Blue Star Limited (500067) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. This is Neeraj Basur. I will be providing you an overview of the results of Blue Star Limited for the quarter ended September 2020. First, financial highlights for Q2 FY '21. After a challenging first quarter, Q2 FY '21 witnessed a revival in business activities with unlocks, easing of restrictions and consequent improvement in the consumer sentiment. We continue to focus on providing uninterrupted services to our customers. In addition, we launched a new range of products embedded with Virus Deactivation Technology as part of our endeavor to fight the pandemic through a contemporary range of product options and solutions for our customers. The business recovery trajectory continued to be encouraging in Q2 across most categories. However, on a year-to-date basis, the business scale continued to remain below pre-COVID levels. And thus, the financial results for H1 FY '21 are not comparable with H1 FY '20. Financial highlights for the quarter ended September 30, 2020, on a consolidated basis, are now summarized by me. Revenue from operations for Q2 FY '21 was INR 902.12 crores as compared to INR 1,249.47 crores in Q2 FY '20, a recovery of 72.2%. EBITDA, excluding other income and finance income, for Q2 FY '21 was INR 55.08 crores as compared to INR 73.58 crores in Q2 FY '20. The robust recovery of 74.9% in our EBITDA in Q2 FY '21 is reflective of the business recovery, along with prudent and swift cost-containment measures undertaken by us. PBT before exceptional items was INR 22.46 crores in Q2 FY '21 as compared to INR 55.75 crores in Q2 FY '20, a recovery of 40.3%. Tax expense for Q2 FY '21 was INR 7.42 crores as compared to INR 16.88 crores in Q2 FY '20. Net profit for Q2 FY '21 was INR 15.32 crores as compared to INR 37.94 crores in Q2 FY '20, a recovery of 40.4%. Carryforward order book increased marginally to INR 3,019.57 crores as of September 30, 2020, as compared to INR 2,934.52 as on September 30, 2019. Capital employed increased marginally by 6% to INR 1,124.27 crores as on September 30, 2020, from INR 1,063.49 crores as on September 30, 2019, as an outcome of a robust working capital optimization measures implemented by us, more specifically in the last 6 months. Net borrowings increased to INR 344.06 crores as on September 30, 2020, which is a debt-equity ratio of 0.44, as compared to net borrowings of INR 188.97 crores as on September 30, 2019, which was a debt-equity ratio 0.22. Net borrowings have been reduced by INR 84.47 crores in Q2 FY '21 as compared to June 30, 2020 levels. I will now move on to business highlights for Q2 FY '21. Segment 1, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment one revenue recovered 69% to INR 540.83 crores in Q2 FY '21 as compared to INR 783.54 crores in Q2 FY '20. Segment result was INR 34.41 crores, which is 6.4% of segment revenue in Q2 FY '21, as against INR 44.56 crores, which was 5.7% of segment revenue in Q2 FY '20. Order inflow during the quarter was INR 684.91 crores as compared to INR 794.35 crores in Q2 FY '20, a recovery of 86.2%. Electro-Mechanical Projects business. Order inflow in Q2 FY '21 witnessed a gradual recovery. We won a prestigious electrical and mechanical work order valued at INR 149 crores from Mumbai Metro Line 3 package UGC-03 for 5 underground stations from Mumbai Central to Worli from Dogus-Soma JV. However, the slowdown continues in commercial buildings and factories segment, which are expected to take longer to recover. As of September end, more than 2/3 of the job sites are available for execution. However, we are prioritizing our job mobilization based on the cash flows. We would continue to focus on infrastructure segments such as metro railways and substation project tenders, which are expected to get concluded in the upcoming quarters, offering immediate growth opportunity. Carry-forward order book of the Electro-Mechanical Projects business increased marginally to INR 2,070 crores as on September 30, 2020, as compared to INR 2,063 crore as on September 30, 2019. Commercial Air Conditioning Systems. While the order inflow and revenue from commercial spaces like malls, auditorium, entertainment centers were impacted, health care, pharma and government sectors helped the commercial air-conditioning business to partially recover in Q2 FY '21. Major orders back in Q2 FY '21 were from Greenfield Electronic Manufacturing Clusters, Hyderabad; Vijayanagar Institute of Medical Sciences, Bellary; Grand Hyatt hotel, Bharuch; Intas Pharmaceuticals, Ahmedabad; and National Mineral Development Corporation, Chandigarh. In addition, the demand for retrofit and revamp solutions with Virus Deactivation Technology is robust. Major orders for products and solutions, such as duct cleaning, UVC emitters, filters and fresh-air augmentation have been received from ICICI Bank, Mercedes-Benz and Airports Authority of India. Our international business. The international markets in which we operate witnessed gradual revival with encouraging order inflows during the quarter. The pace of the projects business in some of the key markets was promising. The market for our joint venture in Qatar