Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the Blue Star Limited Q4 and Full Year FY '20 Earnings Conference Call. We have with us today from the management Mr. B. Thiagarajan, Managing Director; and Mr. Neeraj Basur, Group Chief Financial Officer. [Operator Instructions] Please note, that this conference is being recorded. I now hand the conference over to Mr. Neeraj Basur for opening remarks. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. This is Neeraj Basur. We also have on the call today, our Managing Director, Mr. B. Thiagarajan. I will be providing you an overview of the results of Blue Star Limited for the quarter and the year ended March 2020. First, I will cover the financial highlights for FY '20. A discussion of the last quarter's business performance and associated financial results needs to be contextualized around the unprecedented health and economic crisis triggered by the COVID-19 pandemic across the globe. The spread of this pandemic in China in January saw supply side disruptions and there were concerns with regard to availability of material during the summer season. Consequently, all manufacturers, including Blue Star, accelerated shipments of raw materials and components in the second half of February. However, as the first signs of the pandemic emerged in India, from the second week of March, primary as well as secondary sales specifically for room air conditioners, slowed down. As the virus began to spread and a nationwide lockdown was enforced, execution of orders and consequently, revenue generation from all other businesses also came to a halt in the second fortnight of March. These events leading up to March compounded the magnitude of the problem for most Indian manufacturers and sellers in the AC&R segment. On the one side, materials that were already ordered for faster delivery in February, had begun to arrive in the Indian ports. And on the other hand, the supply chain disruption in India, coupled with the nationwide lockdown caused a steep decline in the billing for all the players, including Blue Star. The resulting stress on cash flows was profound, requiring swift actions to rebuild adequate liquidity on the company's balance sheet, so as to meet external obligations and commitments. In addition, the company focused on ensuring the health, safety and well-being of its employees and their families, while the lockdown continued. Most back-end processes could function seamlessly with employees working from home. Investments earlier made in digitization of critical processes and the IT infrastructure support ensured that these processes could function with minimal disruption. Despite challenges, the company continued to serve the needs of essential services, such as health care, pharma, banking and financial institutions. Overall, the company has ensured business continuity within the permissible norms and regulations. SOPs have been prepared to ensure safe resumption of operations across our factories and offices as and when they are permitted to open. As on date, the company's factories at Dadra and Wada as well as a few offices, including Delhi, Kolkata and Bangalore are operational. Now moving to the discussions on Q4 FY '20 performance. The company's revenue from operations maintained impressive growth momentum till February 2020. Due to the significant demand and supply chain disruptions across India in the month of March, the company fell short of revenue and profits all -- across all segments to the tune of INR 400 crores and INR 70 crores, respectively. In the above background, the company's revenue from operations registered a modest growth for the full year FY '20. Financial highlights for the year ended March 31, 2020, on a consolidated basis are now summarized. Revenue from operations for FY '20 was INR 5,360.19 crore as compared to INR 5,234.84 crore in FY '19, a growth of 2.4%. EBITDA, excluding other income and finance income for FY '20 was INR 282.78 crore as compared to INR 346.54 crore in FY '19. PBT before exceptional items was INR 210.02 crore in FY '20 as compared to INR 248.46 crore in FY '19. Tax expense for FY '20 was INR 65.32 crore as compared to INR 41.99 crore in FY '19. Effective tax rate in FY '20 was 31.7% as against 16.7% in FY '19 due to reversal of deferred tax assets created in FY '19, arising from higher profitability in our wholly-owned subsidiary, Blue Star Engineering & Electronics. Net profit for FY '20 was INR 143.25 crore as compared to INR 190.06 crore in FY '19. Carryforward order book as at March 31, 2020, was INR 2,946.59 crore as compared to INR 2,430.07 crore as at March 31, 2019, an increase of 21.3%. Tight management of inventories and receivables, coupled with reduced billing in the month of March, resulted in the reduction of capital employed to INR 951.13 crore as on March 31, 2020, from INR 1,121.50 crore as on March 31, 2019. Disruptions in the operating cash flows, coupled with the requirement to meet external obligation in the month of March, necessitated additional borrowings during the last few days of the year. However, on the back of tight working capital management earlier throughout the year, borrowings actually reduced to INR 155 crore as on March 31, 2020, giving us a debt equity ratio of 0.21 as compared to net borrowings of INR 243.60 crore as on March 31, 2019, and we had a debt equity ratio of 0.28 as of that date. I will now talk about our business [ segments ] for the year FY '20. Segment I, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment I revenue was INR 660.39 crore in Q4 FY '20 as compared to INR 842.31 crore in Q4 FY '19, a decline of 21.6%. Segment results was INR 3.17 crore or 0.5% of segment revenue in Q4 FY '20 as against INR 36.29 crore, which was 4.3% in Q4 FY '19. The shortfall of revenue in March led to a decline in segment profitability. In addition, taking into consideration the outlook for financial stress in the commercial real estate and infrastructure [ sectors ], the company has been prudent to make additional provisions for potential doubtful receivables in the current quarter. In FY '20, segment revenue was INR 2,826.67 crore as against INR 2,748.11 crore in FY '19, a growth of 2.9%. Segment result was INR 120.26 crore, which is 4.3% of revenues in FY '20 as compared to INR 150.85 crore, which was 5.5% of revenue in FY '19. Order inflow during the year was INR 3,104.67 crore as compared to INR 2,951.98 crore in FY '19, a growth of 5.2%. Our Electro-Mechanical Projects business. In this business, we continue to maintain our leadership position in the integrated Electro Mechanical space in India. However, the lockdown situation significantly affected revenues and job closures in Q4 FY '20. Order inflows, which started slowing down in Q3 FY '20 due to the liquidity stress in the real estate and infrastructure sectors, slowed down further in Q4 FY '20 due to the weak sentiments caused by the spread of the pandemic. Post the lifting of the lockdown, a detailed evaluation of interrogatory project would be carried out by us to re-ensure credit worthiness of customers, visibility of positive cash flows and margin generation on execution of various projects. Carryforward order book of the Electro-Mechanical Projects business was INR 2,039 crore as on March 31, 2020 as compared to INR 1,716 crore as on March 31, 2019, an increase of 19%. Segment-wise breakup of the carryforward order book of the Electro-Mechanical Projects business is as follows: offices, 30%; metro rail, 15%; hospitals, 12%; industrial, 10%; power generation and distribution, 5%; malls, 3% and remaining else is 25%. This will be also available to you when we circulate the