Blue Star Limited (500067) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a very warm welcome to the Blue Star Limited Q1 FY '22 Earnings Conference Call. We have with us today from the management Mr. Neeraj Basur, Group Chief Financial Officer and Company Secretary of Blue Star Limited. [Operator Instructions] Please note that this conference is being recorded. I'm now glad to hand the conference over to Mr. Neeraj Basur. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. This is Neeraj Basur. Firstly, I would like to wish the best of health for you and your loved ones, and I hope all of you are safe. I will be providing you an overview of the results for Blue Star Limited for the quarter ended June 2021. Financial highlights. The quarter commenced on a promising note with a normal summer season coupled with a general improvement in the customer sentiments. However, in the second fortnight of April, the momentum was interrupted by the resurgence of the second wave of COVID-19. The consequent lockdown like restrictions imposed in various states continued to disrupt the business through to the end of May. For the second year in a row, this impacted revenue growth in the peak selling season for our Unitary Products business. However, the impact was relatively less, as compared to Q1 FY '21, due to the staggered and localized nature of the restrictions and a pickup in business activities as the restrictions were gradually eased in June. Additionally, our experience from last year in managing the business environment under the same circumstances enabled us to handle the disruption with agility and end the quarter on a stronger note. Financial highlights for the quarter ended June 30, 2021, on a consolidated basis are being summarized by me now. Revenue from operation for Q1 FY '22 grew 68.1% to INR 1,052.04 crore, as compared to INR 626.02 crore in Q1 FY '21. EBITDA excluding other income and finance income for Q1 FY '22 was INR 42.23 crore, EBITDA margin of 4% of revenue, as compared to INR 1.36 crore, EBITDA margin of 0.2% of revenue, in FY '21 due to higher scale. PBT before exceptional items was INR 19.40 crore in Q1 FY '22, as compared to a loss before exceptional items of INR 29.47 crore in Q1 FY '21. Tax expense for Q1 FY '22 was INR 6.52 crore, as compared to a tax credit of INR 9.52 crore in Q1 FY '21. Net profit for Q1 FY '22 was INR 12.69 crore, as compared to a net loss of INR 19.66 crore in Q1 FY '21. Carried-forward order book as on June 30, 2021, grew by 8% to INR 3,152.30 crore, as compared to INR 2,918.66 crore as on June 30, 2020. Capital employed reduced to INR 969.83 crore as on June 30, 2021, as compared to INR 1,193.83 crore as on June 30, 2020, due to continued focus on working capital efficiencies. In view of the prudent working capital management and other continuing capital preservation measures, net borrowing as on June 30, 2021, reduced to INR 68.47 crore, which is a debt-equity ratio of 0.08, as compared to a net borrowing of INR 428.53 crore as of June 30, 2020, which was a debt-equity ratio of 0.56, despite short-term challenges to the operating cash flows during the quarter. I will now talk about the business highlights for Q1 FY '22. First, segment one, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment I revenue grew 61.7% to INR 505.24 crore in Q1 FY '22, as compared to INR 312.44 crore in Q1 FY '21. Segment result was INR 20.03 crore, which is 4% of revenue, in Q1 FY '22, as against a loss of INR 10.53 crore, which was 3.4% of revenue, in Q1 FY '21. Order inflow for the quarter grew by 143.9% to INR 650.78 crore, as compared to INR 266.78 crore in Q1 FY '21. Electro-Mechanical Projects business. The pace of execution of projects was slower due to the phased lockdowns across multiple states which affected material movement and labor availability at sites. Delays in order finalization due to uncertainties impacted order inflows from the commercial building sector. Muted government expenditures continued to impact order inflows in the infrastructure sector. Inquiries and order inflows from the factories and light industrial sector continued to be encouraging, driven by the Make in India initiatives of the government. We continued to moderate the pace of our execution, based with assessment of customer credit profile and operating cash flow visibility, for the ongoing jobs, which enabled an improvement in margins for the business. We will continue to focus on opportunities in the infrastructure sectors such as metro railways, electrical substations and water distribution; and sectors such as factories, data centers and warehousing, which are expected to throw up good opportunities in the medium term. Carried-forward order book of the Electro-Mechanical Projects business was INR 2,232 crores as on June 30, 2021, as compared to INR 