Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Blue Star Limited Q3 and 9M FY '21 Earnings Conference Call. We have with us today from the management, Mr. Neeraj Basur, Group Chief Financial Officer, Blue Star Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Neeraj Basur. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen. This is Neeraj Basur. I will be providing you an overview of the results for Blue Star Limited for the quarter ended December 2020. First, I will talk about financial highlights for Q3 FY '21. The business continued to stage an encouraging recovery and has almost scaled up to last year's corresponding quarter's levels. Demand revival on the back of the festive season in Q2 and improved customer buying sentiment continued in Q3 FY '21, supported by a more stable business environment. Operating cash flows continue to remain robust, which further strengthened and consolidated the company's fiscal debt. Financial highlights for the quarter ended December 31, 2020, on a consolidated basis are summarized below. Revenue from operations for Q3 FY '21 recovered 90.9% to INR 1,123.89 crore as compared to INR 1,235.91 crore in Q3 FY '20. EBITDA, excluding other income and finance income, for Q3 FY '21 was INR 81.56 crore as compared to INR 57.03 crore in Q3 FY '20, driven by improved profitability across businesses, coupled with cost-rationalization measures. PBT before exceptional items grew 46.9% to INR 48.82 crores in Q3 FY '21 as compared to INR 33.24 crore in Q3 FY '20. Tax expense for Q3 FY '21 was INR 12.96 crore as compared to INR 11.97 crore in Q3 FY '20. Net profit for Q3 FY '21 grew 87.6% to INR 36.72 crore as compared to INR 19.58 crore in Q3 FY '20. Carried forward order book as at December 31, 2020 was INR 3,157.9 crore as compared to INR 2,812.40 crore as on December 30, 2019, an increase of 12.3%. Capital employed reduced to INR 948.62 crore as on December 31, 2020 as compared to INR 1,124.27 crore as on September 30, 2020, and INR 1,020.52 crore as on December 31, 2019 as a result of our continued focus on working capital efficiencies. Consequently, net borrowings reduced by INR 213.05 crore to INR 131.01 crore, which is a debt equity ratio of 0.16 in Q3 FY '21 as compared to INR 344.06 crore as of September '20. Our net borrowings were INR 127.62 crore as on December 31, 2019, which had a debt equity ratio of 0.15. I will now cover business highlights for Q3 FY '21, and first talk about Segment I, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment revenue recovered 77.2% to INR 585.49 crore in Q3 FY '21 as compared to INR 758.80 crore in Q3 FY '20. Segment result was INR 34.11 crore, which was 5.8% of segment revenue in Q3 FY '21 as against INR 39 crore, which was 5.1% of segment revenues for Q3 FY '20. Order inflow during the quarter was INR 636.54 crore as compared to INR 550.49 crore in Q3 FY '20, an increase of 15.6%. Electro-Mechanical Projects business. The order inflow for this business grew -- during the quarter grew as compared to Q3 FY '20 with the receipt of a prestigious order in the factory sector. Slowdown continued in the commercial building sector, which is expected to take longer to recover. We continue to moderate pace of our execution basis our assessment of customer credit profile and operating cash flow visibility for the ongoing jobs. As a consequence, revenue has not recovered to last year's levels in this business, and that's a very conscious effort. We will continue to focus on the infrastructure sector, such as metro railway, electrical substations and water distribution, which are expected to offer immediate growth opportunities. Also, factory, data centers and warehousing sectors are expected to throw up good opportunities in the upcoming quarters. Carried forward order book of the Electro-Mechanical Projects business was INR 2,217 crore as on December 30, 2020 as compared to INR 1,941 crore as on December 31, 2019, a growth of 14.2%. Our Commercial Air Conditioning Systems business. In Q3 FY '21, our Commercial Air Conditioning business recovered well due to healthy traction in the health care, pharma, industrial and government sectors, apart from commercial construction in Tier 3 and Tier 4 towns. Sectors such as offices, marriage halls, auditoriums, hotels and restaurants in Tier 1 and Tier 2 cities are likely to revive only in H2 of FY '22. While we are maintaining our #1 position in ducted air conditioning, we are placed #2 in VRS and #3 in chillers product categories. It is pertinent to note that we are the largest Indian player in commercial air conditioning business. With the AatmaNirbhar Bharat program gaining momentum, this business will be another important growth driver for the company. Major orders bagged in Q3 FY '21 were from Avenue Supermart on an all India basis; Food and Drug Laboratory, Baroda; Prime Hospital, Roorkee; Isro; Mahendragiri, Bangalore; and L&T Bangalore. Our international business, we had improved demand for cooling products in the Middle East markets, which enabled recovery for our international business during the quarter. Inquires in other markets such as SAARC, ASEAN and Africa improved during the quarter as well. The upcoming Expo 2021 to be held in Dubai around mid-2021 is expected to offer good opportunities in