recovered with a pickup in government projects. Relaxations in pandemic restrictions and regulations are expected to aid pickup in the forthcoming quarters as well. We continue to focus on the expansion of Blue Star product range, and build brand awareness and brand visibility in different markets that we are present in outside India. Our campaigns across digital market platforms have been well received by our target customers. I will now move on to Segment II, Unitary Products. Segment II revenue recovered 84.5% to INR 318.65 crore in Q2 FY '21 as compared to INR 377.21 crore in Q2 FY '20. Segment result was INR 11.73 crore, which is 3.7% of segment revenue in Q2 FY '21, as compared to INR 11.96 crore, which was 3.2% of segment revenue in Q2 FY '20. Room Air Conditioner business. With the opening of retail outlets across the country and the growth of e-commerce channel, the demand recovery exceeded the expectation. However, the demand is for affordable premium products. We have launched a wide range of Virus Deactivation Technology products. We maintained our market share at 12.75% during the quarter. The inventory pressure has been largely eased. We expect the recovery momentum of Q2 FY '21 to continue in the upcoming festive season as well. And by December, the market is expected to reach 100% of the last year's levels. Commercial refrigeration business. Our commercial refrigeration business witnessed good recovery in Q2 FY '21 with excellent traction in the pharma and health care segments for our modular cold rooms and medical refrigeration products. We also gained momentum in the supermarket refrigeration business with order inflows from local and national retail chains. With the opening of restaurants and other unlock measures, the demand recovery for our commercial refrigeration products is expected to accelerate in Q3. We continue to maintain our market leadership position across all the product categories here. We launched touchless storage water coolers and bottled water dispensers during the quarter, and these are expected to gain traction in the forthcoming quarters. Major orders were bagged in Q2 FY '21 from UP Medical Supplies Corporation, Dr. Reddy's Labs and also Thyrocare. Water Purifier business. The impact of the pandemic on our Water Purifier business has remained relatively moderate. E-commerce channel continue to contribute to a major share of revenue for water purifiers. We have now reached a market share of 3% in this category. The alkaline water purifier for immunity boosting campaign was well accepted by the target customers, and the flow of inquiries to our network stores was quite encouraging. We continue to stay focused on establishing our brand as a trusted one in this category with well-engineered and reliable products backed by superior service. Given the growing concerns on health and immunity, the demand for water purifiers is set to grow, and the business is poised to break even this year. Segment III, Professional Electronics and Industrial Systems. Segment III revenue was INR 42.64 crore in Q2 FY '21 as compared to INR 88.72 crores in Q2 FY '20. Segment result was INR 8.15 crore, which was 19.1% of revenue in Q2 FY '21, as compared to INR 24.43 crore, which was 27.5% of revenues in Q2 FY '20. The dip in revenue and profit in Q2 FY '21 in this segment is on account of a large onetime order in our data security business, which was executed by us in Q2 FY '20. The data security business continued to do well on the back of digitization initiatives in the BFSI sector. The demand for health care products also increased during the quarter. With a revival in general economic activity, we also saw order inflows from the industrial segment with the material testing business regaining momentum during the quarter. While the corporate CapEx spending is likely to be selective, we expect the Indian digital payment sector and the health care sector to grow further in the current scenario and continue to offer opportunities. With the wide portfolio of products and solutions forming part of our offerings, the prospects for this business segment are positive. Business outlook. Q2 FY '21 witnessed a much-needed revival in business activity with easing of government restrictions. In the Electro-Mechanical Project business, we continue to prioritize our project execution based on availability of the work front and cash flows. We expect the markets for Room Air Conditioners and commercial refrigeration business to get back to pre-COVID levels by Q4 FY '21. Digitization and health care initiatives offer good prospects for the Professional Electronics and Industrial Systems segment. While the revenue recovery will accelerate in the coming quarters, we will continue to focus on working capital and operating cost management. We are optimistic about improving financial performance further in Q3 and Q4 FY '21. 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 up floors to the questions. I will try and answer as many questions as I can. To the extent I'm unable to, we will get back to you via e-mail. With that, we are now open for your questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Lavina Quadros from Jefferies.

