Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening, and welcome to Blue Star Limited Q3 and 9M FY '23 Earnings Conference Call. We have with us today from the management, Mr. B. Thiagarajan, Managing Director, Blue Star Limited; and Mr. Nikhil Sohoni, Group Chief Financial Officer, Blue Star Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. B. Thiagarajan. Thank you, and over to you, sir.

Thank you. Good evening, ladies and gentlemen. Thank you for joining this call. Actually, we should have done this tomorrow, being the Union Budget Day, we thought that we will go ahead and complete this interaction today itself. You might have received the results, which have been already uploaded. As you can see, it is for the first consecutive quarter we have done well. All segments have done well. And as I have been intimating in the television channels or in the press, and to some of you, the margin continued to be under pressure. And the good news is that we are on course to achieve what we wanted to achieve. So in our view, we are performing according to the plan that we had for the financial year. In B2C segment, the preparations for the summer season is on, and the Sri City factory has just gone on commercial production. And we know that this particular quarter will be a very important quarter for buildup presummer. And in B2B segment, as you would have read, the order inflows are very healthy, order executions pace is actually very satisfying. And the Blue Star engineering and electronics or the professional electronics and industrial segment, that is also doing well. Now I have with me Mr. Nikhil Sohoni, Group Chief Financial Officer, and he will give you the comprehensive update on the quarter that ended December 31, 2022. And later on, he will answer your questions. Where I have to step in, I will step in. In summary, we are very, very optimistic about the prospects for Blue Star for this financial year. We will continue to grow faster than the market. We will stay focused on cost. We will continue our policy of prudent capital allocation. And we have set for ourselves pragmatic growth targets. And I am certain that we will end the fourth quarter also on a high note, and we are well-prepared for the summer season ahead as well. We know very well there will be certain headwinds as I have been telling, and we have learned how to cope with that. Beginning tomorrow itself and I am certain in case there is a custom duty increase on components, many of you will have a question how the margin will be impacting and how the summer season will be, so many capacity is getting added, how the competition in room air conditioner segment will be. And whether there will be inflationary pressure or some other reasons due to which whether the project is will slow down. Our risk management framework is comprehensive. And that we have -- you have seen our track record. And that is how we will proceed further. So I will hand it over to Mr. Nikhil Sohoni for the comprehensive update on the quarter. And then we will answer your questions. Thank you very much. Over to you, Nikhil.