the construction sector. We witnessed revival of order booking at our joint ventures in Qatar and Malaysia. We continue to focus on the expansion of the Blue Star product range and building brand awareness and brand visibility in different markets that we are present in. I will now move on to Segment II, Unitary Products. Segment II revenue was INR 492.97 crore in Q3 FY '21 as compared to INR 420.23 crore in Q3 FY '20, a recovery of 117.3%. Segment results was INR 38.79 crore, which was 7.9% of segment revenues in Q3 FY '21 as compared to INR 7.95 crore or 1.8% of segment revenue in Q3 FY '20. Revenue growth and cost-rationalization measures enabled us to achieve improved profitability in Q3 FY '21 vis-à-vis Q3 FY '20. Cooling and purifications product business. Increased in demand owing to the festive season, improved share of billings from e-commerce channel and general business sentiment improvement enabled growth in revenue for the room air conditioner business in Q3 FY '21 as compared to Q3 FY '20. The room air conditional market grew by 25%, we grew by 32% and achieved a market share of 13% in Q3 FY '21. Under the AatmaNirbhar Bharat program, the Government of India has announced production-linked incentive, or PLI, scheme of air conditioner and associated components. The incentive is payable on incremental sales based on the investment similar to the scheme applicable to mobile phones. While INR 3,000 crore has been aside for finished goods and INR 2,000 crores for components, the detailed rules pertaining to air conditioners and related components are expected to be notified soon. The company intends to participate in the scheme. As already disclosed, the company is in possession of 20 acres of land in Sri City, apart from potential expansion opportunities at Himachal Pradesh establishments. Commodity prices, including steel, copper and ABS Plastics and ocean freight are on the rise, and therefore, the company has announced a price increase between 4% to 6% with effect from January 1, 2021. Other products such as water purifier, air purifiers and air coolers are performing well, in line with the plan, and we continue to gain market share. Our water purifiers are e-comm-led products and is on course to break even this fiscal. Commercial refrigeration business. Our commercial refrigeration business witnessed good traction for most of the product categories during the quarter. Demand for cold room and refrigeration equipment increased as a result of investment in the vaccination cold chain. In addition, healthy growth in the supermarket refrigeration and kitchen equipment categories enabled us to recover to Q3 FY '20 levels in the business. The company is the market leader in health care, pharma and pharmaceutical sectors, and it offers cold rooms, deep freezers, medical freezers, ice-lined refrigerators and vaccine transporters. Further, we have the know-how, products and solutions for storage of vaccines from minus 2 degrees centigrade to minus 80 degrees centigrade. The company has been receiving orders from government and private sector players investing in the augmentation of cold chain for vaccine inoculation program. Major orders were bagged in Q3 FY '21 from SK Logistics, Metropolis and RIVERA Lab, [indiscernible] and CMC, Vellore. Segment III, Professional Electronics and Industrial Systems. Segment III revenue was INR 45.43 crore in Q3 FY '21 as compared to INR 56.88 crore in Q3 FY '20. Segment results was INR 8.26 crore, which is 18.2% of revenue in Q3 FY '21 as compared to INR 17.99 crore or 31.6% of revenues in Q3 FY '20. Revenues and profitability were higher in Q3 FY '20 on account of a higher-margin order we had received last year in the data security business. Opportunities from the BFSI sector for the data security solutions business, increased order inflow from the health care sector, a pickup in orders from the industrial sector for material testing and a growth in orders from the essential services for the government sector drove revenue during the quarter. With the wide portfolio of products and solutions forming part of our offerings, the prospects for this business segment are positive. Business outlook. The revival of revenues, which started in Q2 FY '21, with a festive season continued in Q3 FY '21. In the Electro-Mechanical Projects business, we continue to prioritize our project execution based on assessment of customer credit profile and operating cash flow visibility. We are witnessing huge investments in manufacturing sector, consequent to the domestic demand growth and localization under the AatmaNirbhar Bharat program. As a significant emerging player for manufacturing sector, we expect attractive opportunities in the near term. We expect the growth momentum in the room air conditioner and commercial refrigeration business to continue in the coming quarters. Digitization and health care initiatives continue to offer good prospects for the Professional Electronics and Industrial Systems segment. We will continue to focus on improving margins and prudent management of operating costs and working capital in order to improve the financial performance of the company going forward. 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 your 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.