Sir, good set of numbers. I just wanted to understand as far as your order book analysis exercise is concerned, are you all seeing any potential for cancellations of slow-moving orders in your existing book? Any comments over there? And secondly, as far as the residential AC is concerned, how has pricing moved? Like in the first quarter, you all had indicated pricing has weakened. And what are the current inventory levels like?

Thank you, Lavina. Yes, I'll take the first question first. As far as our order book in the projects business is concerned, that's where we are mainly concerned with the order book number. There are indeed few slow-moving projects, particularly in the buildings and commercial real estate sector. And as we've been maintaining for the last 2 quarters, including Q2, our endeavor, our focus is to get the jobs restarted where we have visibility of cash flows emerging from those projects. So it is by choice that we are taking some of those calls. We haven't really witnessed any major cancellations per se. But yes, we can expect some slowdown because of these factors until such time normalcy resumes on a number of other sectors as well. There is good traction, though, on the infrastructure front. And as I mentioned, we have bagged an order of almost INR 150 crores from Mumbai Metro. So that's the third one in the sequence that we have got. So our focus remains sharply on projects where our execution can be balanced with the operating cash flows from those jobs. As far as the pricing of residential ACs is concerned, there is no movement in quarter 2. Of course, there are always pressures on the extent of incentives and discounts that are expected. That was more predominant in quarter 1, when the inventory levels were quite high across the board, though if you remember our conversation end of quarter 1, the inventory levels started to become better in July and August. And our own understanding as far as the market is concerned that as of September and October, the inventory pressures have eased quite substantially across most players. There may still be some players where some of this pressure must still remain, including some channels. As far as Blue Star is concerned, we are perfectly fine in terms of our inventory level, which is also reflected in our working capital numbers. And we are looking forward to now Q3 festival sales, et cetera. So that's the answer to your second question, Lavina.

Sir, just any color on the number of days, like inventory days, channel inventory? Like is it 30, 45 days or lower?

Well, as far as the channel is concerned, the market's concerned, our understanding is it should be around 45 to 60 days. But in the context of the scale of disruption, we feel that's quite encouraging and it continues to improve.

The next question is from the line of Naval Seth from Emkay Global.

Two questions. First, why did working capital increase? If we look at in terms of payable days have kind of reduced or payables have reduced. That is on -- my first question. And in terms of your projects business, as a percentage of the total order book, which you haven't commenced over the last 6 months, so what would be that percentage right now?

Well, working capital increase is largely related to the quarter 1 impact of the business disruption. And if you see in the context of how it has actually improved from quarter-to-quarter now for the last couple of quarters, we feel quite comfortable with that. As far as payables are concerned, we've been actually -- again, it's one, partly, it's reflective of the business degrowth that's happened in Q1. So that's linked with that. And of course, in the last few months, we have substantially caught up with whatever payables that we had to make sure are needed to be paid off. So we are -- we wanted to achieve a level where specifically our MSME suppliers, we wanted to make sure that we are completely up-to-date with them. So we've been consciously ensuring that the entire supply chain has also kept sufficiently supported by us from a payment side as far as our payment obligations are concerned, and the overall reduction, of course, inventory levels reducing and debtors reducing is causing the overall changes. The project business proportion of the buildings and the commercial real estate projects, you can just refer to our overall breakup of our order book as of March. Those numbers don't substantially change because we haven't really added or substantially completed any of those jobs. We do give that breakup once a year. So you might want to refer the breakup given in the month of the March quarter, which pretty much will be the same proportion at this point in time.

Okay. And one last thing, can you give market share in categories like HVAC, within HVAC chillers, VRF and commercial ref, if possible?

Well, VRF, we are now having close to almost 20%, 19.5%, something like that, about 19% to 20% market share we have in the VRF segment. Almost #2 player in that category now. As far as the chillers are concerned, we -- it ranges from 25% to 30% of market share, ducted systems and -- because that's the second-largest category, and chillers will be a little lower. So that's how it's breaking up. But for us, the most important category there is, we are steadily maintaining our market position to around 30%.

The next question is from the line of Nitin Arora from Axis Mutual Fund.

Is it possible to break up in your UCP segment how AC and commercial refrigeration declined as such in both these segments? And given you're saying that inventory is getting normalized, then how we should -- your commentary looks quite encouraging with respect to Q3 and Q4, where despite 45 days or, let's say, 50 days of inventory, you're talking about market coming at 100%. Looks like the channel will again start restocking. Is it specific to you because you are changing some channel or getting more aggressive in North market, where you believe that you can get more to the national chains or to the regional chains? Just want clarity on that. That's first. And the second, if you can guide us for the whole year EBITDA -- EBIT margins for the UCP and for the EPC segments?