2,040 crore as on June 30, 2020, a growth of 9.4%. Major orders received during the quarter were from Ola Electric and Netmagic IT services. Commercial Air Conditioning Systems. Our commercial air conditioning business registered a growth of 108%, as compared to Q1 FY '21, albeit on a low base, due to healthy traction from the industrial, government, health care and pharma segments. Key segments such as builders and developers, marriage halls, auditoriums, hotels and restaurants continued to be impacted by the pandemic and are yet to revive. We continue to maintain our #1 position in ducted air conditioning, #2 in VRF and #3 in Chiller product categories. Major orders bagged in this category in Q1 FY '22 were from MMRDA COVID hospitals, SALCOMP, Reliance Zoo, Kalinga Institute of Technology and Adichuchanagiri Institute of Medical Sciences. International business. Revenue during the quarter grew on the back of substantial normalization of business activities in the markets that we operate in. Demand for both air conditioning and refrigeration products improved across SAARC and Middle East markets. With elevated vaccination levels in the Middle East and expectations of a good summer, the forecast for this business is very positive. The projects business in Qatar showed encouraging recovery. The operations at the joint venture at Malaysia were impacted during the quarter due to lockdown restrictions imposed there on the resurgence of COVID-19. We continue to explore new markets for business opportunities and 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 talk about Segment II, Unitary Products. Segment II revenue 83.9% to INR 505.37 crore in Q1 FY '22, as compared to INR 274.85 crore in Q1 FY '21. Segment result was INR 21.77 crore, which was 4.3% of revenue, in Q1 FY '22, as compared to a loss of INR 3.76 crore, which was 1.4% of revenue, in Q1 FY '21. Cooling and Purification Products business. When the lockdown restrictions were lifted in June, severe summer conditions in the Northern region supported growth. Further, expansion of conventional channels and increase in the share of business from e-commerce portals complemented the revenue growth. Consequently, our room air conditioner business registered a growth of 58%, as compared to last year, while the market grew by around 55% during this period. We continued to maintain our market share at 13%. Commercial refrigeration business. Increased demand from the health care, pharma, food processing and food delivery segment enabled the growth in our commercial refrigeration business, as compared to Q1 FY '21. With end-to-end solutions for vaccine distribution, we have further enhanced and strengthened our brand presence in the pharma and health care segments. We continue to maintain a leadership position in deep freezers, storage water coolers and modular cold rooms. Major orders were bagged from Biological E, Gland Pharma, Ascent Pharma and Zydus Cadila, to name a few. I will now talk about Segment III, Professional Electronics and Industrial Systems. Segment three revenue grew by 7% to INR 41.43 crore in Q1 FY '22, as compared to INR 38.73 crore in Q1 FY '21. Segment results of INR 5.56 crore, which were 13.4% of revenue, in Q1 FY '22 is lower compared with INR 10.18 crore, which was 26.3% of revenue, in Q1 FY '21 due to product mix. Revenue from this segment continues to be driven by opportunities from the BFSI sector for the data security solutions business and in health care for medical diagnostic equipment. With the revival of investments in the manufacturing sector, our testing machine business is witnessing growth. Major orders were bagged from Man Industries, Central Imaging and Diagnostics, Canara Bank, ICICI Bank, MRF to name a few. With the wide portfolio of products and solutions forming part of our offerings, the prospects for this business segment continue to be positive. Business outlook. With the capital investment cycle playing out in a significant manner, the demand for our products and services is expected to be robust. The consumer spending continues to be healthy, and despite price increases implemented, we expect to witness growth in demand. We will continue to focus on controlling operating costs and improving working capital efficiencies and operating cash flows. With the vaccination drive expected to pick up momentum, the impacts of the third wave, if any, should also be minimal. We therefore believe that the prospects for the ensuing quarters are positive and good. With that, ladies and gentlemen, I am done with the opening remarks. I would like to now pass it back to the moderator, who will open the floor to questions. I will try and answer as many questions as I can. To the extent I am unable to, we will get back to you via e-mail. With that, we are now open for your questions, please.