[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.

My first question is with respect to the growth in the cooling products and room air conditioners business, which is 17% and 30%, respectively. Do -- have we seen a kind of a pre-buy effect from dealers which had led to the strong growth? Or -- so basically, the secondary sales also had been as robust given the fact that pre-buy might have been done due to price hike?

Yes. Ravi, so usually, we do see this phenomenon in Q3 foreseeing an anticipation of the summer season that typically starts in Q4. Some dealers do stock up their overall inventory level, so partly it is that. Partly it is also because dealers and distributors are aware that because of the input costs going up, the price increase impact will also be there in Q4, which we have been talking about now for a while. So it's a combination of these 2. And in addition to what I just talked about, good positive sentiment and the festival season was indeed quite encouraging. So it's a combination of all of these factors, which has helped.

Got it, sir. And this 4%, 5% price increase that you had taken, is it sufficient to maintain margins in the cooling products business at 7.5%, 8%? Or is there further price hike needed to kind of maintain that margin?

As of now, we are talking about looking at price increases for quarter 4, which is why the price -- new price structure has been made effective from 1st of January. We will again review the trends in the commodity prices, how they play out over the next couple of months and probably take a view on our quarter 1 pricing towards the middle or end of March.

Got it, sir. And with respect to the employee costs and other costs, it has continued to see a significant decline year-on-year. Is there any chance of employee cost normalizing in fourth quarter onwards? And other costs have also seen 30% year-on-year decline. Is it because of reduced ad spend? Or is there any other cost which has been reduced?

So well, as far as the employee costs are concerned and other costs are concerned, again, you will remember this, we've been talking about the fact that we embarked upon a massive cost-optimization exercise, which was made effective from April itself. This was much before the impact of the entire pandemic was even felt and that helped us because we caught the cycle pretty early on, and we were able to implement quite a few measures in Q1 itself, the impact of that is flowing through in Q2, Q3 also and will flow in Q4 as well. Now to your point on employee cost, we are continuously monitoring the market trends in terms of how the other companies are reviewing. We are also looking at our own business recovery. So it is entirely possible that some of the cost -- employee cost reductions that we have taken, we are likely to put them under review sometime in Q4 to evaluate what kind of roll back measures can be considered, which is a very logical thing to do. Now that business recovery is looking quite optimistic. As far as other costs are concerned, partly because of volumes because typically, some of those cost elements are variable in nature, like freight, like warehousing, like rents, et cetera, that we pay, and partly, there are some structural corrections also we have done. So some of the impact will continue to flow in, in Q4. However, as we scale back to our normal level, part of that will get course corrected in line with the new scheme. So we will see some continuing impact or positive impact in Q4 of some of these measures as well.

Got it. And my final question is with respect to PLI scheme. Two parts are there with respect to this question. One is that our first segment, have you seen a significant ramp-up in terms of order inquiries because of the PLI scheme from other sectors like pharma, et cetera, that PLIs have already been around pharma, electronics, et cetera? And my second question is our own PLI. So how much out of the INR 6,200 crore-odd incentives being given, so how much is it likely to be allocated for the AC business? Is there any broad rules that have been available? Because it has been allocated for both AC and LED lighting, right?

Well, I'm not very clear on the first question, Ravi. The second one I've already touched upon in the opening comments. So that indicative clarity is there for the AC sector. So INR 3,000 crore has been set aside for finished goods, which is room air conditioners, and INR 2,000 crores for the components. We know as much as of now. I guess we'll need to wait for the rules on the PLI implementation to be notified by the government. And like I mentioned, we do intend to participate in this incentive plan as and when the same gets notified.

Okay. So INR 5,000 crores out of the INR 6,200 crores is for the AC industry itself? I mean is my understanding, right?

That's correct.

The next question is from the line of [ Ankush ] from HDFC Life.

Couple of questions. One, just trying to understand the impact if any of this import ban on CBUs with refrigerants, which came in a couple of months back. In your view, has this led to any market share gain by some of the leading top 5, 6 players at the expense of the fringe brands, the smaller guys? Or do you think they managed to kind of they're circling them back by, you are signed up with contract manufacturers or setting up gas filling capacities in India?