Thank you. Thank you, Mr. Thiagarajan. Good evening, ladies and gentlemen. This is Nikhil Sohoni, and I will be providing you an overview of the results of the Blue Star for the quarter ended December 2022. So despite inflationary pressures and general slowdown in the western economies, business and consumer sentiments in India continue to be optimistic during the quarter. Inquiries and order inflows in our B2B business continue to be buoyant. Simultaneously, the demand for our B2C products continue to be healthy. Consequently, we ended the quarter on a high note, with growth across all segments and a robust order book. Financial highlights for the quarter ended December 31, 2022, on a consolidated basis are summarized below. Revenue from operations for Q3 FY '23 grew by 18.7% to INR 1,788.2 crores as compared to INR 1,506.2 crores in Q3 of last year. EBITDA, excluding other income and finance income for the quarter was INR 104.7 crores, which was a margin of 5.9% of revenue as compared to INR 90.6 crores, a margin of 6% of revenue in the quarter 3 of last year. Till Q2 of this year, the company was following a written down value method for accounting depreciation. However, during the current financial period, the company has capitalized new capacity, including plant and machinery and factory building. And due to this capacity expansion, it was decided to relook at the pattern of consumption of the future economic benefits of the property, plant and equipment. Having concluded that, it was decided that a straight-line method of depreciation reflects the pattern in which the benefit from the use of the assets are expected to be consummated. Accordingly, the depreciation method has been changed from WDV to straight-line method with effect of October 1, 2022. This led to a lower depreciation charge for the quarter by INR 10.8 crores. Profit before tax grew by INR 80.1 crores in quarter 3 of current year as compared to INR 70.3 crores in quarter 3 of last year. Tax expense for the current quarter was INR 21.6 crores as compared to INR 22.8 crores in the quarter 3 of last year. Net profit for quarter 3 grew to INR 58.4 crores as compared to INR 47.6 crores in the quarter 3 of last year. Carry forward order book as of December 31, 2022, grew by 47.3% to a record INR 4,862 crores as compared to INR 3,301.3 crores as of December 31 of last year. Capital employed as on December 31 in the current year increased to INR 1,505.6 crores as compared to INR 1,107.4 crores as on December 31, 2021. This was owing to high inventory holdings to prepare for the upcoming season and mitigate the supply chain risks as well as the capital investment for manufacturing capacity expansion projects at Wada and by the subsidiary Blue Star Climatech at its plant at Sri City. Consequently, we have ended the quarter with a net borrowing of INR 395.9 crores, with a debt equity ratio of 0.36 on a net basis as compared to a net borrowing of INR 165.1 crores and a debt equity of 0.18 as on December 31, 2021. Coming to business highlights. The first segment one is the electromechanical projects and commercial air condition systems segment. Here, the segment revenue grew 20.5% to INR 1,000 crores in quarter 3 of the current year as compared to INR 829.9 crore in the quarter 3 of last year. Segment result was INR 71.7 crores, that was 7.2% of revenue in the current quarter as compared to INR 52.4 crores or 6.3% of revenue in the quarter 3 of last year. Order inflow for the quarter grew by 97.1% to INR 1680.8 crores as compared to INR 852.8 crores in the quarter 3 of last year. Coming to electromechanical project business, the investment plans in infrastructure and manufacturing facilities continue to be actively pursued, leading to an improvement in inquiries and order finalizations. We continue to witness healthy order inflow from all segments, including factories and data centers. We also booked significant orders in the newly entered railway electrification segment. Carry forward order book for the electromechanical projects business stood at INR 3,685.2 crores as on December 31, 2022, as compared to INR 2,310.87 crores as on December 31, 2021, which was a growth of 59.5%. Major orders were received during the quarter from Bangalore Metro Rail Corporation and central organization for railway electrification. Coming to commercial air conditioning systems, the demand from government, industrial, health care and hospitality sectors continue to be encouraging. This, coupled with continued focus on channel expansion across Tier 1, 2, 3 and 4 towns has enabled growth in the revenue during the quarter. We continue to maintain our #1 position in conventional and inverted ducted air conditioning system as well as scroll chillers, and second position in VRF and screw chillers. Some of the major orders received during the quarter were from Udaipur Cement Works Limited, Reliance Projects & Property, et cetera, to name of few. We have also received a major order from a municipal corporation for a newly launched state-of-art large-capacity centrifugal chillers. Coming to international business, we observed growth across all segments with increasing demand for our products in international markets. We witnessed strong demand for our room air conditioners and VRFs, and ended the quarter with a healthy order book. The pace of execution of projects and order inflow in Qatar witnessed slowdown due to preparations and restrictions in the run-up to the FIFA welcome. The operations of the joint venture at Malaysia continues to be impacted owing to the slowdown in construction and order finalization amidst weak macroeconomic conditions in the country. We'll continue to focus on the expansion of the Blue Star product range and build brand awareness and brand visibility in different markets that we are presenting. Coming to segment 2, that is unitary products. The revenue grew 15.1% to INR 701.9 crores in the quarter 3 of the current year as compared to INR 609.7 crores in the quarter 3 of last year. Segment result improved to INR 51.8 crores, which was 7.4% of revenue in quarter 3 of the current year as compared to INR 38.8 crores, 6.4% of revenue in quarter 3 of last year. This was due to benefit of scale and higher share of revenue from our whole-manufactured products. Cooling and purification products business, despite subdued festive demand, our room air conditioner business registered a growth of 15% with channels beginning to stock up in December for the upcoming season. We grew in line with the market and maintained a market share of 13.25%. The new plant at Sri City commenced commercial production in January 2023, and is expected to add improvement in margins going forward. Commercial refrigeration business continued to witness traction across all segments with a substantial increase in consumption levels. We also witnessed strong demand from Tier 3, 4 and 5 cities, enabling growth in revenue for the quarter. We have also been receiving major orders for cold storage, for logistics segment, which is expected to offer significant opportunities in the coming months. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms. Some of the major orders received during the quarter were from Reliance Retail, Dr. Reddy's Pharma, Milma, Ascon Agro and several proprietary agro customers to name a few. Segment 3, that is professional electronics and industrial systems, here the revenue grew by 29.3% to INR 86.2 crores in the current quarter as compared to INR 66.7 crore in the quarter 3 of the last year. Segment result was INR 10.9 crores in the current quarter as compared to INR 12.8 crores in the quarter 3 of last year which was impacted by planned investments in business development, marketing and other initiatives for future growth. We continued to witness strong demand for our health care offerings, driven by increasing awareness and investments in the sector. Demand for nondestructive testing business from industrial sector and data security solutions from BFSI sector also continue to be encouraging. Major orders were backed from ArcelorMittal Nippon Steel India Limited, Indian Overseas Bank, Bharat Heavy Electricals, ICICI Bank and Hero MotoCorp to name a few. We'll continue to stay focused on rejigging our product portfolio, introduction of new product categories and expansion in domestic and international markets. Simultaneously, the company is investing in enhancing its R&D capabilities and various programs to mitigate supply chain risks and profitability improvement. We are optimistic about the prospects for the fourth quarter. With that, ladies and gentlemen, I'm done with the opening remarks. I'd like to now pass it back to the moderator, who will open the floor to questions. We'll try and answer as many questions as we can. To the extent we are unable to, we'll get back to you via email. With that, we are open for questions.