[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.

My first question is that if you can throw some light on the mix of in Segment II what was the mix of revenue of UCP and other businesses? Even if you don't want to give an absolute number, the percentage would do. Just wanted to understand if UCP really saw a much more decline and the other business did well. So if you can throw light on that. That's number one. And number two, in terms of margins now because UCP -- and we understand this was a more -- of an impacted quarter, but how you are looking for the whole year, the UCP margins. Because we sort of have taken price increase, but obviously it's more of a lean season starting. So can you throw some light how you're looking at the margin trajectory of UCP segment for this year and -- should be able to do double digit next year. Or it looks tough as of now. Those are the 2 questions.

Yes. Thanks, Nitin. I'll try and address both, yes. So as you're aware, that strategically, as far as our Unitary Products business segment is concerned, we have been expanding the range of the products as well as the solutions relating to, of course, the cooling and purification range of products that we have. So in that context, steadily we have the entire room air conditioners range of products and the other basket of other products that we have, have been changing the mix. So as -- I mean this is not a real representative quarter. However, in this quarter, around 60% of the Segment II revenues would be from the room air conditioner business, and the remaining is basket of other products that you're aware of. That's the answer to your first question. As far as the overall margin profile is concerned, of course, you're aware that quarter 1, as happened last year as well, tends to influence the annual full year's margin profile of Segment II in case quarter 1 doesn't really play out as it should in a proper and a normal summer season. But of course, you're also aware that we -- there is quarter 3 and quarter 4 which is yet to play out completely, as we experienced last year. We believe that -- and you would have -- you will remember that, last year, we ended quarter 4 with a margin profile trajectory in Segment II of around 8%. We expect to get back to the same level by quarter 4 FY '22, of course assuming that there is no third wave disruption and things like that. So we think the overall normalcy in segment 2 should get restored, by quarter 4, pretty much in line with quarter 4 of FY '21 levels.

Just one clarification. You're saying margins for the UCP for the whole year 8% or for the Q4 8%...

So my comment is quarter 4 because quarter 1 is a washout in some sense. So quarter 4, by the time we reach quarter 4, we should come back on the trajectory of 8% margin for quarter 4. And you're aware quarter 1 and quarter 4 are the 2 healthy quarters from a margin perspective, so that's what we are hopeful of.

Neeraj, that takes the overall margin for the whole year even lesser than 5% or 6% -- I mean closer to 5%, 6%. So I mean, despite taking so much price increase, I understand the volume loss has happened, but I think we are trying to increase market share here in North, how is that response? I understand we were not able to make the mark because of the impact, what we saw. So yes.

Yes. So Nitin, this year, because of the abnormality of quarter 1, wouldn't be the correct year to look at the annualized margin profile, but mathematically if you calculate, of course, it will be in that range of 6%, 6.5% for the full year because of quarter 1. So the reason I started by mentioning quarter 4 is because that is a more normalized level after complete normalcy gets restored, hopefully, after this vaccination catches up further and there are no further market disruptions and the commerce and business goes on as smoothly as it can. So this is what we had also talked about in our last earnings call, that pretty much while -- we expected the impact of price increases that we took in January and then in April to play out to the fullest and show up in the desired margin profile in FY '22, but because of now quarter 1 impact, we do not think that is going to happen. So probably it is quarter -- next year is a better year to look at. However, the outlook in terms of there is -- the macro outlook is quite positive. And there's no reason to believe why -- the normalized margin profile. So it is more of a quarter 1 implication that we should just isolate and then understand the overall normalcy which will be different for rest of the year.

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

Congrats on good growth in the UCP despite the challenging environment. So if we look at the overall -- the energy label change we will room AC which was expected last year. We were expecting whether that can get postponed till this Jan. Is that going to happen? Or will it get further extended most certainly, because by now you should have some clarity on that, right?

Yes. So the current notification is for this to happen from January 1, 2022, However, as you're aware that because of again -- when this date was announced, obviously the second wave and the second round of lockdowns were not there. Obviously some discussions, conversations are going on. Maybe closer to the date, we will get to know whether this is the final date or not.

Okay. And how much was the price increase taken in 1Q, if you can help with that number?

Yes. So we talked about it in the last earnings call as well, Renjith. So this was we took a 5% price increase in quarter 1 -- or calendar first quarter, which is Q4 of last financial year; and 3% towards the beginning of this current -- first quarter of this financial year. So that's what we have done, so far.

But sir, despite that our margins are lower, so what was that reason? Is that because the complete passthrough has not happened, or will it come with a lag, so why the margins are still lower despite the price increases.

Well, yes. You need to keep in mind, see, last year, the degree of cost cuts that we took on the operating cost side were very incisive, including Q4. So we were coming back on the normalized operating cost structure from Q3 of last year. So quarter 1 last year, quarter 2 last year, we took some fairly deep cuts across several of our operating cost lines. Now mostly the cost lines, specifically employee costs, which had to be restored back, which restoration started in Q4 last year, have been substantially completed. So now the cost structures are back to almost the normal scales, whereas of course the quarter 1 scale has got impacted, the revenues have got impacted because of the lockdowns. So that abnormality is there. The other way of understanding these results is that, despite absorbing back the normalized cost structure in the operating cost lines, we are having the kind of overall profitability improvement that we have talked about here. So that's another way of looking at it.