investor release. I will now move on to the Commercial Air Conditioning Systems. Order booking and growth momentum in this business was also impacted in Q4 FY '20 due to the spread of pandemic. We however, continue to consolidate our market share and maintain leadership position in the ducted systems in Q4 FY '20 and improved our market share in chillers and VRF categories. But newly launched products, such as the next-generation inverter ducted, water-cooled VRF, air-cooled VFD screw chillers, and the configured oil-free chiller gained good traction and market acceptance. Key segments that contributed to revenue during the quarter were government, hospital, builders and educational institutions. Major orders bagged in Q4 FY '20 were from the Airport Authority of India in Chennai and Avenue Supermarkets across multiple locations. International business. Our international business continues to focus on the Middle East, Africa and SAARC countries and grew steadily. Our brand-building initiatives through seminars and exhibitions in Middle East, SAARC and Africa, enabled us to gain good traction in the market. Our joint venture in Qatar that executes MEP projects continued to do well. However, order inflow and pace of execution were impacted in Malaysia due to challenging economic conditions. We continue to invest in strengthening our brand in select international markets. I will now move on to Segment II, Unitary Products. Segment II revenue was INR 596.28 crore in Q4 FY '20 as compared to INR 703.63 crore in Q4 FY '19, a decline of 15.3%. Segment results was INR 43.75 crore, which is 7.3% of revenues in Q4 FY '20 as compared to INR 73.32 crore, which was 10.4% of revenues in Q4 FY '19. As explained earlier, segment results were impacted due to the loss of sales in the month of March, which is a key month in the peak selling season. Revenue grew to INR 2,300.61 crore in FY '20 as against INR 2,268.97 crore in FY '19, a growth of 1.4%. The segment result was INR 162.27 crore, which is 7.1% of revenues in FY '20 as compared with INR 185.92 crore, which was 8.2% of revenues in FY '19. Segment II results were low due to higher spend on advertising and sales promotion. And of course, the lower sales in the month of March. Room Air Conditioner business. After a good start to the quarter, with volumes picking up in February due to the early onset of summer, our revenue de-grew in Q4 FY '20 over Q4 FY '19, in line with the market de-growth due to the supply chain and demand disruptions throughout the month of March. Our market share grew marginally to 12.5% in FY '20 as compared to 12.3% in FY '19. Given the fact that we are strong in Tier 3, 4 and 5 markets, which are comparatively less impacted by COVID-19, we expect to gain momentum from Q2 FY '21 onwards. Further, e-commerce sales also will accelerate. The delivery and installation infrastructure with adequate safety norms are in place. Commercial refrigeration business. This business performed well over most of FY '20, aided by the growth in the ice cream, processed foods, health care and hospitality sectors before getting impacted adversely in Q4 FY '20. We continue to maintain the leadership position and do well in the deep freezers and watercooler businesses and gained market share in bottled water dispensers. Our new lines of businesses, mainly commercial kitchen, medical refrigeration and supermarket refrigeration also gained good traction. Major orders bagged in Q4 FY '20 were from Reliance Retail, Amul, Vadilal, Dinshaw, Top N Town and Hatsun Agro Products Limited. The health care, pharma and processed food segments offer attractive growth potential for this business going forward. Water Purifier business. We continue to stay focused on establishing our brand as a trusted one in the category with well-engineered and the reliable products, including the ones that offer alkaline water for boosting immunity backed by superior projects. We have established ourselves as one of the leading brands in the e-commerce channels and expect this business to be e-commerce driven in the near future. Segment II rules were impacted by around 80 bps due to investment in water purifiers categories, primarily in marketing, brand building and R&D. These initiatives, coupled with comprehensive product range across price points helped us to achieve market share of 2%. Given the growing concerns on health and immunity, the demand for water purifiers is set to grow, and we have set ourselves a market share target of 14% in FY '21. The business is poised to breakeven next year. I will now move on to Segment III, Professional Electronics and Industrial Systems. Segment III revenue was INR 42.69 crore in Q4 FY '20 as compared to INR 49.90 crore in Q4 FY '19. Segment results was INR 7.5 crore, 17.6% in Q4 FY '20 as compared to INR 16.08 crore, 32.2% in Q4 FY '19. In FY '20, segment revenue was INR 232.91 crore as against INR 217.76 in FY '19, a growth of 7%. The segment results grew to INR 53.34 crore, which was 23.3% of revenues in FY '20 as compared with INR 43.78 crore, which was 20.1% of revenues in FY '19. We expect the Indian digital payment sector to grow further in the current scenario and create more opportunities for data security business in the short term. Further, a probable increase in government funding towards health care systems is also expected to create opportunities for the health care business. However, due to potential cut backs in CapEx for government and private sectors, some of the segments such as testing equipments may potentially face challenges in FY '21. With the wide portfolio of products and solutions forming part of our offering, the prospect for this business segment is positive. I will now talk about the business outlook. As normalcy is gradually being restored, the company is focused on commencement of order execution and revenue generation across all segments with liquidity management as the key priority. The spread of the pandemic and continuation of the stringent nationwide lockdown in India in the months of April and May have taken place during the peak selling season for Segment II. The company is tracking green, orange and noncontainment zones in various geographies to prioritize sales. The company is in the process of renegotiating the prices of input raw materials and components and also credit terms with its lenders. As far as Segment I is concerned, the work is in progress to identify projects which are ready for restart, reassessment of credit profile of the customers, time lines and remobilization of construction manpower. At the same time, several cost-cutting initiatives are being undertaken. It is too early to provide any guidance on the full financial impact arising out of the pandemic on the operations of the company. We will take necessary steps to provide adequate liquidity support to all our businesses as they recover from the current disruption. Accordingly, fundraising plans for the short, medium and long term are being strategized to ensure adequate availability of capital and liquidity across all durations. As in the past, the company will endeavor to sustain this phase in a prudent, balanced and agile manner and emerge stronger once the crisis gets over to resume on the growth and expansion trajectory. With that, ladies and gentlemen, I am done with the opening remarks. I would like to now pass it back to the moderator who will open the floor up for questions. Mr. Thiagarajan will be taking the Q&A session, and between him and I, we'll try and answer as many questions as we can. To the extent we are unable to, we will get back to you via e-mail. With that, we are now open for your questions, please.

