Blue Star vs Voltas

Please read post1 and post2 for earlier posts about Blue Star that will set context for this one.

* Both BlueStar and Voltas operate in mostly the same industries - commercial cooling (60% of BlueStar and 50% of Voltas revenues respectively) and cooling products (25% of Bluestar and Voltas revenues).

* Voltas has done a few big marquee projects in India (Commonwealth Games Stadium and F1 track) and the middle east (Burj Khalifa, Etihad Towers, Ferrariworld, Yas racetrack).

* But when you look at owner's earnings on year start assets, RoI, net margin and asset turnover, BlueStar has consistently beaten Voltas over the years (2003 to 2010)

* This is reflected in the fact that, every rupee invested in the capital of Voltas over the 2003 to 2012 period produced 1.38 rupees, while every rupee invested in the capital of BlueStar over the 2001 to 2012 period produced 4.73 rupees, making BlueStar more than thrice as productive as Voltas in terms of earning a return on invested capital over the last decade

* Since both companies operate in the same industry, and are presumably subject to mostly the same market and competitive dynamics, what is the reason for BlueStar's outperformance?

Return on every incremental Re 1 deployed in the business	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	4.73	3.38	2.94	3.28	3.97	2.46	2.96	9.59	(5.12)	(2.05)
Voltas	1.38	1.36	1.48	1.20	1.56	1.38	1.73	1.54	2.53
Difference	3.35	2.02	1.47	2.08	2.41	1.08	1.23	8.06	(7.65)	(2.05)

Annual RoCE	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	-18%	38%	49%	53%	65%	30%	26%	28%	30%	32%
Voltas	12%	26%	36%	28%	34%	41%	10%	6%	18%	16%
Difference	-30%	12%	13%	25%	31%	-10%	16%	22%	12%	16%

We first examine the net margin - Blue Star on average has 1-2% higher net margin than Voltas each year.

Net. margin	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	-3%	6%	10%	8%	8%	6%	6%	6%	6%	7%
Voltas	4%	7%	8%	6%	7%	6%	2%	1%	4%	4%
Difference	-6%	0%	1%	2%	2%	0%	4%	4%	2%	3%

We investigate if the difference in margin can be due to lower operating costs for Blue Star - but looking at the operating margins from 2003 to 2012, we see that over the last decade, Blue Star has had slightly higher operating expenses that Voltas on average, although there is volatility in individual years. Since Blue Star has the same to slightly higher operating expenses as a percentage of sales, operational efficiency cannot explain the difference in Blue Star's slightly higher net margin

Operating expense	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	23%	19%	14%	13%	13%	14%	15%	16%	18%	19%
Voltas	19%	19%	20%	19%	18%	15%	0%	0%	15%	16%
Difference	4%	0%	-6%	-6%	-5%	-1%	15%	16%	3%	3%

But what is quite interesting is that, over the last decade, BlueStar had a consistently higher EBITDA margin than Voltas in most years - so a higher EBITDA margin inspite of higher operating expenses means that the COGS as a percentage of Sales for BlueStar was much lower than Voltas - this implies that the source of Blue Star's slightly higher net margins is from one of two possible sources:

        1) in purchasing cheaper raw materials and having lower manufacturing expenses as a percentage of revenue than Voltas. One could hypothesize that Voltas has projects that are much more geographcally diverse than Blue Star (many big middle east projects for instance) - COGS for these remote projects may be higher since the raw material has to be imported to the middle east.

        2) The other possible explanation is that Blue Star is able to charge a significant premium than Voltas for the same piece of work

This is inspite of the fact that Voltas was doing almost twice the revenue of BlueStar in most of these years (2003 to 2007), and therefore would have had higher raw material purchase economies of scale.

Thus, BlueStar was able to maintain a higher margin for its products and services not only when its operating expenses were lower than Voltas', but incredibly also in the years when its operating expenses were higher than Voltas'

EBITDA margin 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Blue Star -1% 9% 12% 11% 12% 8% 8% 7% 8% 9% Voltas 8% 10% 11% 9% 10% 7% 7% 5% 4% 4% Difference -9% -1% 0% 2% 2% 0% 1% 2% 4% 5%

BlueStar has between 1-5% of total assets as investments - compared to 10-20% for Voltas Both BlueStar and Voltas have around 45% of total assets as working capital. Therefore BlueStar benefits by not keeping as much of its total assets in investments as Voltas. So it looks like most of the value addition that Blue Star is able to generate over Voltas is due to a consistently higher total asset turnover (by extracing more juice from its fixed assets, working capital and investments).

Sales/Total assets	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	7.05	5.80	5.14	6.45	7.73	5.39	4.74	5.01	5.00	4.71
Voltas	3.22	3.51	4.36	4.66	5.17	6.66	5.47	4.32	4.33	4.29
Difference	3.83	2.29	0.79	1.79	2.57	(1.27)	(0.73)	0.69	0.67	0.42

Sales/Working Capital	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	53.98	13.53	8.67	14.55	16.81	9.16	8.34	9.26	9.28	8.86
Voltas	5.37	5.61	8.56	8.97	18.28	16.01	15.66	8.17	10.99	12.42
Difference	48.61	7.92	0.11	5.58	(1.47)	(6.85)	(7.32)	1.09	(1.71)	(3.56)

Sales/Fixed Assets	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003
Blue Star	7.05	5.80	5.14	6.45	7.73	5.39	4.74	5.01	5.00	4.71
Voltas	3.22	3.51	4.36	4.66	5.17	6.66	5.47	4.32	4.33	4.29
Difference	3.83	2.29	0.79	1.79	2.57	(1.27)	(0.73)	0.69	0.67	0.42