Blue Star : A fallen hero

In the past, I have written a lot of praise about Blue Star, ranging from how management utilized buy-back effectively in 2002-2003 to reduce equity capital, how high dividend-yielding low-debt companies turn out to be good investment when Blue-Star price went up from INR 30 to 1700, and how to find next Blue-Star.

Two months back I was discussing the balance sheet of Blue Star for the year FY11 with one of my colleagues. The company had increased its net current assets from INR 297.16 Crore to INR 668.49 Crore, i.e. an increase of INR 371.33 Crore, i.e. 125%. The company's debt to equity ratio suddenly went up from almost 0 to 0.72, and anything above 0.5 for industrial companies is considered bad as per Benjamin Graham. Even in the years 2000-2001, it had hovered around 0.55, i.e. near Graham's cut-off. Even the June 2011 quarter results show that the interest payment of INR 7 Crore was more than 25% of PBDIT (Profit before Depreciation, Interest and Tax) of INR 27.65 Crore. The alarm bells had already started ringing about the company's financials and I told my friend that Indian manufacturing sector seems to be under heavy stress.

Here comes the latest results and the company's interest payment suddenly went up to INR 30 Crore, that is more than twice its PBDIT of INR 14.59 Crore and the company has shown losses.

This set of events show how good balance sheet analysis enables a person to move their money out of a particular scrip at the right time. Hats off to Benjamin Graham.

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