[Operator Instructions] The first question is from the line of Bhoomika Nair from IDFC.

Yes, sir. Sir, just wanted to understand what is the kind of inventory that we are seeing in the room AC segment, given that there was some buildup of inventory in anticipation of the supply chain disruption from China. And how long do you anticipate that it will take to kind of liquidate that? And my second question is on [ Hulo ], where you spoke about the revenues to kind of expand from 2% -- or market share to expand from 2%. And so really, what are we looking at that can possibly drive such a sharp uptick? And if you can, I missed the market share number for us, if you can just clarify on that.

Good morning. It is wonderful to be on this call. I think I'm participating in the quarterly investor call after around 4 years. The -- broadly, if you ask about the industry, I think the manufacturers plus the dealers put together there should be 75 days of inventory is our rough estimate based on the information which we have exchanged with the dealers and the other manufacturers. As far as Blue Star is concerned, I think we have close to around 60 days of inventory combined, that is what is with the dealers, what is available in our warehouses or the factory, this is where we are. Normal levels at this point, madam, is specifically summer season, should have been just 30 to 45 days. The reason that it has not built up in a huge inventory level, like it happened in 2018 is the one blessing in disguise due to lockdown is that. Otherwise, we would produce in large numbers, that came to a halt. And also the second reason was, you are all aware that I'd spoken to the television channels and the financial press at that point of time. Even on March 15, the question was, there will be shortage in April, how are you going to manage? We set up a wardroom, we were chasing the material since China could not deliver. There was production interruption in March itself. So therefore, fortunately, the industry is coping with just 75 days of delivery. And Blue Star case, it will be around 60 days. And we have not -- though we have the permission, we have not commenced the production yet. So if the market is to reopen -- it has been opened, say, for example, out of 6,000 outlets, which Blue Star serves, we are tracking and we have around 3,000 stores already in operation, some 2,900. As far as the market share is concerned, we would have marginally improved to 12.5% last year. So we -- even though we were impacted in the March -- in the month of March, we have managed to improve our market share. Now we are even tracking today based on green, orange, red zones, containment zones, which shop has opened, which warehouse will be serving that, and how many in-shop demonstrators are deployed and daily tracking of what that outlet sold. We are maintaining the market share even in the past 10 days also. So I don't think there is anything to be concerned about. I suppose I answered your questions.