All right. Thanks, Nitin. Now on your first question, see, the decline in the room AC and the commercial refrigeration categories, product categories within Segment II, pretty much even. Because, see, both these product categories are some more season dependent. And in Q1, both categories got impacted, you can say, almost evenly. So that -- but the only thing is the demand revival for the commercial refrigeration segment starts pretty much from a seasonal point of view, somewhere in November, December, so towards the end of Q3. And then Q4, again, is similar for both these categories. So there's not much of a difference in terms of either of these 2. As far as the -- your question on the optimism and the inventory levels getting liquidated. For sure, Blue Star, like I said, we are quite comfortable as far as our own inventories are concerned. And you will remember from our Q1 commentary, we had significantly taken some actions in Q1 itself, early Q1, in the month of April on rationalizing our fresh procurement. So as a consequence, we did -- and while we ended Q1 with higher-than-normal inventory, it wasn't disproportionately high versus what it could have been if we would have maintained our full trajectory of procurement as we do in Q1. So we were able to mitigate that risk quite sufficiently in Q1. That -- as a consequence now, as we continue to claw back on the growth and recovery, inventory levels are getting better. Market inventory levels may still be a little higher than what you would expect them to be at this time of the year. But the festival season and a number of other measures, which seem to be now getting into place, such as your -- government has also announced some demand-boosting measures to whatever extent they will probably impact the consumer deliverables. Other than that, demand for ACs. Our own -- these are all positive sentiment building measures. Now the only caveat is that we are assuming in this, when we make the statement of complete recovery by the end of Q3 and Q4, full recovery, is that there should not be any further disruptions caused by this pandemic. Rather, we are kind of assuming that the unlocking and restriction easing will only continue to be favorable, even if it is progressive and gradual over the next 2 or 3 months. Barring this particular unknown, which is the behavior of the pandemic, we are quite optimistic, honestly, about Q3 and Q4. Now the margin profile expectation for Segment I and II is your next question. For the full year, I will talk about. So Segment I, we are expecting to remain in the region of 4% to 4.5%. Segment II should be between 7% to 7.5%. This is after absorbing the adverse impact of Q1 and what we expect to deliver in Q3 and Q4.

[Operator Instructions] The next question is from the line of Sandeep Tulsiyan from JM Financial.

I have 2 questions. Firstly, on the Room Air Conditioner part. There were 2 factors which were primarily impacting our sales, is what we understand. First is the regional mix, as Blue Star is more dominant in South, that region relatively underperformed the other regions in terms of growth, which probably led us -- our market share sustaining at current levels, and we were not able to increase further. And second was due to downgrading of products to this affordable category. So what are the steps that we have taken to counter these moves? Have we made any notable shift in our regional mix or any other steps in terms of pricing or product catalog correction towards addressing this downgrading part, if you could highlight, please?

Yes. So I'd first like to clarify what you're calling as downgrading is not a downgrading. See, in line with the market requirements, what the market is gravitating towards what we call as mass premium range of products. So these are -- and typically, the sweet spot will be the middle of the value of this market. So we need to be aligned to the market requirements, specifically in Tier 2, 3 and 4 towns, what the customers expect or want us to deliver while retaining a range of differentiators around quality, around the brand image that Blue Star has is what we are also making sure that we are quite comparable. Now as far as the regional mix goes, we have consciously been enhancing our position in the Northern market. So obviously, the relative impact will be visible in the mix change between our North, West and South markets. So as it stands, our North and West -- North and South market shares are, within our own sales, is almost evenly split at around 30%, 35%, followed by West and then followed by East. So that's been a very conscious choice we have exercised over the last couple of years. And we are, again, going to maintain that position because North is a big market as well, without giving up on our leadership position in the Southern markets. The market -- maintaining the market share is an outcome. So obviously, our first preference is to make sure that there's a good balance maintained between whatever growth we are able to register and the margin profile. And the outcome is always the market share, and we always want to make sure that we are maintaining or slightly going beyond the market rate of growth in any given quarter. And that strategy has also not changed for us for the last many years now. Within that context, of course, now the new channel that seems to be emerging, again, in the context of the current environment, is e-commerce. And we are doing -- we are taking few steps to make sure that our overall market share from e-commerce is -- gets calibrated with the growth of overall sales composition from that channel, which has now grown up to around 16%, 17% as far as the market is concerned. We are currently around 12%, 12.5% in terms of our e-commerce sales. And that's where we are now focusing, including our own e-store on our website. We are taking -- we have taken few steps. We're taking few more steps to get as closely calibrated to the markets that are emerging on e-commerce. So it's a mix of a lot of these initiatives. But I would say that the product portfolio is being consciously made quite competitive while retaining the mass premium appeal. And the mix between the regions is, again, a matter of conscious choice by focusing more on North and continue to focus on South.