The next question is from the line of Saiyed, Arafat from Reliance ADA.

Sir, my first question is on online sales. I just want to understand how the market over there and what kind of investments you have done to increase your online sales. And is it is -- AC is more salable on online channels? Or how is that...

Yes. So the e-commerce channel has been gaining some traction ever since last year because of the shutdown that was -- happened in the general trade and modern trade, of course. So as of now, e-commerce is roughly about 15%, as far as the market is concerned. Our share of e-commerce is also pretty much tracking on a similar line, around 13% to 14%, so yes, that's showing some traction...

Okay, fine, sir. And then the next question is on your in-house manufacturing versus outsourcing. So I just want to understand how is that going -- process after, let's just say, some buy in from China? So what's your outsource and in-house mix in terms of production?

So our -- we are maintaining our own manufactured share of close to 70%. And there are some SKUs that we do get manufactured through contract manufacturers based in India. And as you're aware, the import content is pretty low now ever since the changes happened in the -- or for the finished items, I will say. So overall we continue to maintain the position of pretty much having a substantial part of our overall fulfillment through our own factories, close to 70% now.

The next question is from the line of Sandeep Tulsiyan from JM Financial.

My first question is pertaining to the ASPs in the room AC segment, how they have changed, because what is happening is we have rolled out price hikes, but at the same time, we are aggressively trying to increase our market share in the affordable range. Would you give us an update, was close to 70% of your sales in fourth quarter. So if you can share on how the ASPs have moved due to this mixture -- change in mix? And where is the share of affordable range ACs right now?

Yes. So Sandeep, obviously there are these counter pressures in the market where, on the one side, because of commodity price increases, pretty much all players have been compelled to course correct on the pricing, which we talked about earlier as well. So between Q4 of last year, Q1 -- early Q1 of this year, when the season started, we have taken price corrections. And the same time, obviously since this lockdown has caused disruption, the overall pricing pressure remains from an ASP point of view. So part of it also gets reflected in terms of discounts and other incentives that are then kind of offered. So the full impact of price increase -- or the proper impact of price increases will probably start becoming visible from Q3 onwards when the overall market normalcy resumes. This quarter, again because of these unforeseen disruptions, is not really the right quarter to have a view on the -- and certainly the ASPs have not normalized for this quarter. They will settle down, they should settle down once we start entering the festival season pretty much in Q3. That's how we are looking at this aspect at this point in time. The Mass Premium products are doing very well. The entire range that we talked about earlier, it has gone down quite well with all our dealers, distributors. And they're very happy with the extended range. They are very competitive in terms of the coverage, the features, the price points. And so they have -- are a much better portfolio to offer which is far more competitive. And like -- again we told you that, between March and early April, we did sense and we experienced some very good traction. Later in June, end of -- towards the end of first quarter, also again we witnessed some good traction. So we are quite optimistic and hopeful that, once normalcy is restored, this entire range will do very well. And that's, again, something closer to the festival season that we will find.

All right. So if I got that correctly: So the 8% price hikes that you took cumulatively in the first 4 months were not fully reflected in the quarter due to higher discounts, and that should normalize by festive season, right?

Yes. To some extent, yes. It will start getting corrected out now as we get into quarter 3, quarter 4.

Okay. I have 2 more questions. 1 is on the strategy of entering or making a dent in the North India market. You did make a comment in the press release saying that severe weather conditions have helped you gain some market share or helped you grow better than the other regions where you are present. Just if you can share a little bit of update where it is in terms of total share versus your other regions, North India? And what is the strategy of growing market share over there going forward? Second question is pertaining to the investments in the PLI scheme, where I think, by 15 September, most participants are expected to submit their proposals. So which components we are planning to participate. And what can be the outlay over there?

Yes. So as far as the North India market is concerned, yes, of course, we have -- it's played out well for us. And one of the reasons this has done: In quarter 1, we could have derived the benefit or realized the benefit of extended focus on North has played out. So now -- despite the fact that we have rains in South and all that. So South didn't fire or trigger as much as normally it does in the peak summer season. So North is now about 40% of what we -- in quarter 1, I will say. It was about 40% of our overall sales. And then the other regions are -- so in fact, it's done better than South in quarter 1, as far as our North -- the share of North is concerned. As far as your question on PLI investments is concerned. We are aware that PLI is now available only for components and not for finished products. We are evaluating the possibilities of -- or the feasibility and possibilities of making an application for certain components. That plan is not yet fully firmed up. And probably by the time we meet you after Q3 -- Q2 results, we will -- we should be able to give you a more definitive statement there, but yes, to the extent the PLI benefits can be realized from the components side, we will definitely -- we will be interested and keen to look at that, for sure.