Yes, sir. Sir, just on this, you said 2,900 or 3,000 of our outlets have been opening, have opened. How quickly do you think the balance will open? And when do we start touching almost normalization of activity in terms of sales across these outlets? And also in EMP, anything you said about 10% of sites have opened. By when do you expect that most of the sites should be operational?

The -- it depends on the lockdown 4.0, what it is going to say. My personal guess is that they will allow the shops to open, and they will be restricting the number of hours. They will say you can operate only for 3 hours, 4 hours like that. Now the second development is like in the case of liquor, e-token being given for people to go to the shop if they want to buy, indeed, we have mooted that idea, like Mumbai, Chennai, Bangalore, Hyderabad, please allow at least a e-token if somebody wants to buy, let them go there and get a appointed time for visiting the showroom. But important thing is that they are not able to open the e-commerce, nonessential in these cases, basically because retailers, they want to protect and they want to provide a level playing field for both the channels that you can anticipate from the government. The -- what our dealers are trying to do is also enable virtual demonstrators. I think, let us be very clear that this virus is not going to go away. The guess is that it will continue to be there for quite some time. And we will not be surprised if there is another lockdown in July or another lockdown in October, it can keep happening. So therefore -- and look at the consumer side, it is not that they are -- they were -- shop is not open, they're not going. Even if it is open, the traffic is going to be lower. They -- each one will try to avoid going out unless and until it is absolutely essential. In that context, you can anticipate in a very short frame of time, you're going to be having dealers enabling virtual in-shop demonstrators. So there are apps that are being developed by us for dealers and we ourselves are developing. So over phone, you will be able to get the same experience as you have visited the showroom and then place the order. In the matter of seeking e-commerce and the brick-and-mortar stores, there is a convergence that is emerging. So coming to project sites, 10% have opened, discussions are on, on balance around 12% of the sites. But we are not there in a very great hurry because of 2 reasons: #1, as Neeraj explained, our focus will be on liquidity. And therefore, collections are important, unless and until that customer is able to pay, we are not going to be there. We are doing new credit risk assessments of all our customers. So we will give priority to the customers who are going to be paying. Second reason is the migrant labors. They have gone away. So you cannot mobilize so very easily at all. The third one is that we want to exercise all precautions because in a project site, not only Blue Star, many other vendors will be working, how to control the spread of the virus. So therefore, we are not in that great hurry. Our priority is before the summer season harvest that we can do. And in commercial refrigeration, that's a line at this point of a time for many, many reasons. The lifeline for the customers, lifeline for the dealers, because the food delivery as well as vaccine pharma, it offers great opportunity for Blue Star. So in opening the factory also, we have gone ahead and opened that factory -- even during lockdown, the factory that manufactures cold rooms and cold storages or the pharma-related refrigeration products was open, and it continues to function.

Thank you. I would request Ms. Nair to come back in queue for follow-up questions. [Operator Instructions] The next question is from the line of Ravi Swaminathan from Spark Capital.

Just wanted to know what was the kind of growth that we had seen in Jan and Feb in Room Air Conditioners, that is just before COVID lockdown? And also, what is the kind of industry decline that do you expect in FY '21 for Room Air Conditioners?

Ravi, the -- January and February, the primary sales in January saw around 10% growth. In February, there was a huge growth. That is one of the reasons in March it suddenly declined. That it would have been close to around 19% growth in the month of February. And not only Blue Star, all manufacturers did exceedingly well because the indications were that there will be shortage of material in April and May due to China component supply getting interrupted. So therefore, there was a huge rush to buy. Then there was an announcement. If you recollect, we were the first one to do so. We said there will be a 5% price increase due to custom-duty hike as announced on February 1. Because the ocean price had gone up dramatically, it went up almost thrice. And the third one was we were airlifting certain critical components. Now because of this, the dealers went ahead and lifted the material. Then March onwards, there is nothing that is happening. Now this is all that I can tell you about 2020, '21, I think summer season the drop will be anywhere between 30% to 50%. That is my guess because there is very little window that is left for us to avail. Already in Kerala, Tamil Nadu intermittent rains have started. So the night temperatures are not that unbearable yet. And since the vehicles are all out of the roads, I think the -- even in Mumbai or Delhi, the temperatures have not shot up as it should have been otherwise. So therefore, 30% to 50% drop is my guess. And full year, very, very difficult to assess at this point of time. If this package translates into lot of money in the hands of the people and the economy is back on stream. And the virus doesn't come back, there is a reasonable possibility that last year level we marked at INR 10 crores. I'm going by 2018 experience. Even though some -- we all degrew by 15%, at the end of the year, there was a 10% growth. So there is a possibility it will be made up. So very difficult to guess now because everything is new to us at this juncture.

