Emkay Research has issued a BUY recommendation on Blue Star Limited, setting a 12-month target price of Rs 1,850. The report, published on July 2, 2025, dissects the company’s recent performance, industry headwinds, and forward-looking prospects. Despite a challenging first quarter, Emkay’s analysis underscores the cyclical nature of demand in the air conditioning (AC) sector, the resilience of Blue Star’s diversified business model, and the potential for a robust recovery in the latter half of FY26. Investors are advised to focus on the company’s operational discipline, margin guidance, and the strategic implications of regulatory changes, all of which are expected to shape Blue Star’s trajectory in the coming quarters.

Emkay Research Reiterates BUY: Blue Star’s Investment Thesis

Emkay Research maintains a BUY rating on Blue Star, with a target price of Rs 1,850, reflecting a 5.4% upside from the current market price of Rs 1,756. The research house’s conviction is anchored in Blue Star’s ability to weather short-term volatility and capitalize on structural growth drivers in the consumer durables and commercial cooling segments.

Despite a weak Q1FY26, the management’s guidance for FY26 remains intact, with revenue and margin expectations supported by cost discipline and operational efficiency. The report highlights that the recent demand softness is transitory, not structural, and that the company’s diversified revenue streams will help offset near-term headwinds.

Q1FY26: Demand Deferred, Not Destroyed

Blue Star anticipates a 20-25% year-on-year revenue decline in the Room Air Conditioner (RAC) segment for Q1FY26, primarily due to an unusually high base and unseasonal rainfall that dampened demand across key regions. The South experienced early showers in April, followed by rainfall in the North and West during May, leading to subdued consumer offtake.

Commercial Air Conditioning (CAC) and Commercial Refrigeration segments are expected to partially offset the RAC weakness, with projected growth of 10-12% and 15-20% respectively, driven by data center projects and robust demand for visi coolers and freezers.

Inventory Overhang and Channel Dynamics

Q2FY26 is likely to witness a slower offtake, as elevated channel inventory persists due to muted secondary sales in Q1. The management notes that while no significant discounting has occurred yet, continued monsoon activity could prompt players to revisit pricing strategies to clear excess stock.

Despite these challenges, Blue Star’s management remains optimistic about a demand rebound in H2FY26, fueled by festive season momentum and pre-buying ahead of the Bureau of Energy Efficiency (BEE) star-rating change in January 2026.

Guidance and Margin Outlook

The company has reiterated its guidance for 10-15% RAC growth in FY26, with Unitary Products (UP) EBIT margins expected in the 8-8.5% range, skewed toward the lower end due to ongoing cost discipline and operational efficiency measures.

The upcoming BEE star-rating revision is anticipated to result in a 7-8% cost increase across industry players, likely triggering pre-buying activity in Q3 and Q4FY26 as dealers and consumers seek to lock in current prices.

Financial Performance and Valuation Metrics

Blue Star’s consolidated financials reflect resilience and prudent capital allocation, with revenue projected to grow at a 12% CAGR, EBITDA at 15%, and PAT at 13% over FY25-28E. The company’s net-debt position is expected to remain negative, underscoring a robust balance sheet and ample liquidity.

Key valuation metrics as of FY26E include a P/E of 58.8x, EV/EBITDA of 37.2x, and a dividend yield of 0.6%. The stock currently trades at a premium to its 10-year average P/E, reflecting investor confidence in Blue Star’s long-term growth prospects.

Segmental Performance: Unitary Products, EMP & CAC, and PEIS

Unitary Products (RAC + Commercial Refrigeration) are expected to see a marginal decline in FY26E, but a strong rebound is forecast for FY27E and FY28E, with EBIT margins improving steadily.

EMP & CAC (Projects + Commercial AC) continue to deliver double-digit growth, supported by infrastructure investments and the proliferation of data centers.

Professional Electronics and Industrial Systems (PEIS) remains a smaller contributor but is projected to maintain double-digit EBIT margins, reflecting operational efficiency in niche segments.

Stock Levels and Investor Targets

Blue Star’s stock has exhibited notable volatility, with a 52-week high of Rs 2,420 and a low of Rs 1,521. The current market price stands at Rs 1,756, offering a 5.4% upside to Emkay’s target of Rs 1,850.

Key support levels are observed near Rs 1,520, while resistance is expected around Rs 1,850-1,900. Investors are advised to accumulate on dips, with a medium-term horizon aligned to the company’s earnings recovery and sector tailwinds.

Strategic Takeaways and Investment Rationale

Emkay’s analysis underscores the cyclical nature of weather-led demand volatility in the AC industry, with historical trends indicating that weak summers are often followed by sharp rebounds in both volume and stock prices.

Blue Star’s diversified business model, prudent financial management, and proactive response to regulatory changes position it as a compelling investment in the Indian consumer durables space.

Investors should monitor the impact of the BEE star-rating change, channel inventory normalization, and festive season demand as key catalysts for stock performance in the coming quarters.

In summary, Emkay Research’s BUY call on Blue Star is underpinned by the company’s resilience, operational discipline, and the expectation of a cyclical recovery. The stock offers a balanced risk-reward profile for investors seeking exposure to India’s growing consumer durables and commercial cooling markets.