Sure, got it. Sir, just the comparable number for 40% North share, what was it last year?

Last year would have been close to about 35% -- 30% -- 35%, last year, North and South were pretty much equal. So this year, North is a shade better because of extended summer, which is what we have talked about in the press release as well.

The next question is from the line of Charanjit Singh from DSP Mutual Fund.

If you can just help us understand the price laddering in terms of where does, in the Mass Premium, Blue Star stack up versus the competitors, the larger competitors like maybe Voltas, and other players. What is the kind of pricing differential as of now? If you can just touch up on that.

Yes. So Charanjit, this range of products -- and probably my reference point is more like of 1.5-ton 3-star machine or that family of machines. We will be -- we are quite competitive when it comes to the top 3 or 4 players are concerned, pretty comparable. The difference between our price and another 2 or 3 players will be very, very nominal. Of course, with a couple of players, we may still be about 3% to 5% higher -- about 3% higher, not more than that. So overall as far as the market positioning is concerned, this is a highly price-competitive range now that we have and very acceptable, as far as the market is concerned, because we are still -- the reason we call it Mass Premium is because indeed there are differentiators when it comes to the quality side of performance or the overall experience that the customer will get. So that is only the -- one reason why there's a little bit of differences compared to a couple of players, but more or less we are in sync and in-line.

Okay. Sir, on Southern market because there are still concerns from Kerala and other parts in the Southern market. Sir, if you can touch upon, what are your thought process in terms of going forward, how do you see the Southern market can pan out? And also, on the inventory levels, where we are right now. And you -- think that it may take longer to get it liquidated?

So you see Southern market in Q1 has -- was impacted because of the twin reasons of early rains and some very extensive rains in Kerala and parts of South India plus the pandemic-driven disruptions in Karnataka and a couple of more states. So that is the real reason why South, relative to -- its potential in Q1 has not really done that well. So we don't see any macro reason to feel concerned about South. It will come back on its normal trajectory once the situation stabilizes by the festival time. And it will again come back on its normal selling potential, and we are very comfortable with that.

Sir, last question from my side is on the commercial ref, if you can touch upon that category, how it did in Q1 and how we see it going forward contributing during the remaining year in FY '22.

Yes. So we have mentioned about commercial refrigeration segment and category. So here are the traditional customers which are, for example, ice cream manufacturers or QSRs, restaurants, hotels. Obviously, as you can imagine, these traditional customers are still not normalized. They will take some time to come back on their usual trajectory of buying. However, very encouragingly for this particular segment, we are seeing good traction from pharmaceutical, also the health care sector, government. And so these are the new segments which have emerged very well; in addition, of course, the traditional segments which continue to be there. The vaccine supply chain as of now is -- continues to offer good opportunities both in terms of vaccine storage solutions right from cold rooms to equipment which is needed at the vaccine storage centers as well as vaccine transporters that are needed at the vaccination centers. So that is continuing, and obviously we think that, as the vaccination pace increases further, certainly for the next couple of quarters or a little more than that, this traction should be there. Obviously a bulk of buying has already happened, so it may not continue in the same -- with the same momentum, but this is one area. And then of course, the newer segments we entered in, in terms of the supermarket refrigeration as well as the overall retail refrigeration solutions is also showing some encouraging signs. So all in all, commercial refrigeration is a segment -- or a category we continue to be quite optimistic about.

So sir, can you highlight any numbers then on the growth rate? And are these new categories that are able to offset the traditional customer base? And what's the kind of growth expectations you might have on the commercial ref?

So overall, Charanjit, you're aware we always discuss and talk about segment as a whole -- well, these are all part and components of Segment II, but needless to say, as I mentioned towards the beginning of the call, now about 40% of segment two comprises of a basket of these products of which the Commercial Refrigeration is definitely an important constituent. So overall, the segment does continue to be significantly -- it gets mitigated when it comes to the strategic diversification of the products portfolio between room ACs and commercial refrigeration range of products. And that is expected to continue to strengthen.