Got it, sir. And in terms of the project business, so basically, when you talk to customers, is there a sense that some of them might cancel orders which are there? How is it? You told you are evaluating project and you're going to execute only for the ones who are -- where payment can be got. So is there a chance of order books, some of -- a portion of it getting canceled or something of that sort? Or is it still wait and watch?

First of all, Neeraj had read out the segment-wise breakup, we have a very large portfolio, that is #1, it is diverse portfolio. We know if it is going to be a hotel, mall, mix of use, these can get postponed. I don't think they will cancel it, it may get postponed. And knowing India, they will go ahead and convert this into something else, that whether it should become a hospital or the -- like that the -- anyway the builders go ahead and dynamically change the layouts and the purpose of the building. All that will happen. But the hope is only this that right -- our part of the job is the last one in our building. The civil work would have been completed, there would have been occupants who would have been already signed for the lease. And we come at the far end of it. So I don't think for the purpose of air conditioning, see in other words, 92% of the monies you would have already spent as for the building excluding interior reconstruct. So I'm wondering that the cancellations will be so very huge. There may be still postponements here and there. But our principle is very clear. We are not interested in chasing the market share in that segment at all. We are interested in profit and cash flow. So cash profits are important there. So to that extent, if that business is going to shrink by 10%, it is good. We are not worried.

Thank you. I would request Mr. Swaminathan to rejoin the queue. The next question is from the line of Nitin Arora from Axis Mutual Fund.

My first question is, when we look at your AC cooling product segment, a good amount of sales also comes from the commercial part of it. Just wanted your thoughts from the end market where you supply to the ice cream segment, commercial real estate, which segment you think will slow down significantly amongst all? Do you see a change here? And do you see any chance where commercial products -- any opportunity, whether it be demand really coming from pharma or from any other segment which can offset each other? That's my first question. And on the second part, on the EPC, how much provisions has been created because of the expected credit loss in this quota? And do you think that would be last -- suffice enough in terms of movement of ECL when you do provisioning for the next year? Is that large enough? Or you think further ECL can get up depending on the payment of the customers? Those were 2 of my questions.

So first part is, by the way, there's lot of disturbance in your line. See the first part is definitely, we see certain segments. That's why I keep telling that whether it is McKinsey report, BCV report, Bain report or it is to do with Moody's ratings or stock market. I -- my own principle, this is what I tell the teams that do not worry about any of this. Our job is to figure out. And despite all this, there will be pockets within which we should be able to do business and grow. And so we are constantly on the look out for, which are those segments where we will be able to go ahead and grow. So definitely, health care, pharma, these are segments which have been doing well and will continue to do well. Second one is there is -- manufacturing expansion will come back because there is pent-up demand, it will come back. And I think FMCG, they're in the verge of expanding their capacity, I don't think they will postpone at all. They -- if the package is going to be helping in many of these ways, #1, money goes to the poor and the lower class in terms of the income, they all have to spend. And therefore, there will be an economic activity. If it is going to MSMEs, they will start investing in the business and they won't think. So till yesterday I had that fear, whether the MSMEs are going to get washed out, but the indications are good. Agriculture continues to be doing well. Even this year, the harvest should be good. Now rural economy, according to us, will be definitely flourishing in the coming years because I think in the cities were worse affected by this kind of pandemic. Now we -- fortunately, we have close to 65% sale coming from Tier 3, 4, 5 and we will continue to strengthen our presence in those towns. Right now, our approach is, I don't think you can anyhow run the operation based on all India and our traditional regions and branches. Our focus has to move on to the towns because this zoning like green, orange, red or containment as forced us to think that way. You have to get directly into, which are those towns where activity can happen. And this will be the method for foreseeable future. Even if the vaccine comes, people think that everything will go away, no. India's vaccination program will last for about 24 months of time from the time it is cleared for India. So therefore, we must learn to live with this and within that, grow. Now e-commerce will be a segment and many of the brick-and-mortar dealers, as I had mentioned earlier, will also enable that contact-less selling. Now we see growth in -- including your bank, we are service providers in terms of the air conditioning. Now we are seeing great demand coming from smaller towns where most of the orders that we are executing are for even commercial air conditioning systems like package air conditioning are in these towns. So therefore, in terms of geography, it is Tier 3, 4, 5, in terms of segments, it will be health care, banking, financial institutions and the expansion of FMCG, expansion of other manufacturing, including MSMEs. So if I'm saying in B2C, the Tier 2, 3, 5 and the lower middle class and middle class in terms of industries, it will be MSME-focused. And in terms of priorities, it will be commercial refrigeration, room air conditioners. Even in big cities, we have seen the inquiries. The number of inquiries that come every day unfortunately, we are not able to deliver in big cities because they are working from home, they are asking for, I want to buy an air conditioner. And within that air conditioner, there will be products such as air conditioners with inbuilt air purifiers. So -- and I think water purifier demand itself will go up as the focus shifts to hygiene and immunity. So we are working on these lines. The factory demand our penetration in any case was lower, that itself should propel the growth. And the consumer finance is not affected at all. I -- my sense is that when it was 45% of the sales coming from consumer finance, I think it will move to 55% by the end of this financial year. Because people will have certain wage cuts. But the same time, they would like to consume by going in for 0 percent finance scheme. This is the summary of what I want to communicate.