[Operator Instructions] We have a first question from the line of Ravi Swaminathan with Spark Capital.

Congrats on a good set of numbers. So we had seen margin expansion in the project and cooling products business, more than 7% we had clocked this quarter. How sustainable is this? Or how do we think about profitability in both the segments? And also in the professional E&I segment, it had dropped to 12.7%, historical numbers used to be 16%, 17% average. Why did it drop so much? So the thought process would be great.

Ravi, thank you for the question. Thank you for joining the call as well. See, in the electromechanical projects business, so you're aware, it is electromechanical projects and package air conditioning. That's a combined segment actually. There are quite a bit of equipment sale as well. So quarter-to-quarter, this margin may vary depending on the product mix. Somewhere the products will be higher, somewhere the projects will be higher. Now the other thing is also which project is getting executed faster. It's not that all projects are booked in the same margin. Now we are very happy that we could deliver this margin result this quarter. But the outlook, we will continue to maintain a 6% to 6.5%, okay? Now anything comes more than that in a particular quarter, it is welcome. I would like to maintain 6% to 6.5% in that segment. Now in the cooling product segment, there has not been -- you are aware that we have increased the prices 5x consecutively, and but post-summer we have been maintaining the same price level because you have to manage the market share versus the margin that [indiscernible]. This is one part of it. Two, we sincerely hoped that the commodity prices softening will help us to improve the margins. We had indicated in the last conference call, our margin will, may improve, but then it is getting offset by the rupee depreciation. So that is the issue here. Now whether, the obvious question, which you didn't ask, somebody else is going ask is, will we be increasing the prices going forward. Now we are in a off-season. The buildup to the summer is going to take place and new range of products are getting introduced. And quite a bit of those products will be from Sri City also. Now this again is in the public domain, I had talked about it. Sri City provides not only the new affordable range of products, it is also going to be a cost-efficient location basically because incoming raw material as well as outbound material meant for, which Blue Star will be sourcing from BlueStar Climatech Limited, is likely to provide some. Of course, in this financial year, 2, 3 months of production is not going to make it, but the story is there is a leverage in terms of logistics and working capital. So you can imagine that 10 to 12 days, the material was in the transit pipeline itself. Here in Sri City we can serve overnight any of the locations in south. So there is -- is there a room for price increase, we have to necessarily watch who he is launching which product during the season. From now on, you will see, I think our product launches will be from February 7 onwards in various locations. You have to watch how -- what is being. And eventually, the market determines the price. We are clear about our direction to grow our market share to 15%. That is not going to be at any cost. We have to manage our costs in order to compete there to get there. Second, we will be going ahead and ensuring that we deliver the profits. The outlook there remains unaltered. It is 8% to 8.5% operating margin. We are very confident, we will try to deliver more, this way we are. Equally, you should look at the -- when it comes to the PBT part of it, there is interest depreciation on the CapEx cycle we are into. See, we are very happy about the CapEx cycle across the country because we are benefiting through the business that is coming in, in many segments actually, the -- whether it is -- we are package air conditioning or is connected to the electromechanical projects. We are seeing this CapEx cycle is benefiting us immensely, but Blue Star also is into a high CapEx cycle. After Wada plant, it is Sri City Phase 1. And Sri City Phase 2 will come up within a year. So therefore, we are -- and as Nikhil explained, we have changed the methodology to the straight-line method. And we are prudent in ensuring that our capacity expansion in line with our growth. So therefore, the bottom line is it is -- the margin pressure will continue due to competition. But we are very clear about our goal. And I think we have delivered what we promised or we have only exceeded, and I am confident that we will do that.