Yes. [ Ankush ], so as of now, it is difficult to get a sense on whether this ban has impacted probably midsize or smaller players significantly because remember, even till beginning of Q3 or even in Q3, there are players who were having inventory -- old inventory that was still getting liquidated. So I guess, the real implications of this on various business models for players who are more dependent on CBU import, will probably get better visibility in either Q4 or Q1 of next year, which is when the inventory levels will absolutely normalize. In Q3, we don't think that, that has been a factor which has contributed to growth.

Okay. Fair. Sir, second question, again, on the PLI scheme, I guess, given that we already have enough domestic capacity for ACs versus the kind of demand we have, I'm assuming we would be -- that the industry would be looking at exports, therefore, to kind of meet those targets. So sir, anything you can share because you already do export from India to various market? So anything you want to share how competitive would we be once we get these incentive versus, say, some of these Chinese players? And this would be potentially could be targeted, therefore.

So see, the PLI scheme, the way it is likely to play out, I mean, we are just taking some guidance from how it has been designed for the mobile phone, it will run over a period of 5 years. So firstly, this capacity is not going to get created in the first year itself. So there is a 5-year time frame over which capacities will come up. So that is point number one. Point number two is, the organic growth in the Indian domestic market, considering that, of course, we've had a pretty challenging FY '21, should also give some encouraging base effect, at least, for the next few years, again, assuming there is no other extraneous external factor, which impacts growth. So the growth prospects of the market, number one, a phased approach to capacity building itself will be quite enabling as 2 important factors. You're absolutely right on export potential. As far as Blue Star is concerned, we have had a pretty deep and an old presence in -- mainly in the GCC region and to some extent in the ASEAN and SAARC region as well, where we do export some of our equipment and products. So this will give us another opportunity to deepen some of our presence through some -- into some of those markets. And of course, there will be the competitiveness with other players, whether it is the Korean or the Chinese or the Japanese players who are already present in these markets will continue to be a factor, one has to contend with. But I guess it's a combination of all these 3, where over a period of time, these capacities, and in our own case, anyway, we will -- we are facing a situation that in the next few quarters, our peak capacity in our Himachal plant, which is where we manufacture room ACs is likely to pick up. So anyway, we had on our plans much before this PLI scheme was envisaged to set up another plant in Sri City. And that fits in well in terms of our own expansion aspirations. So overall, we feel it's quite -- it's a good opportunity to explore.

Sure. And as a follow-up...

Sorry to interrupt, [ Mr. Ankush ]. May I request you to please rejoin the queue. There are participants waiting for their turn.

Sure. Okay.

The next question is from the line of Renjith Sivaram from ICICI Securities.

Congrats on a good set of numbers, especially in the room AC segment. Good to see growth coming back. So can you share what's the sustainability of this? And is this probably due to bunch of demand which was there in the last few quarters, which finally we saw it? Or do you see the strength continuing, therefore, how can we source this?

Yes. So Renjith, we think the growth is sustainable as far as the fundamental drivers of growth are concerned, which is, again, we go back to the fundamentals of penetration levels, we go back to the replacement cycle for some of these equipment, which is there. So the market actually has weathered the tough and rough times and again -- I'm sorry, the main factor is we are hopeful and optimistic that this pandemic, the worst is behind us as far as India is concerned. And if that is true and we are not likely to go through any disruptions or significant disruption in the next 3 to 6 months, we are quite optimistic that growth patterns or trends that we saw in Q3 should continue in Q4. And of course, if the summer season starts early or on time as it usually does sometime towards the beginning of March, if that were to happen again and continues till May, June, we should be back on track as far as the growth trajectory -- usual growth trajectories are concerned for the beginning of FY '22. That's what we are expecting, and we hope that comes true.

Okay. And what's the outlook regarding the water cooler segment, which was actually eating into the margins, has that finally turned around?

I think you were referring to water purifiers. Is that correct?

Yes. Water purifier, yes, yes.

Yes. So we mentioned this in the last quarter's earnings call as well. Yes, so our water purifiers business for full financial year '21 will come -- will become neutral. So it is going to hit a break-even level. And so we are comfortable on that. So it's not going to dilute the margins of segment to anymore.

Okay. And sir, finally the Sri City, what is the...

The next question is from the line of Bhoomika from DAM Capital.

Yes. Sir, I wanted to just expand a little bit on this PLI. As you saw in the mobile scheme, there were certain licenses given out to few MNCs and few domestic players. So is there any clarity on how -- because the AC market is much larger relative to in terms of number of players versus mobiles in India. How this license will be given out? Or will it be given out to everybody in terms of the incentive, et cetera?