I have just 2 more questions. One is related to this what you highlighted on e-commerce channel that Blue Star is around 12%, 12.5% versus 16% to 17% of the industry share of e-commerce. So how that has grown over the last 2, 3 quarters, if you could help us with that trajectory? What are the measures we have taken? And second question is on the recent DGFT restrictions on completely-built units. What portion of our portfolio gets impacted with that? I know there should be a market share gain because some of the other fringe players may get impacted more than Blue Star. Or how are you exactly reading this entire restriction to have an impact on Blue Star, if you could elaborate on that?

Yes. So as far as the e-commerce, we have to wait for a couple of more quarters to find out whether this e-commerce share of revenues for the market will stick on, and the 16%, 17%, 18% level will grow or will taper down. Because in the last 6 months, needless to reemphasize, the spurt in e-commerce sales is closely linked with the way the consumers are preferring to buy in this current phase. Now whether those preferences will remain for the next 1 year or 6 months or 2 years remains to be seen because, you will remember till last year, for the industry, e-commerce share of sales used to be below 10% or just around 10%, 8% to 9%. So we -- so as of now, we are taking whatever steps are required to calibrate our own positions with the e-commerce sales proportion, and we will continue to do that as a steady strategy as well. As far as the prohibition on import of completely-built air conditioning units, again, without refrigerants, that's the complete restriction, we are least impacted because you are aware that we've had -- always, we had a choice of fulfillment predominantly comprising of our own manufacturing facility, supported by or supplemented by some SKUs that we always bought from the ODM manufacturers in India, and some of these SKUs we used to import. But predominantly, since we are self-dependent, we have been self-sufficient and self-dependent on our own manufacturing, it will be not too much of a challenge for us to reorient the fulfillment requirements between the other 2 remaining choices that we have. The theme of this change is mainly to bring a level playing field from -- for imports of CBUs from FTA-benefited territories and countries, which was anyway not applicable for us even in the past. Now to the extent obviously different players will adopt different fulfillment strategies remains to be seen. Right now, there is inventory in the system to take care of everyone's requirements for a few more months. So the real effect of this play will probably be visible either in Q4 or in Q1 next year, not before that. It will take 3 to 4 months or 5 months for the impact to get absorbed in the market. We see this as an opportunity. We welcome this move because this does, in a way, reiterate the self-manufactured strategy that we've always adopted. And for us, it's a very healthy mix between not overly depending on an ODM-driven supply source or having a very economic-based decision on what we want to manufacture versus what we want to buy. So that will continue. And within what we manufacture, we have also been sharing with you the fact that almost 100% of the indoor units that were imported earlier are now getting manufactured by us in-house. So it's almost 100% now, which was -- which has increased over the last 2 years substantially. And that, in a way, will also help us -- anyway, that was part of our long-term strategy to derisk our import dependence. It has been there. We've been talking about it for the last 2 or 3 years. So that also is in line with the current thinking around being Atmanirbhar as far as the manufacturing of some of these categories go. So it is a welcome move, and we think that we will continue to go in this direction and continue to enhance our own manufacturing capabilities while being judicious about buying from the ODM suppliers as well. So both the fulfillment options are there for us.

Mr. Tulsiyan, may we request that you return to the question queue for follow-up questions as there are several participants waiting for their turn. The next question is from the line of Anupam Gupta from IIFL.

First question is on the margin guidance which you gave for the products business, where you said 7%, 7.5% for the full year, which basically implies 10%, 10.5%, at least for the second half. And if I go back many years, second half, 10.5% has not been there primarily because of water purifier also. But what is underlying -- what is underpinning this sort of a guidance for the products business, especially when you also had Virat Kohli this year? Will you have operational expenses towards that? And you are right now saying that the market has 45 days sort of inventory. So is this margin doable or what is underpinning this sort of a guidance?