And the professional E&I segment, sir, margins…

Yes, so I'm sorry, I forgot about that question. Look, that segment, I don't think the top line and bottom line should have any correlation at all for the simple reason. You do have -- it is also an agency business. You are getting some -- we are a system integrator. Our own manufactured items are not there at all. You're getting something and you're doing the value addition locally, number one. Number 2 is in the medical electronics business, we are doing refurbishing as well. Exactly like project business, in 1 quarter something will happen, another quarter something will not happen. So do not -- I am of the view there is -- top line to bottom line comparison there on a regular basis will not be a right thing to do. You have to see on a full-year basis how it is. And it will be, the margin of last year will be maintained there.

[Operator Instructions] We have next question from the line of Sandeep Tulsiyan with JM Financial.

First question is pertaining to the industry profitability, where, of course, a lot of guys are sitting at local capacity that will increase materially. But at the same time, we see barring the 2 listed players, Voltas, Blue Star, all the other listed players are making a loss right from Lloyd to IFB or Whirlpool or Hitachi. So where do you see the profitability normalizing, over what time period going forward? If you could give your thought for that, please.

Yes, so this is a period where multiple things are happening, right? So that's why this question will keep coming up. It's not only you as analysts, as management we or our Board, all stakeholders keep asking the same question. What's really happening? One is India's penetration in room air conditioners segment is very, very low. It is some 7%, say, penetration, it has got. The question is, at some point of a time it should rapidly move up to touch at least 25%. So there is a huge market growth opportunity is there. And that's how it has happened in many segments. There is going to be exclusive growth in terms of demand. And even the weather conditions are changing and urbanization and disposable income, that is where that part is happening. Now importantly, some point of a time, it is not affordable not because of the capital cost but the recurring costs. But thanks to the energy labeling, air conditioner consumes only 20% of what it consumed in 2020 in terms of energy. So therefore, that energy efficiency is helping people to actually reduce their recurring expenses. So there is a growth that is going to take place. Thanks to the PLI scheme, there is indigenization that is taking place and there is a capacity expansion that is taking place. And therefore, there is going to be also the -- there is production happening in a big way in the country. The PLI itself is also going to be based on the incremental sales over FY '22 -- sorry, FY '21. So the -- every brand wants to derive PLI benefit, they have to go ahead and show incremental sale in that particular component, which was imported earlier, now you are making yourself because it is not on the finished goods. So therefore, the companies, I have been maintaining this, that they have the headroom actually as a PLI benefit also in order to pass on and grow the market. They want to grow, and they will get the PLI benefit if they grow. And in the process, the market also is going to grow. Now competitive intensity will be high whenever there is going to be growth. Why everybody is eyeing this market because they know this penetration is going to grow, whether it is energy efficiency or ozone cell, India Cooling Action Plan, all of them -- I mean bilateral agencies, all of them are actually worried about the huge growth that is going to take place and therefore what all has to be done in order that our carbon footprint is. So their figure also shows there is going to be huge growth. So the opportunity is there, competition is intensifying. Now from Blue Star point of view, we are prepared to compete. So look back, 2010, we were asked, look, you are a last entrant, how you will serve as a B2 company in B2C part of it. We did. Then they said, look, beyond 5% market share, whether you will grow your largely institutional player, so we did grow. When it became double digit, will it become double digit, that was the question. Now the market share, they are moving up towards 15%. We have not stated we want to become #1. We have not stated we want to become #2. We have not stated that we want to become a 20% market share player. Our goal, we believe is doable. And our segments and our product portfolio will have to be looked at closely, which we are working. What we have done is only now 50% plus. We have some more to do in order to ensure that we are able to deliver consistent results in terms of product portfolio, in terms of distribution footprint in terms of our own manufacturing capacity, all our actions are taking place. Now if you ask me a question where the margin will end up, I'm not able to answer that at all because it is dependent on who are all going to do what. But I am confident that Blue Star will reach 15% market share. Blue Star will deliver at least 8% operating margin. That much visibility conviction we have got. And we know which segment we have to focus. We are a player who is significant in institutional sales, we are #1 there. We do extremely well in quite a few markets, in quite a few geographies. Within India we hold #1 or #2 position. We have to replicate that largely in the North India market, in the Hindi-speaking belt by and large. So I am not -- this is what I keep telling internally as well, able to -- or I'm not willing to, rather, think about what will be 2 years from now, what will be 3 years from now for the simple reason this business itself is like T20 cricket, which I keep repeating. Second is, right now, my team, my management, my colleagues on the Board, all of them, I say, this is like the test much cricket, take session by session. Have a long-term goal, which is pragmatic and keep doing the corrective actions then and there. That is the only way to deliver consistent results. If you ask me, at any cost I'm going to get the market share, no, Blue Star will not do that. This is where I am. You can -- one can endlessly worry about what will happen in 2 years, 3-year time frame. I am against that internally. And you are all justified in asking that question. So in strategic planning point of view, we have set out that we will grow faster than the market. We will attempt 15% market share by FY '25, and that goal remains. And the 8% to 8.5% operating margin is the goal. We are doing every action. Every addition is done keeping that in mind. And whether one summer will be good, another someone will be wash out, we are prepared for that. Now equally, Blue Star's portfolio, if you look at it, we have kept buy on B2B as well as B2C. This answer is I'm taking time to answer because number of others who are following you will get the clear perspective and direction. Thank you.