So Bhoomika, that's exactly what we are also awaiting more clarity on the nitty gritties and specificity of the scheme. But it's safe to consider that, I guess, there will be some credit given or some consideration given for some track record, past track record. How that plays out, we really don't know. But certainly, it's unlikely that any new player can just apply and get a license. So it will be considerations like those. And of course, then conditionalities around minimum investments that will be expected over a period of time, of course. And then the incremental sales growth or revenue growth or scale growth that will be expected as a consequence of that investment. So these are some broad structural constructs that we are getting some -- little bit we are taking guidance from the earlier PLI schemes as well. But I guess we just need to wait a little bit longer to -- for the rules to get notified for us to get a very clear picture on what it translates into for us.

Okay. And sir, my second question is in terms of the -- you mentioned about prebuy in the current quarter. So has there been any inventory buildup And as we move ahead, we saw fairly decent jump in terms of margins in the current quarter on back of lower fixed cost ad spend and some operating leverage playing out. How sustainable is this? And what kind of margin profile can we look at as we move into FY '22?

Again, I'm clarifying for your benefit. Pre-buying is a very usual phenomenon in Q3. So it's nothing unique that's happened this year to the extent, like I said, there is stocking up, which happens. But the inventory levels are absolutely back on track that's a sense across most of the players as well as the channel. So inventory, which was still a little bit of a concern in Q2, the levels of inventory is no longer a concern or any pressure point end of Q3. The margin profile, of course, there are counter pressures in terms of commodity price increases. Ocean freight has gone up quite significantly. Steel is, again -- so there are counter pressure as well. So while you're right in terms of our ability because of the scale, the operating leverage impact and the cost rationalization that we have done, all that is helping. So to that extent, I guess, that is -- the margin profiles are very sustainable in Q4. And as far as the scale growth, further growth in Q4. And we had mentioned this in our last earnings call, we were quite optimistic even then that we should start looking at around 100% of Q3 levels of last year by the time we complete December this year. And that will leave us with some runway of around 3 months to register growth over Q4 of last year. And also keep in mind that there's a little base effect because March FY '20 was impacted because of pandemic. So we have a little advantage in that sense. So we think it is sustainable. It should be sustainable for Q4 as well as moving on to Q1 of FY '22.

The next question is from the line of Manoj Gori from Equirus Securities.

Sir, a couple of questions. First on the supply chain side. So like currently, what would be the like overall stocking with us with regards to components because there have been few players across the industry they have been talking about non-availability of containers, which has been -- which could have a material impact on components or maybe IDUs or ODUs. Can you throw some light on that?

Yes. Manoj, as far as IDUs are concerned, we are almost 100% manufacturing them in-house and in the current financial year. So until last year, you will remember, we used to import IDUs. Now this year, we have become fully self-sufficient on IDU manufacturing. So that we need not worry about imports. Again, the context of this availability -- nonavailability of containers and the ocean freight increases as a result. We have taken care of our buying requirements for Q4 in Q3 itself. So when the trends of some of these challenges and availability of vessels as well as containers started way back in October, so we did some -- we took some proactive measures, you can say, to ensure that our availability of the critical components that still needed to be imported is very well taken care of. So as far as our Q4 consumption is concerned, we don't have a problem, and that has already been taken care of. Of course, we will...

And also, about the Q1 we are covered or we would be covered?

Yes. So those orders are already placed. And by the time Chinese guys get into the New Year, et cetera, et cetera, so we should be good with those components by February, February end, something like that. So we don't see a challenge there either. And hopefully, I think this entire container issue has happened because of the pandemic-led disruption in the international supply chain. We are hopeful by March, April, all of that should also start normalizing because mostly these containers are stuck in parts of the world where they need to come back into the Asian supply chain. And that should start getting normalized by March or April, but we will be good. So we don't see any risk or concern as far as our own factory production ability is concerned because of components.

Right, sir. Sir, secondly, if you look at the FY '20, normally, we say like market would be somewhere around 7 million units for room ACs. Now obviously, during the current financial year, we would have lost some volumes at an industry level. So how do you do your internal analysis and expectations on the market size which could pan out for you or for the industry as a whole during FY '22?