Well, Anupam, first point is that there is a significant impact of cost reduction measures that we have undertaken, which are quite visible even in our H1 results. And if you do that math, you will be able to also understand how the continuing cost-reduction measure -- all of the cost-reduction measures may not be structural in nature, but definitely, by design, most of them are intended to give us relief and benefit in FY '21. That's the first point I'll make. The other point I'll make is around the fact that the entire scale issue that also happened in the month of March last year because the lockdown had -- disruption had started somewhere in the month of March. We are hoping, like I said, the caveat being no further disruptions or dislocations is what we are hoping for, which will again help. Now this is a guidance at this point in time. If the situation changes in 3 months' time, we will come back and let you know.

Sure. And just one thing in continuation. Water Purifier, as you had guided earlier, will be breakeven this year, right?

That is correct.

Okay. Second question is on the -- so given all the import restriction and your focus on domestic manufacturing, are you relooking at the CapEx plan and doing it faster, given the deadlines of -- for tax purpose as well? What is the CapEx outlook? What is the commissioning outlook for the new plant which you have been planning?

Well, we have yet to redo our long-term strategy, again, because we had, quite recently, we had just finished our strategy plan in the months of February and March last year, and then we were -- as we were just preparing ourselves to roll that out, this had happened. We are yet to go back to the drawing board on the long-term strategy is concerned. Right now, the focus is 1 year at a time, FY '21 for now. And in that context, we have also tapered down the expansion CapEx in FY '21. We will be incurring CapEx for sure, but that will be mainly for maintenance CapEx purposes, and it should finally come to a level of some INR 90 crores to INR 100 crores for the full year, pretty much in line with our usual normal CapEx level. So for FY '21, we are not planning to accelerate any further expansion projects. We will take those views probably over the next few months, and we will keep you guided.

Mr. Gupta, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Amber Singhania from AMSEC.

Just a follow-up on the previous question around the CapEx outflow. Is it really [indiscernible]? As of now, this Sri City is ongoing?

Mr. Singhania, sorry to interrupt you, sir. Your audio is not clear, sir. Please repeat your...

Hello. Is it better now?

Yes, sir.

Neeraj, just wanted to understand, does that mean that the Sri City CapEx is on hold as of now?

Well, Amber, we had never -- I mean, Sri City, you are aware just bought land, and we had not finalized the exact project plan in terms of commencement dates and end date, commercial production date, et cetera. Of course, it is there on the radar. And of course, also the fact that the potential, I would say, an added advantage of being able to utilize the corporate tax benefit in case of the new manufacturing. And although we are aware of all those all the levers, like I said, we have to go back to the drawing board and draw up our slightly-longer-duration plans and then decide when we expect our expansion plan in order for the 3-city plant. We have not yet decided.

Secondly, just -- sorry to have one more on this point of margin guidance on the UCP side of 7%, 7.5%, which is more or less equal to the last year's number in that space, despite having a major part of the season, which is Q1, already off on that account.

Yes.

Is there anything which we are building significant improvement in Q4 per se? Or is there any major improvements you're building because of the Water Purifier business getting -- breaking even? Just wanted to understand your thought process on inventories current 1.5 years' working capital number despite having a very difficult Q1 around the world.

So I explained that in detail, Amber, I'll just again reiterate for your and other's benefits. Firstly, it is just the guidance. It's not a projection. And if the situation changes in terms of market levels, we will continue to review and revisit this outlook. That's point number one. Point number two. Until last year, we had a situation of water purifiers as a subcategory in this segment we were funding. It is going to be a breakeven year for water purifiers, so that's going to help. Third point is quarter 4 this year versus quarter 4 last year, specifically in the month of March, other things being normal, we don't see any reason why quarter 4 in FY '21 should not be better than quarter 4 of last year, which means some degree of growth in quarter. And the fourth point, which I elaborated is around the overall operating cost structure that you can see the impact of that in H1. We are likely to realize those cost benefits even in H2. So a sum total of all of these makes us feel that our margin profile for the full year should start coming back pretty much from last year's level. So that's what I will say.

Mr. Singhania, may we request that you return to the question queue for follow-up options. The next question is from the line of Nirav Vasa from Anand Rathi.

Sir, my question pertains to the credit or I can say, the business terms that we are going to have with our channel partners. Sir, as I understand, last season, they were impacted by COVID and a season before that, they were impacted by unseasonal rainfalls. So they have seen 2 seasons of back-to-back peak summer season getting impacted. So are we going to have any kind of liberal trade terms with our channel partners for the forthcoming season?