Second question is on the numbers. The unallowable expense has increased materially. If you look at it on a year-on-year basis, all the segmental numbers look good. How should we read that number? Is it predominantly A&P expenses, which is being shown up here, and we should associate this with the unitary product segment?

See, the -- one of the reasons for unallocated may be -- unallocated you are talking about, right?

Yes, unallocated, right…

See, well, some of the expenses may be connected with. It is not one lump sum item, which is changing, point number one, there are multiple items. Some are connected with basically the ForEx gain loss, which are really unallowable. It is brought across. And there is one item there. There is second item. There are certain professional fees which we have incurred in order to either improve the manufacturing margins or manufacturing excellence. There are some exercises that are going on within the company. And there was a campaign cutting across the product lines. It is in the marketing expenses. So really there is no lump sum item, nor it is going to be the trend. Our policy of allocating everything that is identifiable with the business, that continues here.

We have next question from the line of Praveen Sahay with Prabhudas Lilladher.

And my question pertaining to what you have guided the due range of a product going to be increased. So it will be largely the mass premium product segment which will be from the Sri City?

Sri City will produce both. For understanding now, we are classifying in 3 ways now. One is affordable, second is affordable premium, and third is premium. So our 3-year strategic plan is based on these segments now. It is not entire thing is affordable premium because we are doing something affordable as well, something premium as well. Now Sri City as well as Himachal plant will produce all kind of products. The new products that are going to be launched predominantly are in the affordable range, some are in the premium range as well. And because there -- we are -- I told you, we are a #1 player in the institutional segment and high-end residential customers as well. So there are some products that are required for that segment as well, which are premium. Affordable is needed because you want the margins to be protected, at the same time you want to grow the market share in Hindi-speaking belt. So the products that will be launched for the seasons will be a mix of this too.

One clarification on what you had said about the 8.5% margin target. So fair to understand that whatever the benefit from the Sri City you will receive, it will pass on to the margin. It will not consider for the sub price action to gain market share?