That's a good question. Now the thing is, of course, we can't look at our FY '21 because that's a completely distorted base. I'm talking about quarter 1 of FY '21. So I guess we go back to FY '20 levels and see where we were in FY '20 because that's a more normalized market situation. And if things would have continued to play out without the pandemic, FY '21 quarter 1 would have seen at least 12% to 15% growth or 15% to 18% growth as well. That was our initial expectation at that point in time. Now -- so a little bit of catch-up of over FY '20 levels is what, I guess, we have to look at. And whether -- now the thing that is still a little unclear is whether there will be some unfulfilled demand from quarter 1 of FY '21, where people will come forward and buy in quarter 1 of FY '22. Now that should also happen to some extent. And if you look at what has happened in Q3, the market has grown by around 25% in our sense, all the numbers are not yet available, but we think around 25% growth, the market has existed, which itself is encouraging because so there is a little bit of a catch-up of these supplies that is now happening. And if that continues into Q4 and Q1, we see no reason why FY '22 should not see encouraging growth for the year as a whole.

Right. Sir, lastly, on EMP business. So obviously, now we have been -- like we have been focusing on order executions largely based on your clients' credit profile. But in this case, if you delay a lot when it comes to execution, is there any risk that we might lose an order because even our client would be waiting for a certain period of time. Can you throw some light at what is the nature of these orders and like what are the risks, if any, from client orders?

Yes. So first clarification, so it's not like we are -- this area that we talk about in terms of being watchful applies mainly to few customer categories, which are more, we would say, impacted by or more stressed because of the current financial situation of theirs. It's not across the board. So the clarification -- first clarification is that we also have equally customers, let's say, in the manufacturing or factory space, which we are absolutely fine continuing, and we are going ahead with that. Then there are government orders, there are infrastructure orders. All those are continuing on course and on track. It's -- the more stressed kind of customers is where we are being more watchful. And to that extent, we feel it's prudent to do that even if it comes -- so far, we haven't seen any order cancellations to be clear on this part, if that was the concern. So these customers also understand that for us to sustain continuation of our job work and for them to first come on board in terms of their ability to move ahead with the projects, they need to close that financial gaps if -- to the extent those gaps exist. So it's a balancing act we have to play. And like I mentioned in the opening remarks as well, the revival of around 70% in Segment I, 77% actually, could have touched close to 90%, probably if we were a little more aggressive with some of these costs, maybe 90% plus. But we generally feel that the right thing to do is to have a balance between growth and operating cash flows. And that's the reason when we talk about generating close to INR 200 crores of operating cash flow in quarter 3 alone, which has allowed our borrowings to now come back to INR 130 crores, which is actually lower than where we were end of December last year. So we don't see any great risk in losing customer orders. And so it's a balanced and a careful play which we will continue for some more time till such time, there is absolute clarity in terms of the overall credit worthiness of some of these customers. So you can expect that to continue even in Q4.

So completely agree with that.

Mr. Manoj, sorry to interrupt you. Maybe we request to please rejoin the queue.

Just a continuation.

Yes. Carry on, carry on. Complete your point, please.

Yes. So if I understand in the opening remarks, you did highlight that we would be on growth trajectory for EMP from the fourth quarter onwards?

We hope so because our commercial air conditioning business is doing very well. But there -- again, there are -- see, again, that commercial air conditioning business also has certain customer categories like auditoriums, like marriage halls, like educational institutions. These are not fully operational yet. So our hope is based on the degree of normalization. Now schools and collages were to start reopening in Q4 or part of Q4. That business will see good traction again because some replacement demand will come, some revamp growth will come. So partly, it is also because the environment is also not fully normalized. And when the environment starts to normalize and as the vaccination program grows, hopefully, these residual segments or sectors or categories or customers will also start normalizing. The big point I'm trying to make is we are not in a hurry. We are not rushing up. We are trying to balance out growth and cash flows very, very consciously because the triangulation of growth, cash flows and profits is very critical. We can't -- I mean, it can't be one at the cost of another kind of a situation. And once, I guess, in the next couple of quarters, things do normalize across most customer segments, you will see the impact of this tactical position that we have taken play out very effectively on the balance sheet as well.

The next question is from the line of Nirav Vasa from Anand Rathi.

My first question is pertaining to the kind of order inflows that we can expect in your commercial air conditioning segment. So just wanted to get some idea because of this COVID-related air conditioning requirement which has increased for storage of vaccines, would it be possible for you to give some kind of opportunity size? And how long can this opportunity be?

So Nirav, I presume you are referring to -- you talking about commercial air conditioners. I presume you're talking about the Commercial Refrigeration Products business?

Yes.

