Blue Star faces the heat in Q1 from a milder summer season

Subdued Summer Hits Cooling Segment

Blue Star Ltd, a leading Indian air conditioning and commercial refrigeration company, is grappling with the effects of an unexpectedly milder summer in Q1 FY2025. Historically reliant on soaring temperatures to drive peak sales, the company’s performance in the initial quarter has been notably subdued, with lower-than-expected consumer demand for cooling products.

Industry watchers had forecast a strong start to FY25 for Blue Star on the back of rising urbanization and higher discretionary spending. However, a relatively cooler summer across key markets like North and Central India dampened sales volumes, particularly in the residential air conditioning segment — traditionally the company’s seasonal growth driver.

Sales Volume Growth Falters

According to preliminary estimates from brokerage firms, Blue Star may witness flat or marginal single-digit volume growth in Q1, a significant drop compared to the double-digit expansion seen in the same period last year.

“Summer months are critical for revenue acceleration in the cooling products segment. This year, the mild temperatures have disrupted consumer buying cycles,” said Rashmi Bansal, Consumer Durables Analyst at Prudent Securities. “Retail offtake in the north, especially in states like Uttar Pradesh and Punjab, has been noticeably weak.”

In FY24, Blue Star’s cooling products segment had contributed over 55% to its top line in the April-June quarter. However, the company now faces mounting pressure to diversify revenue sources and focus on institutional and project-based orders for stability.

Channel Inventory Build-up Concerns

Retailers and dealers are reportedly sitting on higher inventories, owing to a mismatch between expected demand and actual footfalls. This has resulted in discounting pressure and promotional campaigns in the second half of Q1, as channel partners look to reduce unsold stock.

“The channel inventory build-up has added cost pressure, leading to thinner margins,” said Amit Roy, AVP – Institutional Equities at Truemark Capital. “The company is deploying offers and trade incentives, but these impact profitability.”

Notably, many retail outlets in Tier-II and Tier-III cities have cited lower walk-in traffic compared to previous summers, despite newer product launches and energy-efficient models on offer.

Commercial Projects Provide Partial Cushion

On the brighter side, Blue Star's commercial air conditioning and engineering projects division has offered some cushion to topline growth. Institutional orders from infrastructure and real estate projects continue to provide steady business, albeit with longer project cycles and slimmer margins.

The company recently bagged several high-value orders for HVAC systems in metro rail projects and government infrastructure initiatives. These are expected to reflect more prominently in Q2 and Q3 revenues.

“While the summer-dependent consumer segment faltered, Blue Star’s institutional business has maintained its momentum. This helps de-risk the seasonal nature of its portfolio to some extent,” said Naveen Bhagat, Portfolio Manager at Avista Advisors.

Market Reaction and Stock Performance

The market has already priced in some of the weakness. Blue Star shares have underperformed the broader Nifty 50 index over the past month, falling by nearly 5% as of early June. Analysts expect near-term volatility to persist, especially if early monsoon rains further dent cooling product sales.

Despite this, long-term sentiment remains stable. “We remain structurally positive on Blue Star, given its strong brand equity, pan-India distribution network, and R&D-backed product innovation,” said Mahima Kulkarni, Research Head at Edelwise Equities. “The current softness may be temporary, and pent-up demand could return if temperatures spike again or during festive-season purchases.”

Investor Outlook: Patience Required

Investors are advised to adopt a medium- to long-term horizon. While Q1 might reflect pressure on revenue and margins, subsequent quarters could provide recovery as infrastructure orders materialize and festive-season demand kicks in by Q3.

For now, all eyes are on the company’s official Q1 earnings guidance, expected in late July. Analysts will watch closely for commentary on inventory correction timelines, demand outlook, and project execution rates.

Key Takeaway: While the summer’s mild temperament may have caught Blue Star off guard, the company’s diversification strategy and institutional order pipeline offer hope for a rebound. Investors should brace for a muted Q1 but stay optimistic about the broader fiscal year.