Blue Star shares are 'fairly valued', says Motilal Oswal, but projects 25% bull case upside

Shares of Blue Star Ltd. are in focus on Tuesday, November 25, after brokerage firm Motilal Oswal Financial Services initiated coverage on the stock.

The brokerage initiated coverage with a "neutral" rating on Blue Star with a price target of ₹1,950 per share, representing an 8.9% upside from its previous close of ₹1,790 apiece. It sees profitable growth driven by backward integration and scale.

Motilal Oswal also has a "bull case" price target of ₹2,240 for Blue Star, which has implies a potential upside of 25% from current levels.

Steady market share gains

Motilal Oswal said Blue Star is steadily gaining market share in the Indian room air conditioner (RAC) segment, improving to 14% in the financial year 2025 from 7% in FY14. It is now targeting a market share of 15% by FY27.

Blue Star also retains a strong leadership position in the commercial refrigeration business, holding over 31% market share in deep freezers and modular cold rooms.

The brokerage estimates the company's unitary cooling product (UCP) revenue will decline 3% this fiscal, primarily due to a weak summer season. However, the brokerage has projected a revenue growth of 19% and 18% in financial year 2027 and 2028, respectively, fueled by a recovery in demand.

It has also estimated Blue Star's earnings before interest and tax (EBIT) margin to be in high-single digits and to improve gradually as the company achieves a higher scale of operations and increases indigenisation.

Shifting focus to high-value segments

Motilal Oswal said Blue Star has shifted its focus to high-value segments. It is now looking at data centres, factories and select infrastructure projects, having better profitability and cash flow generation, the brokerage said.

Meanwhile, Blue Star has retained its leadership in the commercial air conditioning (CAC) business, which offers a full range of energy-efficient packaged, ducted, VRF systems and chillers catering to B2B customers, the brokerage said.

Blue Star holds the leadership position in ducted air conditioners and scroll chillers, with 45%-50% market share, and ranks second in VRF and screw chillers, with 20% market share.

The brokerage projects Blue Star's revenue to grow at a Compounded Annual Growth Rate (CAGR) of 15% over financial year 2026-2028, led by its healthy order book and a segment margin of 8.6% and 8.9% in FY27 and FY28, respectively.

PEIS segment, a value-added play

Blue Star's professional electronics and industrial systems (PEIS) segment contributed to 4% of the overall revenue and 8% to the overall EBIT over financial year 2021-2025, although its margin contracted to 9% in FY25 from 15% in FY21. The MedTech and data security businesses witnessed regulatory and demand challenges, while the industrial solutions business has been gaining traction.

Motilal Oswal estimates recovery in the PEIS segment would be driven by improving private capex and demand in healthcare and data security. It estimates a 10% revenue CAGR over FY26-28 and margins to expand to a 11% to 13% range.

Fairly valued at present

Blue Star currently trades at 48 times and 38 times its FY27 and FY28 estimated earnings per share (EPS) compared to its average of 46 times in the last 10 years and Motilal Oswal believes the stock is fairly valued at the current levels, given the strong re-rating in its valuation multiples in the last few years, which prompts its "neutral" stance.

Of the 24 analysts that have coverage on the stock, 10 have a "buy" rating, nine have  a "hold" rating and five have a "sell" rating.

Shares of Blue Star ended the previous session 0.8% up at ₹1,790 apiece. The stock has declined 9.6% in the past month, gained 15.3% in the last six months but has declined 20.8% this year, so far.

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