Brokerage firm Prabhudas Lilladher has downgraded Blue Star to 'Accumulate' with a price target of Rs 1,783. While the company continues to see strong sales growth, particularly in air conditioners, rising commodity costs are putting pressure on profit margins, which has prompted a rethink of the stock's near-term outlook.
Prabhudas Lilladher has revised its stance on Blue Star, downgrading the stock from 'Buy' to 'Accumulate' while setting a new price target of Rs 1,783. This adjustment reflects a cautious view regarding the company's profitability in the current inflationary environment. While the company continues to demonstrate strong sales momentum, the challenge of maintaining profit margins in a highly competitive market has become a key concern for analysts.
The core of the issue lies in the performance of the unitary cooling products segment, which includes the company's popular room air conditioners. During the second quarter, this segment saw a notable 29.4% year-on-year increase in revenue, highlighting healthy consumer demand. However, the surge in top-line growth was offset by a sharp contraction in operating profit margins. The segment's EBIT margin dropped to 2.3%, significantly lower than the 6.2% reported in the same period last year. Rising commodity costs, such as the prices of raw materials, are putting direct pressure on profitability. Management is attempting to navigate this by rationalizing product offerings and implementing selective price increases, but the intense nature of competition in the cooling appliance sector limits the company's ability to pass on these increased costs to consumers.
Despite these margin headwinds, Blue Star remains focused on long-term growth through its projects business, with a particular emphasis on the data center sector. The company is actively pursuing this space, targeting order bookings of INR 40 billion by fiscal 2027. To maintain capital efficiency and protect cash flow, the company has also made a strategic decision to exit certain infrastructure projects. While this is intended to streamline operations, it may cause some volatility in project execution in the short term. Additionally, while the commercial refrigeration segment is showing early signs of recovery, management is keeping growth expectations conservative, projecting single-digit growth for the fiscal year.
Looking ahead, analysts at the brokerage maintain a positive outlook on the company's revenue trajectory, projecting a compound annual growth rate of 17.6% between fiscal 2026 and 2028. Earnings growth is also expected to be robust, with projections pointing toward a 20.3% growth in profit after tax over the same period. However, the actual benefit to shareholders will depend on management's ability to stabilize EBIT margins. The company's goal is to reach a 6.5% margin level, and the success of this objective will be the primary monitorable for investors in the coming quarters. Market participants will likely track whether the company can successfully balance its revenue growth ambitions with the necessary cost-control measures to protect its bottom line.