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

My first question is on the -- for the product -- our AC business basically. Based on your current inventory levels and the procurement cycle, let's say -- assuming commodity prices remain here, what sort of price increases would we need, assuming this market is coming back, what sort of price increase will be needed to restore margins to slightly older levels of like the 9%-plus? And also, if you can include, assuming that your energy labeling change happens from January, what sort of price increase will that require over and above this?

So Anupam, as far as the inventory levels are concerned, we think -- and this, I am talking about the markets, not -- certainly our own market inventory situations also. So it's not something alarming, end of June, I am talking about, so it's not something which is alarming. And we think the inventory levels will normalize. For us, it will -- it should start normalizing early Q3 pretty much on the lines of what we were able to achieve last year. So that's quite comfortable. And even as far as the market is concerned, we think, by the end of Q3 or towards middle or end of Q3, once the festival season starts, the market inventory levels should also normalize. So inventory is unlikely to be a key concern over the next 2, 3 months. It will be over, as far as that is concerned. We are just watching the entire restoration of normalcy across rest of the states and we just -- anyway, it's Q2. So it doesn't make sense to take a pricing decision in Q2. We will watch closely. And probably around Diwali time or a little ahead of Diwali is when we will take a view whether any further price corrections are required in order to restore the margin profile, what we are expecting, at that time. So it's a little early to talk about price increase. We will take that call probably in Q3.

Okay. And the energy label change would require what sort of cost increases for you?

So energy label change, at this point in time, that entire portfolio has not been finalized. It's in the process of getting finalized because, like I mentioned earlier, the -- right now date is January 1, '22. That clarity, also we will be -- we will get in Q3 as to the entire range. And then obviously we will stick to our Mass Premium portfolio profile, but I guess, that clarity, we will get and we'll be able to share with you around Q3.

Okay, understand. The second question, for the projects business. What sort of growth are you now looking at given that obviously there was some impact in first quarter but should things normalize fully from the second quarter's onwards? And also will the margins recover also in the balance part of the year? What levels are you looking at?

Yes. For the projects business, see, the traditional customer segments, which is buildings and commercial real estate and private infrastructure, we think, is going to take slightly longer to normalize. So that part, we are -- we have been watchful for the last 15 months, 18 months, we continue to be so and for all the right reasons. So that will continue. So as far as that segment is concerned, we see some very interesting and healthy traction from light industry and light commercial. So the factories which are getting committed and which are getting expansions in the factory space is a good area for us to get in. E-commerce, warehousing space is another good one to look at. Data centers is the third segment where MEP works are being looked at. The fourth one is government-funded infra segment. We are participating quite aggressively, be it metro rails, airports and so on. Those are good projects. So it's a mixed bag where there is a good replacement of some of the traditional customer segments by some of these newly emerging customer segments which I've talked about. And hopefully, once the credit cycles and the credit profile of the traditional customer starts to strengthen, improve or come back on track, those projects will come. We have differentiated ourselves, you are aware, across 2 main platforms: firstly, the integrated MEP services that we provide vis–à–vis some other players. And there are not too many national-level players who are now able to offer integrated MEP services, and you are aware of that. And then of course, the -- overall, our ability to -- from an integrated -- integrating not just MEP but also supplementing it with the equipment that we manufacture. So those are some of the differentiators over some smaller regional players which will keep helping us. And the healthy order book is an indication of that over the last 2 years. We have not really seen a degrowth in the order book despite being watchful, careful, cautious and highly cash flow- and credit profile-centric approach that we have taken in that segment. So the margin profile. That's a reason you see very stable margin profiles now hovering in the range of 4%, 4.5%. And we see no reason why these should not come back to 5%, 5.5% levels as more normalcy resumes. So that's on the Segment I business dynamics.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

Neeraj, if you could give us an update on how has the traction been in June and the month of July. This is on the unitary cooling products segment.

Yes. So the month of June, Bhavin, so actually the lockdown started to ease off towards the first week of June. So really speaking, there were 3 weeks in June. And within that constrained 3 weeks and also considering that the monsoon season pretty much settles in South and West India. Despite that, it has been very encouraging experience in those 3 weeks; and specifically, that we've talked about in our press release, also the North Indian market, which continues to have extended summer which spilled over into the month of July. And similarly, we have seen that experience flow into the month of July as well, specifically in the northern part of the country. So it's encouraging. And that's one of the reasons you see, relative to last year, the revival and restoration of normal business activities, from our perspective, is far softer and quicker this year, probably, of course, we also had experience of last year. So overall we are reasonably satisfied with what has happened in the month of June in the backdrop of the disruptions that were encountered in the preceding 45 days or so.

