip service and managements typically mouths some platitudes. The Blue Star discussion was excellent with detailed analysis of each of the business segments, plants & various functions. It was informative and the management has made a genuine attempt to educate as opposed to just informing the shareholder.

The business had a great time last year and things might slowdown a little bit this year bcos of the general slowdown.

Here’s a company which delivered RONW of 66% and ROCE of 81% last year. Consistent growth in profits in the last 10 years. The stock has a PE of about 20

So what’s the call …

I m clear that I will own stock in this company someday not just for performance but more importantly for the clarity of management thought process. At 20 PE I m unable to break the mental barrier of paying top dollar for a good business. So I will wait patiently and hope for a bad quarter or some bad news when the market irrationally hammers the stock down.

But then like I said in one of my earlier post maybe …

Yeh Na Thi Hamari Kismat, Ke wisaal-e-yaar, hota,
(It was not in my destiny, to be united with my lover)

Agar aur jeete rehete, Yahi Intezaar Hota
(If I had lived any more , I would still be waiting for it) …… Mirza Ghalib


Rohit Chauhan said...

blue star started focussing on capital efficiency from 2002 onwards. They reduced capital employed, improved margins etc. The company was available for a PE of 5 in 2003. I think they have kept a focus on the capital efficiency since then. one worrying point i noticed a year back was a big increase in Accounts recievables. not sure if they have taken care of that now


Ninad Kunder said...


Receivables have come down from 80 days to 79 days. Not very dramatic but then atleast assuages one that the 41% increase in sales is not by pushing inventory to the dealers end.

I havent read the previous balance sheets but a guesstimate would be that as the customer profile expanded into long term contracts like retail chains, malls etc, accounts receiveables woud have increased.

If I remember reading on your blog, I think you held the stock from 2002 onwards :-). At 5 PE it was a brilliant buy.


Mahendra Naik said...

Hi Ninad,

Also look at Hitachi Home & Life Solutions in a similar line of business. They have turned around in the past 3 years and are showing great growth. It's also available at sub 10 PE and its products are well known and command a premium in markets. In fact I use their window AC for
the past 8 years and am highly impressed by its quality and reliability. They are less into the industrial & commercial HVAC business but they are getting into it. I also own the stock

Ninad Kunder said...

Hi Mahendra

Will check on Hitachi and come back to you.



Anonymous said...

" So I will wait patiently and hope for a bad quarter or some bad news when the market irrationally hammers the stock down."

Hi Ninad ,
Don't you think that the market has irrationally hammerd the stock down.?

Ninad Kunder said...

Hi Anon

You are right the market and it is a good time to own the stock. However there is so much value across most stocks that it is becoming difficult to choose. There are stock available at market caps which are less than free cash on the balance sheet or stocks available at a fraction of book value.

To quote buffet from his last letter "feel like a mosquito in a nudist camp: :-)