Financial Analysis:

Blue Star Limited

Group-3, Section B

Abhijeet Mukherjee
Amit Kumar Bhil
Diptiranjan Panda
Neha
Piyush Vanjani
Purva Tamhankar
Ritu Raj

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 Financial Analysis: Blue Star Limited Group-
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Industry Overview:

In 2009-10, the estimated total market size for air-conditioning in India was around Rs. 10750 Cr.
During the year, the economic slowdown continued to affect certain segments such as retail and
builders. Project expansion plans in the IT/ITES segment were also delayed mainly due to the impact
of the US recession on this segment. However, the air-conditioning market witnessed significant
growth in segments such as healthcare, hospital, data centres and education. In addition,
infrastructure segments such as airports, power plants, steel and metro rail were unaffected by the
economic downturn and project plans were largely on tracks.

Blue Star Limited

Blue Star is India’s leading central air-conditioning and commercial refrigeration company, fulfilling
the cooling requirements of large number of corporate and commercial customers. It also offers
expertise in allied contracting activities such as electrical, plumbing and fire fighting services. Blue
Star’s other business include marketing and maintenance of imported professional electronic and
industrial systems and execution of industrial projects.

Key Financial Ratios: Snapshot

Ratio   Calculation Blue Star Ratio

Liquidity      
Current   139280.16/109710.30 1.26952674
Asset Management      
Inventory turnover   253103/(22000) 11.5046818
Days sales outstanding   365*62821/253103 90.5942047
Fixed asset turnover   253103/35187 7.19308267
Total assets turnover   253103/159770 1.584171
Debt Management      
Total debt to total assets   110602/159770 0.69225762
Profitability      
Profit Margin on sales   21148/253103 0.08355492
Basic earning power   27662/159770 0.17313638
Return on total assets(ROA)   21148/159770 0.13236528
Return on common equity(ROE)   21148/49167 0.4301259
Market Value      
Price/Earnings   400/21148*899.36105 17.010801
Price/cash flow   400/1300*899.36105 276.726477

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Liquidity Ratio:

Current Ratio = Current Assets/Current Liabilities

1.27

Industry Average: 1.33

According to the schedule, the sundry debtors account for 45% of the total current assets while the
inventory account for 18.5%. This suggests that Blue Star quick liquid assets are 36.5% of the total
current asset. On the other hand 27% of current liabilities consist of customer advances and
provisions for dividend distribution. As the inventory turnover ratio (7.3) suggests a healthy flow of
inventory, the rather low current ratio may not be the cause of concern.

Asset Management Ratio:

Inventory Turnover Ratio = Cost of goods sold/ Inventory

7.3

Industry Average: 6.83

As the figures show Blue Star has a healthy inventory turnover ratio, which suggests that the sales
are good and it is not holding inventory which would have resulted in added cost. When compared
with its competitors like Godrej which has an inventory turnover ratio of 3.65, Blue Star reflects
better inventory management which has also resulted in improved profit margin.

When we see the turnover ratio and the current ratio, the inventory levels in the current ratio may
not be a cause of concern due to its healthy flow. As the turnover ratio suggests Blue Star is quite
comfortable in churning out its inventory due to its strong sales and brand value.

Total Asset Turnover Ratio = Sales / Total Assets

1.58

Industry Average: 4.8

The rather low asset turnover ratio suggests that Blue Star is not utilizing its total asset in an efficient
manner. Some asset should be disposed off as per our analysis.

Operating Asset and Operating Capital Analysis:

As calculated above the asset management ratios, the investment done on the operating asset and
operating capital must also be analysed to get a clear picture of the utilization of capital by Blue Star.

Net Operating Working Capital = Current Asset – Non Interest Current Liabilities

2010: 43206.75

2009: 33907.81

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Total Operating Capital = Net Operating Working Capital + Fixed Asset

2010: 62972.44

2009: 52666.59

When we look into the above figure the working capital rose by 27% while the fixed asset rose by
5%. Also the sales rose by 0.3% as compared to previous year (2009). The 27% rise in working capital
and the 45% of current asset being locked up with sundry debtors shows that the receivables are not
being collected effectively and is building up. This may be cause of concern for the management we
therefore recommend that the firm should take steps to realize its outstanding dues.

Free Cash Flow:

Net Operating Profit after Taxes = EBIT (1-Tax Rate)

2010:

21148.62

Operating Cash Flow = NOPAT + Depreciation and Amortization

2010:

Operating Cash Flow = 24621.94

Gross Investment in Working Capital = 10305.85+3473.32= 13779.17

Free Cash Flow = 24621.94 - 13779.17 = 10842.77

Debt Management Ratios:

Total Debt to Asset = 0.69

Industry Average = 0.62

Blue Star has a proper mix of capital funding, if needed it can utilize its leverage to raise money from
bond market.

Profitability Ratio:

Profit Margin on Sales = 0.08

Basic Earning Power = 0.17

Return on Total Asset = 0.13

Return on Equity = 0.43

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The above ratios give a healthy picture of the company. Profit Margin on sales being 8% is better
than most of its competitor. And the ROE of 43% makes it more attractive to the investors. Blue star
has been creating good wealth for its shareholders and thus in case company need more money
through equity we believe it would not find it hard to attract investors to put money on this firm.

The Profit Margin on Sales for 2009 was 6.57% whereas this year the margin is 8% this shows that
Blue Star has reduced its operational costs. As evident from the balance sheet, the management has
taken serious efforts to cut down the operational expenses and thus ensuring healthy profit margin.
Though when compared with previous year ROE has fallen from 49% to 43%, as mentioned in the
annual report the economic downturn faced by the firm may be one of the prominent reasons for
this. But the improving profit margin of the company reflects brighter prospect for the company.

Market Value:

Price to Earnings Ratio = 17

Price to Cash Flow Ratio = 276.72

As the PE ratio is higher for Blue Star its shows that the investors treat it as a growing company with
good prospect in the future. The high cash flow ratio also shows the same.