Right. Okay. So -- yes, so that's a good point. Now our Commercial Refrigeration Products business is part of Segment II, by the way. So that business is catering to the vaccine supply chain into wave. So firstly, we manufacture and install cold rooms. Now these are rooms which you would have seen in some of these TV footage is where this vaccine cartons are being stored, waiting to be supplied to the end vaccination points. So that's one product that we have. It's a very old product and we are -- we have some very good customer relationships, pretty much with all pharma -- most pharma companies, most vaccine players that you keep reading about. So that's one product that is needed or that will be needed more. The other range of products relate to medical refrigeration equipment, which for the 2 current vaccines, we have entire range of products that can be used again at the secondary storage points. Then we also have something called ice-lined refrigerators, which are also used for transportation of these vaccine or vaccine transporters as they are called. So the first point I'm making is that as far as the product availability and solution availability is concerned, we are well equipped. We are equipped to cater to even minus 80 degrees centigrade. Of course, those solutions are quite expensive as and when some of those vaccines indeed come to India, but we have the capability to supply some of those solutions as well. As it stands currently, and you are aware that currently in Phase I, which is a limited -- the vaccination is limited to the frontline and health care workers. And it's being carried out by the government themselves, central government and state government and even Phase II, which will involve the next 2 crore people will also be under the same structure and probably even Phase III. So as far as the current supply chain of this cold chain vaccination equipment and the entire infrastructure is concerned, to the extent, there were some state government who needed to beef up their infrastructure. That has already happened, and we anticipated wherever those opportunities existed in Q3 and Q2. So that is already done. We think the next wave of opportunities may happen as and when the government decides to privatize the vaccination programs. Because when the private hospitals and private sector pharma companies are -- will be permitted to directly engage in supply chain, at that point in time, there are more opportunities. But as it stands and we have done some estimates that overall at a market level, this may generate some INR 200-odd crores of incremental opportunities over a period of time. And we being one of the very serious players in this entire value chain, we will stand to benefit as and when those orders get placed. But we don't think that there will be one major order or a string of some few big orders that will certainly happen in 1 particular quarter. This vaccination program is likely to be there for some time. So you can expect the cold room chains and the commercial refrigeration business to continue to do well in that context.

My second question pertains to the advertisement and the promotion spends that we are going to do -- we intend to do for the forthcoming season. So we have already hired 1 brand ambassador. Do we intend to continue with that brand ambassador and have heavy marketing expenses? Or what can we read on it?

We are yet to frame our Q4 marketing calendar and marketing plans. Most of that starts somewhere in March. So I guess, in February, we will make up our mind as to what we want to do. So far we've been very prudent in terms of the spend. Of course, that had to be -- it is a discretionary line and it had to be rationalized. But we will, I guess, make our next year's plans in a month from now. And probably by the time we have our Q4 earnings call, we'll have answers to these questions for you.

The next question is from the line of Apoorva Bahadur from Jefferies.

Sir, continuing on the vaccine part. So could you share how much revenue was booked in this quarter on that opportunity? And how much like on, say, an annual basis, do you see that opportunity to be going ahead?

Well, Apoorva, we are -- so like I mentioned, so we are a very regular supplier to hospitals and pharma companies and vaccine manufacturers. Now of course, there's a little uplift because of the current, I would say, phase of vaccination would have already happened when state governments had to beef up their vaccine storage capacity or their vaccine transportation capacity. It is -- so it's not something that we are projecting out for future as a very big or a very major additional line of revenue. And like I said, it will get spread out over many quarters. So it won't suddenly have in 1 or 2 quarters any particular impact. The other point is it's difficult to call out only vaccines because the same equipment are also used for all the other pharma products that they buy. So it's difficult to call out only vaccines as an outcome of sale of some of these solutions and products.

Okay. Got it, sir. Sir, secondly, on this PLI scheme. So you said like INR 3,000 crore has been set aside for finish goods and INR 2,000 crore in component. So I wanted to understand on what level of the value chain will our investment be? Or are we focusing to invest? For example, I mean, do we intend to get into compressor manufacturing as well? Or will it be like only on assembly side or complete end-to-end value chain including the component? How do you see this opportunity playing out for Blue Star?

So certainly, augmentation of our finished goods production capacity is a no-brainer. That is something like I mentioned because we are -- we will run our capacity in our Himachal plant soon. That anyway we need to consider. So that is the first point. Now this gives us a good opportunity to focus on backward integration beyond what we've already done. Like, for example, we talked about IDUs being manufactured. That was one step towards backward integration. We are going to actively look at electronics. We have been also talking about in our own drives, for example, which are design biased for the inventer machines. So those and other electronic components that get into these machines, how do we -- so potentially, how do we get into the assembly or manufacturing of those components as well. So we are yet to -- like I said, we are yet to make up final plans, and those will need to be preceded by the PLI rules themselves. Specifically on compressors, it is not likely that we will get into that space because compressor manufacturing requires investment as well as economics of a very different scale and order. So that's not -- so other than compressors, probably we will be examining most of the components for a potential backward integration opportunity.