And what's the ECL provision?

Yes. Now the concept of expected credit loss is based on our track record in the past, whatever revenue you do, you are going to be creating a expected credit loss provision. But if you're asking about the year ended March, Neeraj will clarify, I think around INR 15 crores will be prudently provided for.

Yes, that's right.

[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.

So the question is, last year, you had mentioned about 30% of the revenues of the Unitary was commercial refs and of the projects division, 30% was commercial air conditioning. So if you can give us an update for this year. And second question is, will you actually see a need to support your channel? And if that were to be the case, do you actually -- are you building in a buffer of increased working capital requirement in the shorter term?

Yes, the first part is that, that ratio might have gone up last year. For the commercial air conditioning, it would have gone up by around 10% compared with the previous year because clearly, the focus was on shop, showroom, boutique, small-value projects and also in Tier 3, 4, 5 towns. And we significantly gained market share in our VRF systems as well as chiller. In VRF, we are a clear #2 now, and in chillers, we are close #3. These product categories have been doing extremely well. Now commercial refrigeration, room air condition, also the ratio would have changed basically because of a sharper decline in room air conditioners in the month of March. But generally, the ratio of the previous year should remain. As far as the funding is concerned, Neeraj can explain what are our plans?

Yes, Bhavin. So as far as supporting our channel is concerned, we have to be quite mindful of the fact that some of our channel partners will indeed need support. So here is what we are doing, as I've explained during the opening remarks, we are first making sure that our own balance sheet is sufficiently funded. And as a strategy, we are actually taking slightly longer rated view on our borrowings for 2 reasons. One, opportunistically, there is a possibility of raising some long-term loans through the LTRO proceeds, which RBI has made available to the commercial banks for corporates. So that's one opportunity. And the cost of that for a company like ours is likely to be quite competitive even if I were to compare it with the short duration commercial papers or short duration bank loans that we would typically take. Why we want to do this is because we want to make sure that our balance sheet is sufficiently funded for the next 3 years. We don't anticipate our debt equity to go beyond our usual trend of below 0.5%. That's what we like to maintain. In fact, we want to use this as an opportunity to make our balance sheet stronger, stable, more resilient to withstand if there are any further volatile phases to be -- yet to be encountered by us as a company. So that's a core focus. As part of that strategy, we will maintain some surplus liquidity on the balance sheet. So for some quarters, you will see borrowings as well as surplus cash on our balance sheet like this quarter end, whereas we closed market with some INR 200 crores surplus cash. The improvement in a level liquidity in order to be efficiently funded. So that's what we're trying to do for ourselves. And as Thiag explained most of this inventory once it will get sold, we expect the operating cash flow position to regain further ground. And as you would have seen from our March results, working capital is very, very high on our radar as a management team, and we want to make sure that the efficiency of managing our working capital and therefore, the balance sheet and ensuring that balance sheet remains very strong in this unprecedented and uncertain times. So once -- and my sense is in the next 60 days or so, we will be done pretty much with our financing reengineering, if I may call it that way, whatever we are trying to do, so that 60 days from now, we can all only focus on operations. Having done all of this, like you would hear in an airplane that first, you pull your own oxygen mask before you try and help others. So this is what we're doing for ourselves, making sure that we have sufficient oxygen. Now having done that, then we will move to start supporting our channel partners as well as our suppliers and vendors. On the -- in the last week of March, when the going was extremely difficult, we made sure that all our MSME suppliers got paid before March 30. That was a very conscious choice we exercised. Going ahead, we will work closely with our bankers to put in place channel financing arrangements for our channel partners and distributors. We will also put in place similar financing arrangements for our suppliers and vendors because we are very mindful of the fact that the entire ecosystem that we operate in needs to be kept reasonably healthy for us to continue to grow. So it has to be a very participative and an inclusive solution, and we are mindful of that. It will take some time because, obviously, a lot of this is still evolving, but we are very determined, and we are clear in our minds that this is what we want to do. We want to first re-enhance Blue Star balance sheet, we want to make sure that -- that's why very prudently, we've been making some provisions, just to make sure that the quality of our assets, realizability of our working capital is insured at all times. We want to make sure that we are maintaining a healthy asset liability matching profile on our balance sheet. P&L will follow, so we are very clear about that. And once we are able to strengthen the entire ecosystem, then we don't -- then I think the overall situation will normalize faster for us as a business. So that's where we are. I thought I'll just elaborate a little bit more because some more callers may have similar questions. So I thought of addressing this entire thing in one go.