No, not really, Nirav. We -- in fact, it's been quite encouraging and has been a very positive experience, specifically even in Q1. In fact, Q1 is where we were most worried on, let's say, the credit profile of the channel partners and their ability to liquidate stocks and continue to buy more. And then as you're aware, the overall trend period in this trade is hardly -- it's actually very, very few number of days, if at all. So -- and that doesn't -- that has not changed even in the last 6 months. And our own releases since the worst phase in terms of the inventory management for them has pretty much got over. We don't see any reason why this will deteriorate going forward, specifically as we're getting into a festival season and then, of course, Q4, once the summer season sets in. So we are not expecting any change in the credit rate terms.

Sir, my second question will be pertaining to the marketing expenditure. So we have hired a leading -- we have a brand ambassador. And I -- as I believe that these brand endorsement contracts are for a limited period and between which we had an impact of COVID. So has there been any change in the contractual terms with these brand ambassadors and what can be the marketing spend? And maybe this year, we might be down, but from -- for next year, or how can we look at it?

So Nirav, frankly, like I said, we are very, very sharply focused on managing FY '21. We have not yet decided what do we want to do from FY '22 onwards, which we will, I guess, in the next 3 or 2 or 3 months, we will have all those answers for you. And as we take stock of the expected market recovery or market growth in FY '22, our own aspirations for our market positioning, our product portfolio choices, and then, of course, distribution and marketing will also follow all those decisions. We will probably be clearer about some of these decisions that we want to take in FY '22, probably in few months from now. As of now, it's very, very sharp focus on managing cash flows, managing working capital, reviving growth and coming back on a very strong and robust profitability trajectory track record. That's what we are staying focused on.

Mr. Vasa, may we request that you return to the question queue for follow-up questions. The next question is from the line of Veenit Pasad from Investec.

Sir, a couple of questions. First one, what has led to such a sharp improvement in our EMP margins despite almost a 30% drop in revenue, whether there were any ECL reverses or some lower provisioning, et cetera, thus far?

Yes. So Veenit, this happens in this particular segment every now and then, where it all depends on which jobs are getting closed in which quarter and the mix of jobs having slightly better margin profile. If they tend to get clumped as far as closing in one particular quarter, then of course, you will see these kind of more-than-expected, you can say, improvement in the profitability profile. But then we've been maintaining that you need to look at it over a period of time and not at a point in time. In addition to that, the same rationale and logic of the cost management also applies to Segment I, what I've been talking about for Segment II. So Segment I, also, there is a conscious attempt to manage our operating cost structure, which is also giving some impact -- has given some impact in Q1 and also Q2, it's also produced results for Segment I as well, but it is largely the impact of the embedded profitability in the jobs that get closed. We have not reversed any ECL in quarter 2.

Okay. Sir, my second question is again on the guidance, but on EMP side. So for us to make 4%, 4.5% margins this year after impacted in Q1, which implies roughly more than 5.5%, 6% sort of a margin for next 2 quarters as well.

Yes.

So are these margins, which we have recorded in Q2, more of a sustainable margin going forward?

Well, like -- so this quarter itself is reflective of that now, so about 6%. And we've been maintaining. Last full year, we had a 4.5% margin profile, which is after taking into cognizance the impact of the month of March. Because there, we had an impact on the margin profile in Segment I last year. So full year, despite that, we closed at around 4.3%. So same rationale we think will hold true here as well. We are almost at around 3% for H1. We think it should improve to around 4%, 4.5% for the full year.

Mr. Pasad, may we request that you return to the question queue for follow-up questions. The next question is from the line of Aditya Kondawar from JST Investments.

My questions have been answered.

The next question comes from the line of [ Rahul Soni ] from [ Smiths Limited ].

Like you said, you have 100% self-sufficiency in indoor unit manufacturing. What about the outdoor unit self-sufficiency currently? Are you dependent on the other the ODM manufacturer for that? And what -- at what extent?

Yes. First, [ Rahul ], I clarified that earlier. There are a few SKUs which we very consciously buy from our ODM partners. We work with multiple partners and we distribute pretty much our business amongst them. There -- so it all depends on the economics of the product family, which we decide whether to manufacture in-house or get it manufactured on a contract basis. So to the extent we are buying the units from an Indian ODM manufacturer, the ODU and IDU is bundled with them. The comment I made on 100% IDU is for our own manufactured [ ODUs ]. So earlier, we used to. There was a point in time, it was 100% imported from 3 years ago. So we have swung from 100% import IDUs -- imported IDU for our own manufacturing to 100% self-manufactured IDU. So that's the swing, which is going to also have its own positive impact on us.