The next question is from the line of Rahul Gajare from Haitong Securities.

In the AC business, we've seen very strong growth during this quarter. Could you comment what would be your market share right now? And also, along with this, if you could highlight the sales that your company is doing from the e-commerce channel. I think you had mentioned earlier sometime that it was 12%. So I just wanted to understand how that number has missed. That's the first question.

Sure. So as far as our market share in the room AC business is concerned, end of quarter 3, we are at 13% of market. This is up from -- we were at 12.2% same time last year. That's improved. As far as the e-commerce sales is concerned, we are now at close to 6%. Our sensors industry is at around 9% for the overall room AC sales. We were at a lower level relative to current year. So we have stepped up our overall e-commerce penetration, and it's now tracking around 6% in Q3.

Sir, my second question is on the capital employed. I think in your opening remarks, you did indicate that capital employed has increased. But when I actually see both the segments, important segments, your cooling segment and project business, both have actually reduced, both on a year-on-year basis and sequential. Obviously, the unallocable has increased. So could you comment on this aspect? And also if you could also indicate is the credit terms have improved, given that we've seen significant improvement in the capital employed in the -- in both the segments, specifically in the project business, how that is moving?

So just to clarify, I had mentioned a reduction in our capital employed. So maybe I was not clear enough. It was -- it is a reduction as compared to September. It is a reduction as compared to December of last year. So that point I'm reemphasizing. So capital employed has reduced across all of the 11 quarters. Sorry, what was the second question?

How things have moved in terms of credit terms and a specific comment on the project business?

Yes. So credit terms as far as our products business is concerned, it's pretty much normal. We -- usually, it's a cash and carry kind of business. And on an average our debtors base never exceeds 8 to 10 days, and that trend is back on track. So it's not like we need to support the distributors with any credit period. And on the projects business, this entire conversation I was having in the context of being watchful on the credit profile of customers is intended to ensure that we are taking a measured credit risk exposure on some of those customers, and which is actually what you see on the overall reduction in the capital employed as well. So overall, we are comfortable in the overall operating cash flow situation. And that's what is reflected in our net borrowing reduction as well. So -- and that is something we wanted to do it quite consciously because bringing the debt equity back to below 0.2 level is something we have stated in the past as well that we will we consciously focus on and ensure that the health of the balance sheet and cash flows is kept equally high on everyone's radar internally.

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

So first question is on the RAC business, where you've said that industry has grown by 25% and you have are grown by 32%, whereas the primary sales which you reported here have grown at 17%, all in that range. So is the overall inventory normal? Or you say that you still have a leeway significantly in terms of, let's say, fourth quarter can still absorb a lot of upstocking by the dealers because of this faster growth, which has happened in the first quarter?

So Anupam, I clarified that. So inventory levels, our understanding -- in fact, our own inventory even in end of Q2 was almost normalized, barring few SKUs, which we had to take care. In December, we are very comfortable on inventory, not just our inventory level, even the channel. And our understanding is -- which we are still awaiting numbers from others, our understanding is, at least the top 5, 6 players and the channel on an overall basis is back on normal track as far as the inventories are concerned, again, in preparation for Q4 sales. So there is no reason to worry about inventory anymore.

Actually, I was referring to it the other way, that because the end market has grown faster than what your primary sales has grown. So what I was referring to is that is there significantly more upstocking which can happen is what I was checking.

No. So the stocking levels, again, like I mentioned, are in line with what you would typically see as a trend towards the end of Q3 every year. So there is nothing to be worried about or there's nothing unusual there.

Okay. And secondly, continuing on the product margin, so let's say, this year, obviously, you had first quarter impact and which has sort of -- and then we have seen a significant jump in third quarter. But let's say, if you go to the next year versus earlier commentary that the stable margin for this business is around 9% to 10%. Is that a number you're still targeting? Or has it changed in the current scenario?

We'll take 1 quarter at a time. So firstly, we'll -- we are still focusing on exiting FY '21 on a strong note. So that's what we are looking at. And I guess, by that time, we will be ready with our FY '22 plans, which are under work. And we may have some more clarity for you for FY '22 by the time we come back to you in May.

Ladies and gentlemen, due to time constraints, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

Thank you. 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 by us, and we will be happy to provide you additional details by e-mail or in person. Thank you very much and stay safe. Take care.

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