Yes. Yes. One more question, if I may. So you mentioned that the inventory of 60 days, given that bulk of the summer is now behind, what percent -- what would be the -- in terms of day sales or percentage of -- if we balance part of the fiscal?

No. See, it is level of the system will be with 0 inventory, right? Normally, together ideally somebody should carry around 30 days of inventory. Second, the myth is that it is not that post summer, the sales become 0, it is not at all. So you have got the rest of the year closely around 60% of the sales happens between July and March. So I -- that's what I had mentioned to you. Fortunately, this equity -- this inventory is -- achieving that normalcy will progressively improve, or we are on the right path to address to a normalcy as early as possible, inventory is not an issue this particular event at all. It is the demand, consumers coming in and how you will enable that process. As I had explained, this is base -- it would have gone completely out of hand with around 90 to 120 days inventory if China components would have arrived on time or March closure had not happened. So therefore, the -- it is not necessary to worry about the inventory in the field at all. The consequence of this is only one financially, a, your liquidity to some extent is blocked. You have to manage that. That's what Neeraj explained. The second one is you have got -- we were to pass on around 5% cost to the consumers through -- by the way of price increase. That is not going to take place. So therefore, that increase in cost due to the custom duty increase, second one is the ocean price, the third one is the warehousing inventory holding period in beverages, which we would have incurred. And the airlifting of certain competence that took place in February and March, these are the things that you need to be bearing in terms of margin. Other than that, the inventory has got no issue. But there is the other way of looking at it, right? Post this inventory arriving, the exchange rate also has gone up. And if we were to manufacture this in July, August, you will be actually incurring more cost. And I will not be ruling out a possibility that the -- in order to manage this economic package, government goes ahead and increases the custom duty. That also can take place. So therefore, I'm not so much worried about inventory, and we will be worried about how fast we liquidate so that the cash comes into the future.

The next question is from the line of Shrinidhi Karlekar from HSBC.

Sir, just a couple of questions to better understand the exposure. So you touched upon that for Blue Star 65% of Unitary Cooling exposure is to Tier 3, 4, 5 cities. I just want to know how does it compare to overall industry? And the second question is on consumer financing penetration. So you touched upon a number something around 45%. Was it like exit Q4 rate or it was a full year FY '20 rate?

Yes. We -- I will take the second question first. The shortages happen during the summer season. Then it drops again festival season, it goes up. Then it comes back again in the summer season. That is how it has been. If you are taking an average number, it should be in the order of around 40% last year. And sharp changes we see from year-to-year. And I am foreseeing it will substantially go up in the coming year, that is #1. #2 is that we are stronger than our peers in Tier 3, 4, 5, basically because we have our dedicated sales and service dealers who enjoy the extraordinary amount of equity within those towns. They are town like, let us say, Rajahmundry, Belgaum, Trichy, Madurai or Karnal, Indore, these kind of places, there are certain dealers of ours exclusive who do extremely well in that market. They have been there for generations together. And in these markets, our -- we will be #1 in quite a few places, #2 in quite a few places, #3 in many places. While all India, we may be between #5 and 6. There are -- therefore, we have been strong in those towns. And not only for room air conditioners, even if it is water coolers or deep freezers, we will be doing extremely well. These are my answers. And if you ask me about the among the industry, even though some of the players have other categories such as brown goods or white goods or consumer electronic products, we do better than them in those towns.

Okay. Just last one, if I may. Sir, you -- it is some of the reason why like input goods costs have gone up, such as trade rates and custom duty. Sir, I was just wondering, there has been sharp rates in commodity side as well. So just wondering, is it large part of the increase due to trade rates and custom duties is getting offset by the benign commodity costs?

Yes. But these are all bought. Our industry's problem is this. You plan your supply chain from November, December onwards. And so when the commodity prices drop, we don't have any need to produce at all, number one. Now you may be noticing commodity prices are beginning to go up again. And we -- despite -- normally, I've seen when the oil prices are lower, exchange rates should come down, that is not. So it is the same situation. It has to stabilize. Perhaps you will see some kind of a stability, I suppose, in the month of September also because the whole world has to get started, then only we will get a clearer picture. As of now, it doesn't matter to us because we are not into procurement cycle for these products or ramping up production. We'll worry about it in July, August.

Okay. And sir, the last, if I may. Sir, if we typically talk about the...

We're very sorry Shrinidhi, there are actually many other callers waiting. So may I request you to please get into the queue again?

Or you can send a mail, absolutely no problem, we will respond to that.