The next question is from the line of Anupam Gupta from IIFL.

Just a couple of questions again. Firstly, the cost reduction which you're talking about, obviously this year, you will see benefits. But any of those can sustain even beyond FY '21? Or that is up to when the business normalizes?

This is a difficult question to answer at this point in time, Anupam, because you're aware that we have taken measures on cost optimization across all our expense lines. Now as the business normalizes, as the situation looks better, we have to revisit our positions on various -- the level of cost that we need to incur to ensure that the business growth is also supported. So this will change. This will change, but our endeavor is definitely to use this crisis as an opportunity to embed, to the extent we can, structural cost improvement changes. That's why we were on this cost optimization curve right from the first week of April. At that point in time, we were not even aware whether this pandemic disruption will last for 21 days or 40 days or whatever. But we started this exercise in the first week of April itself, and that's kind of helping us -- has helped us in Q1, has helped us again in Q2, will also help in Q3 and Q4. But how it will play out in next year or next years? Again, we will have to draw up our entire thinking and realign, recalibrate the entire cost line. But like I said, the endeavor is to try and see, to the extent we can, we would like to see some cost benefits becoming structural in nature.

Right. Okay. And just a second, on the working capital, the increase, to some extent, obviously is driven by your reduction in current liabilities...

Yes.

Wherein you have supported MSMEs, and I think there is a government directive also that you need to clear their deals faster. Will it be a structural feature? Or will it revert as you move ahead?

No, it will revert to more normalized levels because, see, that's why we have -- we had to resort to increased borrowings in the short duration because we had -- most of these liabilities were also committed in nature, were backed by LCs in Q1, so they had to be paid off. And then, of course, we have not been buying. Because we've not been buying, those liabilities had not got backfilled for now. And of course, we've also settled most of our dues for the other unsecured creditors. So it's a combination of that. As we start procuring again, this will get normalized.

Okay. Okay. And if I can squeeze just one more on the project portion with the growth guidance, sort of revenue run rate in the current quarter sustain for the next few quarters, or do you see an uptick?

We are -- well, the -- it all depends on the -- again, there, like I mentioned to you, our choice of resuming work wherever the jobs are, we have visibility of cash flow on the jobs, is the driver more than the ability or the market reopening potential. And that's difficult to predict because as early as we are, we are keen to start work in most of the job sites, but the dependency we are consciously keeping is on operating cash flows and working capital. And that's helping us because you see the overall reduction in borrowings quarter-on-quarter that we have achieved of around close to INR 100 crores or INR 85 crores, INR 90 crores is an outcome of some of these measures. And like I said, the focus is, again in Q3, we want to achieve further borrowings reduction. And we are very confident we'll be able to do that as long as we stay focused on some of these measures.

Mr. Gupta, may we request that you return to the question queue for follow-up questions. The next question is from the line of Mayank Bhandari from B&K Securities.

I had a question pertaining to your change in mix. Like now you are completely importing the -- sorry, completely manufacturing the indoor units by yourself. In last 2 years, I think you've changed it from completely -- from nearly 0% to now, it is 100% in-house indoor manufacturing. So sir, I'm just wondering, I mean, what -- how you do have impacted your margins? I mean revenue or more costs, got any gains in terms of margin because of this in-house shifting off indoor-unit manufacturing?

So Mayank, that's a good question. However, our -- the cost which you can expect to get from a Chinese supplier will always be quite competitive as compared to the cost at which you will manufacture that in India. Now that's been one of the constraints in not being able to migrate to this in-house manufacturing in the last few years, which we have overcome now. So at this point in time, at the current scale, we are quite cost-competitive, even if we manufacture ourselves. Now of course, these added governmental interventions around Atmanirbhar policies and imposition of higher custom duty structure will only make in-house manufacturing. That much more attractive. But that -- those benefits will real -- get realized sometime in the future. And also, as the scale goes up, that's the point in time those economic benefits will be more visible. But we need to bear in mind that -- and this is not the only item where we are having a potential for benefit. There are many other cost-optimization measures on the product cost side as well. However, the margin pressure in the market mean that one has to play a very balancing point in terms of maintaining a certain price level and a cost level and margin profile. So it's all linked with balancing growth with the overall margin profile that we wish to have.

Thank you. Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Mr. Neeraj Basur for closing comments.

Thank you very much, ladies and gentlemen. 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 or in person. I wish you the best for this festival season. Stay safe and stay healthy. Thank you.