I will not be able to comment something like this. So the question is, as I'm again repeating, the operating margin that we are supposed to deliver is, or we want to deliver is 8% to 8.5%. We have to grow faster than the market because the scale brings in lot of benefits as well because the scale leverage is very high in this business. Now whether as analysts you have to be taking into account, yes, PLI benefit also will accrue to Blue Star, you must very well do that, okay? Now whether I'm keeping it separately as a profit and all, I won't be able because for the simple reason, if you do these actions, it will flow in EBIT or PBT or PAT okay? So therefore, your understanding is right. There is also a PLA, which is, like I will save something in material, something due to scale and operating leverage. Like that, there is also a PLI benefit that is available. But you should know that this year we are not getting any PLI benefit till March 2023. If there is a PLI benefit, it will be in the subsequent area. Again, it is not going to flow every quarter, right? When you see our first quarter of FY '24, second quarter, third quarter, no PLI would have come in. You have to be showing the incremental sale. You have to be getting the chartered account certificate, file with the PAT and then you have to get that money. So therefore, it is -- all there you can assume is, there is an inherent benefit one is going to get.

We have next question from the line of Dhananjai Bagrodia with ASK Investment Managers.

Congratulations on a great set of numbers again. So I just wanted to know with Sri City now, we've been focusing on it. And lot more other players have also started focusing on South. How is that in terms of so much capacity coming impact, A? And B, what margin working capital asset turnover do we see for this project?

Yes. So Sri City in our case is going to be -- because we never had a factory in the south, so from Himachal. So there is incoming raw material as well as outbound material have to, we were incurring huge costs there, and you have to hold the inventory of raw material as well as the finished goods also that 10-day period. So therefore, there is a cost leverage out there. In any case, our Himachal plant has reached its capacity for -- in fact, if we wouldn't have commissioned this factory in record time, we would have fallen short of materials. So it has come out in order to meet the requirements. Even Q4 requirement is going to be met by our getting the material from Blue Star Climatech Limited. That is how it will impact. Now what will be the -- what will be the working capital, it is not changing at all. In fact, working capital turns will improve because of Sri City, okay? 10-day kind of finished goods inventory can be lower. Around 7-day raw material inventory can be lower. And transportation costs, you can imagine that Sri City to Chennai or Sri City to Madurai or Sri City to Kochi versus Kala Amb near Chandigarh 2. So that is a clear cost saving that is going to happen. Now therefore, the working capital requirement or working capital turns will be lower. Now if you're asking about the interest depreciation, yes, you've invested in a factory and the breakeven period I think is in the order of around 3 years or so, like any other investment.

And sir, just this might be a little longer-term question. But sir, what are we doing in terms of our positioning in room AC where we are being able to see such strong growth and, let's say, our market leader is not being able to see a similar growth. And it's not like we are undercutting them in prices. So are we going through different channels? What would be our strategy in this?

Honestly, I do not know at all. The question is that perhaps we were underperforming in the past because you are all ask, the competitor is doing much better, why you are not doing was the question, right? Obviously, we had some inefficiencies we are catching up with. So I would sincerely believe that because of our -- for more than 8, 9 quarters. See, if you look at the market leader versus us, on a lagging basis, the market share or the volume we were more or less following. At some point over time, we divide it because some scale benefit would have happened to the leader or whatever it is. And now the question we were answering not only to you, to our team, our board, everybody, why they are not catching up with. Now I won't be able to answer why they caught up with. So the point is we had inefficiency, probably.

And sir, are we available with many large retailers like some of the ones which -- or are we more with let’s say smaller mom-and-pop shops because lot of the large retailers still are still working with only the little of the global brands or the Indian leader.

And see, I don't think distribution is a challenge or bias or anything like that at all. The question is that he has got a set of customers. That client, how he will serve. He has got his geography, history, he needs certain products, certain features, certain price points. We have disclosed this, that in quite a few geographies, at that price point the Blue Star will not be able to make the margin targets of ours. We didn't want to grow our market share by under-selling it. So you have to reengineer, reposition. It's only a 2- to 3-year story that we are repositioning our product portfolio. And we are getting there. And still some more work to be done. 70% work is over in terms of product portfolio. At the end of the day, you have to segment the market very, very -- in the minute, micro way because when we, say, take India as a whole, say, 130 billion people are there. In quite a few product categories, it is only 30 million people are even in FMCG. And there are quite a few categories that the customer base is only 1 million. So that is the situation in India as it grows. So we were very clear, 10% -- up to 10% market share you could grow, beyond 10%, unless and until you address those segments, you won't. So the moment you have a product for that segment, that dealer will go ahead and say, yes, I am able to display your product also. Otherwise, it is not that they are against taking Blue Star product. The thing is it will lie there, he doesn't get a customer who is willing to pay that premium, but we have corrected it.