Okay, sure. The second question is on the margins for the professional segment. I mean historically we have been seeing north of 20%, but over the last 2, 3 quarters, the trajectory has been downward, well, 13.5% in the last quarter. Any reason -- specific, if you could give us, and what could be a sustainable level that one should be building on?

Yes. So if you look at our longer tenure of margin performance for that segment, it's -- it ranges from 15% to 18%. So that's more like a median margin performance, 15% to 18%. We are hovering now in the range of 13.5%, 14%, as of now. In the last few years, I think FY '19 or FY '20, we did get a couple of large orders with healthier margin profiles. In each one of that business is like that, it will always have -- every now and then, there'll be some one-off large orders which will bump up the margin profile over the ensuing 2 or 3 quarters when those orders are fulfilled. And you'll see a sudden bump-up going up to 20% or 18%, 19%, like that. So a little bit of variation is to be expected in the margin profile of this segment, but yes, its range, it will stay in that median range of around 15%.

Sure. A couple of housekeeping questions: On the interest costs, in your press release you mentioned that debt has come down to INR 68 crores, but when -- we see INR 11 crores of interest costs. So if you could help us understand that.

Yes. So the debt has been coming down progressively. And if you compare the interest expense quarter 1 last year with quarter 1 this year, you will see the reduction more starkly there because, quarter 1 last year, we were building up debt. In quarter 1, we had to resort to debt to bring in sufficient liquidity on the balance sheet, but after that, we were pretty much done. So that's a progressive reduction in debt. So that's why you see, you will see an overall reduction in the overall cost of financing as well, as well as the quantum of money that we need. The investment corpus that we are maintaining, again to ring-fence liquidity on the balance sheet, stays in the range of around 250 crores to 300 crores, which of course generates interest income or investment income which gets grouped in some other line in Regulation 33. So really speaking, you have got to look at the net picture from that perspective.

Sure, sir. No, sir, let me rephrase the question. So INR 10.7 crores interest in the current quarter, or let's say INR 44 crores on an annualized basis, on a gross debt of INR 68 crores is something that -- if you could help me reconcile.

So you are looking at net debt here. The INR 68 crores is the net debt level.

Okay. So if you could help me on the gross debt, that -- maybe that could answer my question.

Yes. So gross debt at end of June was around INR 450 crores.

Perfect, yes. That answers the question.

Yes. The other way of understanding the question is you've got to net off the investment income from the interest expense. So just for this equation: So there is about INR 4.5 crores, INR 5 crores of interest income in this quarter, INR 5 crores.

Okay, sure. And lastly, if you could guide on....

Bhavin, I'm sorry to interrupt. May we request you to come back in queue for follow-up questions? The next question is from the line of Ashish Jain from Macquarie.

Sir, my first question is on price hikes. So earlier in the call, you made a comment that, by Q4, you feel confident to go to 7%, 8% margins, but can you just indicate what kind of cost inflation is still not passed down in spite of the 8% price hike that you have taken? Because our understanding is that at least 4% to 5% gap is still there. So can you please help and triangulate that?

So Ashish, this, you can reflect one comment which I made in response to a question raised by one of the participants a short while back. So while price increases have been taken -- the 8% has been taken between 2 quarters. But in quarter 1, because of disruption, obviously there has been a discounting impact also. So currently that is not the right comparison to study the absorption impact of price increases. We will just wait for another quarter or so to allow the full impact of price increases to settle down. So by Q3. Like I said, before Diwali, ahead of Diwali is when we will decide. We will get a real sense of -- once inventory is normalized, everything is back on track, fully. We want that to happen first. And we will recompute whether there is any deficit still left in terms of the component and the commodity price increases that needs to be bridged, and we will take that call ahead of the festival season.

Okay, okay. Sir, if I can just dig a bit deeper into it. What I'm trying to understand is, even if I, let's say, ignore the discounts and all for a minute, which I understand impacted your Q1 margins, but just from a maths of it point of view, is 8% enough to offset the commodity you have seen? Or there is a gap needed, whether we take it -- and the timing of it, I understand, is a response to how market is, but just from a maths of it, is there a gap left? Or we are well covered.