Yes. Sorry about that.

[Operator Instructions] The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

Yes. So first question is on the -- is it -- are we expecting any down trading to happen over? Because typically we are hearing across categories down trading to happen. So are we expecting a surge somewhere in the fleet or maybe in the window AC parts as well with the inverter? And to that extent, how are we positioned to that extent?

Your voice is not clear. Perhaps you may have to repeat the question.

Sorry. I was just asking, given that the markets are probably talking about down trading happening across many categories. Over here, in case of ACs, are we probably seeing a mark down happening in terms of either fixed speed, movement of fixed speed or probably to even, let's say, window ACs, is that trend likely to happen given pressure on incomes? And how is Blue Star placed in account of that?

Honest answer is, we do not know yet. The -- but we began the year with a very clear understanding. It was not India's economy was doing great, right? If you were to visualize that. So we felt the unemployment rate is high, the union budget didn't do much. Therefore, we thought the demand for lower end products will be one way maximum. So say, for example, if it is window, within window category, it will be the low end of window air conditioners. If it is inverter, it will be the low end. So if you would have gone through our product launch-related press releases or my interviews at that point of the time, we very clearly stated that affordable premium is the route that we are taking this financial year. So most of the product introduced this year were affordable range. It didn't compromise on quite a few features, but it was affordable. We had brought down with our competitor. There are 3 at bottom, there are 3 in the middle, there are 3 in the top, that is how it is. And we were very clear. We don't want to become the low-cost product at all. But the gap between that was substantially reduced. In the sense that between INR 500 to INR 700 higher than the other 3 brands, which are at the lower end, we were having -- or we continue to have in our product range as far as this financial year is concerned. Now if you would have made an assumption that our sales 60% will come from those products. So here, these affordable premium products protected our margin, but made it attractive for the consumer. So it is not at the cost of losing the margin. And if that was 60%, I had a feel it will go up to 75%. As I told you, honestly, we do not know how it is. If there are yearly trends, if we are seeing to: #1, whatever sales is taking place in the past 15 days, we are maintaining the market share. That means we are able to compete effectively. #2, we are getting quite a few inquiries surprisingly for portable air conditioners. So therefore, there is, I think, within the home, normally in the bedroom only first time I would have had an air conditioner. If they are working from the dining room or if they are working from the other bedroom because they have to work-from-home, this may be the need. Other than that, I'm not able to see a clear trend, you have to wait for some time.

The next question is from the line of Amber Singhania from Asian Markets Securities.

Just a confirmation of the previous question. Sir, out of these 3,000 stores which we have opened, how are we seeing the sales given some states have ordered not to use AC that was making the sales. Also, malls may take longer time to open up, are we working anything on expanding our presence to single store? That is my one question. And second is just your outlook on the margin given that price increase will be difficult to take and write-offs are coming on the business also, what are your margin expectation for both the segments?

Yes. So the -- you're right, in the malls, it may not get permitted immediately, but I think they are coming to terms with that. By June 15, I think in the malls, select stores -- that is what I'm aware of through the committees which I am a member working on restart with various governments. The recommendation to them is that, look, you need not open cinema theaters, you need not open the food courts. You may want to restrict -- like, for example, if there is a Nature's Basket operating in Phoenix Mall here in Mumbai, it is allowed to operate. So we are saying, please allow certain shops to open and you restrict the incoming customers. So irrespective of that, it is true that at least for next 6 months, you will see stand-alone stores operating. Now the sale is -- if I had to hazard a guess, again, exact number is very difficult to say. The -- in the past 10-day figure, if you take it, the stores will be getting or recording 50% of their sales across all brands. It is not like last year. So there is substantial drop in the inflow of customers out there. So there -- that's why I mentioned Q1 can be anywhere between 30% to 50% lower sales compared with the previous year. And your -- I answered your questions, I suppose.

[Operator Instructions] The next question is from the line of Abhineet Anand from SBICAP Securities.

Yes. This provision in the Segment I, can you quantify that number, sir?

Yes, Neeraj will quantify. As we mentioned, it is INR 15 crores.

Yes, Abhineet. So this is an estimated extra -- expected credit loss we have assessed for now, and we have taken that provision.

Okay. And secondly, you said that the Water Purifier at the Segment II margin is around 80 bps for the year, right?

Yes.

The next question is from the line of Renjith Sivaram from ICICI Securities. [Operator Instructions] Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Neeraj Basur for closing comments.

Thank you, ladies -- thank you very much, ladies and gentlemen. We are aware that there are quite a few other calls, people wanted to ask questions, but we have already run over time. So we are very sorry we could not accommodate any more questions. With this, we conclude this quarter's earnings call. Do feel free to revert to us in case any of your questions were not fully answered, and we will be happy to provide you additional details by e-mail. So thank you very much, and you take care and stay safe.

Thank you. On behalf of Blue Star Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.