[Operator Instructions] We have next question from the line of Anupam Gupta from IIFL Securities.

So the first question is related to the project business. So clearly order inflows and order book are growing very well for you. How do you see the outlook here for the next few quarters? And should ideally the revenue or the execution should also follow there? Or do you see any slowdown in execution run rate at this point of time or, let's say, couple of quarters down the line?

The execution pace will be good. In fact, there is a lot of pressure in quite a few projects to get it executed. The CapEx obviously did not happen according to the plans of many of the customers. And then there had been pandemic, and all of them are willing to catch up. And they would like to be ready. When the global recession is over, they are able to go ahead and supply. Same way, quite a few infra projects, the public sector undertakings would like to complete as early as possible. Unless and until something completely unforeseen happens, everybody is putting pressure to get their projects executed. So revenue will follow the order inflow. So if you're asking about order inflow outlook, the inquiry funnel is good. Across the segments, we get, surprisingly even the office space is getting consumed. The question is that whether there will be headwinds, I'm again telling you that there -- I'm talking as a witness, headwinds are going to be there. You know that tomorrow itself something, some sentiment can change after the Union Budget and all, but we are confident that -- see, first of all, I have to -- for the benefit of you and others, I have to tell -- we are talking about if it is room air conditioners, some INR 17,500 crores market. In 2023, for this country, one particular category, INR 17,000 crores looks very miniscule actually. And same way, what is the total number of projects on MEP getting finalized in a year, it is some INR 6,500 crores. It is only 20% of what this country wants is getting built. There is a 80% more to be. So it is in that flux where it is going to be providing consistent growth. I'm not saying it is going to bombard in a big way and so much. But the growth opportunities are good for our industry.

Sure. I understand that, sir. And the second question is related to the margins in this quarter specifically. So given that you have changed the depreciation policy, if I look at the EBIT margins for both the segments, it obviously is higher because of lower depreciation if I look Q-on-Q or Y-o-Y. So ideally, your margin guidance should also be higher just because the depreciation would be lower incrementally going ahead at the segment CapEx level. So is that the right reading? Or would you still maintain your margin guidance at 8%, 8.5% for project -- for products and 6, 6.5% for projects?

So far, our track record has been good. By and large we have met what we have been indicating. The question is our minimum margin target is that, okay? Now it is going to increase, it can happen. But all that I'm saying in our outlook is we are maintaining the same margin level.

We have next question from the line of Gopal Nawandhar with SBI Life Insurance.

Sir, can you just give the rationale for the change in the depreciation accounting method? And is it like across all plant and machinery we have changed? Or is it just only for the new CapEx which you have completed?

Yes. So if you look at it, the change will be across because what the standard requires or all the accounting estimates require is that we have to take into account what is the change in the pattern of consumption going forward. As you would have heard during the call, that we have invested heavily in capacities this year, which means that there is additional capacity which has been put up, both at Sri City and Wada, which requires us to review the pattern of consumption for all our assets. And looking at that, it was felt appropriate that this is the right time to look at whether straight-line method is a proper way of doing the depreciation. If you look at the policy, it has always been that the useful life of an asset is defined as around 20 years. And normally any asset for a manufacturing company, it has to be equally depreciated over a period of time. If you go by WDV method, which also is an acceptable method, almost 70% to 75% of the asset will get depreciated in 10 years. So we have to look at the kind of industry. But of course, we have been following it historically. And the estimate requires us that only when there is a trigger, we can give it a relook. So this year, given that we have capitalized a large part of the plant and machinery, there was an opportunity to give that relook, and that is the reason why it was carried out.

So what is the CapEx for, what was the capitalized amount for Sri City plant.

It is not only for Sri City plant. We have also capitalized Wada the current year. And the total capitalization in the current year is in the region of around INR 280 crores.

So if I multiply this amount by 15 points, takes whatever it is, multiply by 20. So that amount comes to INR 300 crores. So are we saying there is no remaining depreciable amount from the past projects or?

No, how INR 300 crores. See, the capitalization for the full year will be INR 280 crores only.

My bad, my bad.

And the thing is it is not that the new method. The old method had a depreciation, new method has a depreciation, right? So this quarter, we have the figure which is INR 10 crores is the impact.

Impact, yes.