So Ashish, if you're looking at, let's say, Q2, Q3. We have, firstly, inventory, whatever had to be created, produced or acquired, for -- so it's going to be sufficient till Q3, like I mentioned, because by Q3, we have -- we will come back on track in terms of inventory levels. So the good news is we don't need to buy immediately in the next few months for at least the next 1.5 quarters. This will be your question probably for Q4 and Q1 next year. And depending on how the commodity price cycles behave at that point in time, including ocean freight which seems -- which has been there the entire anomaly in the entire international logistics scenario. So we hope that, by the time we close the calendar year and by the time we are ready to procure again, that is the time we will work out what kind of cost-to-price equation requires us to consider. But right now we are just looking at the inventory which is already -- so the commodity prices are already priced in the -- I mean costed in the inventory that we are holding. So that's what we are looking at, at this point in time.

The next question is from the line of Kunal Sheth from B&K Securities.

Sir, my question was regarding the market share targets that we have for the year. Do we hold on to the market share targets for -- overall for the room AC segment as well as for the North market that we had set out in Q4?

Yes. So Kunal, we are currently at 13%. We think, by the time we end the year, we should reach our 14% level. We have our stated -- this thing is we have to get closer to 15%. So around 13.5%, 14% is what we think we should be able to close the financial year with, and then we'll take it forward from there. So we don't see any concern and holding off to that 13.5%, 14% for rest of the year.

Okay, sure. And secondly, sir, what is the kind of growth that we are now building in the room AC market for the year given the disruption that we have seen in the first quarter?

Yes. So we -- I mean we are quite optimistic, we think, yes. And this is based on last year's experience. While we think market might be just flat over FY '20 -- we are not looking at FY '21. FY '20. Market should tend -- should be just about flat. Over last year, if we want to understand, market should be around 25%, 30% growth is what our sense is for the rest of the year, for the entire year. And our own sense is we shall -- we would want to look at, at least 10% growth for rest of the year over FY '20; over FY '21, around 30%, 35%, for the full year. So that, we are quite again optimistic about.

And this is the value growth that we are talking about, right? Because there is a lot of commodity impact in the current year as well...

We always look at value growth, yes.

The next question is from the line of Mayank Bhandari from Nirmal Bang Securities.

Sir, in the 55% growth you have highlighted, what would have been the growth for the inverter ACs? Or what would be the composition of your mix in terms of inverter and non-inverter?

Yes. So inverter ACs, I will tell you, the mix growth, I may not have readily with me. The mix of inverters for us in Q1 FY '22 is about 58%, market was around 65% for inverters. We are having some very good traction for our fixed-speed AC, which is around 42%. So that's our mix for inverter and fixed speed.

Okay. And secondly, sir, in terms of competitive intensity, as we have seen 2 consecutive summers mainly washed out. And we were anticipating larger players gaining more shares than some of the smaller players. So how is the competition in the market panning out? Any comment on that?

Well, competitive intensity, again, we have to see in the context of how different players restore their normalcy and what kind of inventory levels they are holding on. So it continues to be high. I mean there is no letdown on competitive intensity because, see, everyone, again, planned for growth in quarter 1. This planning starts, you're aware, in quarter 3, quarter 4 of previous year. So when you plan for growth, you make some investments, you make -- you take some position. And then suddenly when disruption of this kind of a scale hits, then a lot of these plans get disrupted as well. And that puts all sorts of unplanned competitive pressures on everyone, but if we go back to our experience from last year: We were all pleasantly surprised with the normalcy that was restored by Q3, so we see no reason why that should not be done, again now in the backdrop of enhanced vaccinations. And basically, customer sentiments and market normalcy, if that gets restored, we see no reason why we should all not be gearing for again a good Q3, Q4; and then look forward to FY '23.

Okay. And lastly, sir, I remember we had highlighted opportunity related to vaccine of about INR 200 crore market size. And sir, any quantum you can give, like how much revenue would have booked by now or how much you are anticipating in next 2 quarters related to vaccine opportunity?

So vaccine opportunity. We talked about INR 150 crores to INR 200 crores market opportunity last year. And since last year itself, we have been realizing part of that opportunity. You can say INR 75 crores to INR 100 crores annualized, so far. But this is -- just keep in mind this won't be a perpetual, indefinite opportunity. This will be a finite-period opportunity, but since this time, it is there. We are aware we are one of the leading players in all these products and solutions. And we will definitely have whatever impact it will have, but it is a finite opportunity.

Thank you. That was the last question. I now hand the conference over to Mr. Basur 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, and we will be happy to provide you additional details by e-mail or in person. I wish you the best of health, and stay safe and stay healthy. We'll speak with you next quarter. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of Blue Star Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.