Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Blue Star Limited Q2 and H1 FY '24 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 that 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 morning, ladies and gentlemen. It's a pleasure interacting with you today. Also, I wish to convey the festival greetings to all of you and your family members. As you might have seen from the results announced yesterday, it was an excellent quarter for Blue Star. And with the revenue from operations growing by around 19% and EBITDA improvement in terms of the margins to 6.5% of the revenue from 5.4% of the revenue and the PBT, again, has grown significantly to INR 95.03 crores with being 5% of the revenue. So the -- on this particular quarter, today, we will deal with several comments and answer your questions on the quarter that ended as well as the outlook for the forthcoming quarters. As you may be aware, during the quarter, we also had completed the QIP issue. And we are on a different plane altogether with regard to our balance sheet, our growth strategies and what we would like to deliver in the coming years. Before Nikhil interacts, gives you the update on the quarter and we begin to answer the questions, I would also like to state that the festival season has started off well. We had impressive sales during Onam and subsequently during the Puja as well. As we are approaching the Diwali season, the demand from the market seems to be significantly higher than what it was last year. The order inflow from several segments, as far as B2B businesses are concerned, are also healthy and encouraging. We have moved past the issues pertaining to supply chain. Our manufacturing capacity and investments are on track. Supply chain disruptions are behind us. And we continue to invest in capability building in terms of people and the processes. I can share with you that barring certain unexpected or unintended consequences that may be happening due to global economic issues, we seem to be on the right track to end the financial year again on a high note. With that, I will hand it over to Mr. Nikhil Sohoni.

Thank you, Mr. Thiagarajan. So good morning, ladies and gentlemen. I'll provide you an overview of the results of Blue Star for the quarter ended September 2023. Q2 FY '24 has turned out to be an excellent quarter with demand for room air conditioners bouncing back and B2B business continuing to grow at a healthy pace. Moreover, margins improved across business segments, both owing to the continued thrust on total cost management initiatives and stability in commodity prices and rates. Further, the company witnessed healthy order inflow and consequently ended the quarter on a record carryforward order book. As you are aware, during the quarter, the company also successfully completed a fundraise of INR 1,000 crores through our first-ever QIP transaction. This has witnessed a strong response from existing and new marquee foreign portfolio investors, sovereign wealth funds and top domestic institutional investors. The financial highlights for the quarter ended September '23 on a consolidated basis are summarized as follows: Revenue from operations for quarter 2 FY '24 grew 19.5% to INR 1,890 crores as compared to INR 1,582 crores in Q2 of last year. EBITDA, excluding other income, for Q2 of FY '24 improved to INR 123 crores, which gives an EBITDA margin of 6.5% as compared to INR 86 crores, which is an EBITDA margin of 5.4% in Q2 of last year. This improvement was due to scale at higher gross margins. PBT before exceptional items grew 65.2% to INR 95 crores in the Q2 of this year as compared to INR 58 crores in the Q2 of last year. So tax expenses for Q2 FY '24 was INR 24 crores as compared to INR 15 crores in Q2 of last year. Net profit in this quarter grew to INR 71 crores as compared to INR 43 crores in Q2 of last year. EPS for the current quarter stands at INR 3.65 as compared to INR 2.21 in the quarter 2 of last year. The carryforward order book as of September 30, '23 grew by 44.4% and to INR 6,009 crores as compared to INR 4,162 crores as of last September. As already reported, the company continues to invest in expanding manufacturing capacity, accelerating its R&D investment as well as digitalization investment as a part of its growth plans and profitability improvement. Consequently, the capital employed as on 30th September '23 increased to INR 2,070 crores as compared to INR 1,441 crores as on September 30 of last year. The net cash position as on September 30, 2023, was INR 286 crores as compared to the net borrowing of INR 393 crores, which we had as on last September. Coming to business highlights for the second quarter. The segment one, that is Electro-Mechanical Projects and Commercial Air Conditioning, the segment revenue grew by 12.1% to INR 1,077 crores as compared to INR 961 crores in the quarter 2 of last year. Segment results were INR 65 crores, that was 6.1% of revenue in the Q2 of the current year as compared to INR 60 crores in -- at 6.3% of revenue in Q2 of last year. Order inflow for the quarter was INR 1,765 crores as compared to INR 1,198 crores in the Q2 of last year. Coming to individual businesses. Electro-Mechanical Projects business, while the slowdown and delay in order finalization in commercial buildings sector continued during the quarter, inquiries and order finalizations from factories data centers, railway electrification, water MEP, metro railway sectors and health care sectors remained buoyant. The company continues to be focused on profitable and healthy cash flow projects. Carryforward order book for Electro-Mechanical Projects business was at INR 4,609 crores as on September 30, '23, as compared to INR 3,054 crores as on September 30 of last year, it was a growth of around 51%. Commercial Air Conditioning Systems. The Commercial Air Conditioning business continued to witness traction from industrial, health care and retail sectors. Additional demand for Tier 3 and 4 cities also continued to increase significantly with major orders from these towns in light commercial segment. We continued to maintain our #1 position in ducted air conditioning system as well as scroll chillers and second position in VRFs and screw chillers. Coming to international business. We have observed growth across all segments with increasing demand for our products in international markets. We witnessed strong demand for our VRF systems with increasing adoption of this technology and rising demand from developers seeking value-oriented brands. The pace of inquiries and order inflows at Qatar started to pick up with a few major orders received during the quarter. We are also in the process of developing advanced products and solutions for North America and Europe. Coming to segment 2 that is Unitary products. The segment 2 revenue grew 38% to INR 729 crores in Q2 FY '24 as compared to INR 529 crores in Q2 of last year. Segment results grew to INR 62 crores, which is 8.4% of revenue in Q2 of the current year as compared to INR 32 crores at 6.1% of the revenue in Q2 of last year. This was aided by both scale as well as improved gross margin. Coming to Cooling and Purification products business. While the second quarter has traditionally not been a strong quarter for room air conditioners, this year, aided by latent demand arising out of the muted summer, the industry is estimated to have grown at 30% and the company registered a growth of 39%. Our market share of H1 is estimated at 13.5%. Coming to Commercial Refrigeration business. With growing investments in segments such as food retail, HORECA, hospitality, dairy, ice cream, processed foods and food delivery on the back of rising consumer demand, we witnessed volume growth across major product categories such as deep freezers and visi coolers. We also witnessed a robust demand for storage water coolers from its institutional segments. Additionally, demand from for cool storage for warehousing, processed foods, pharma and HORECA segments remained strong during the quarter. We also launched our new range of deep freezers compliant with the recently launched BEE Star rating program. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms. Coming to the third segment, that is Professional Electronics and Industrial Systems. The segment revenue was at INR 84 crores in quarter 2 of the year as compared to INR 92 crores in quarter 2 of the last year. Segment result was at INR 12.2 crores in current quarter as compared to INR 13.8 crores in the last quarter. The steady rise in corporate CapEx across segment continued to drive overall demand for this segment. The nondestructive testing business continued to witness traction on the back of manufacturing investments. Increasing investment in health care by both public and private sectors continued to drive growth for health care business. However, a slowdown in data security business partially impacted revenue growth for the quarter. Finally, coming to business outlook. The early indications are at the demand for room air conditioners and commercial refrigeration products during the forthcoming festival season will be good. With a healthy order book and steady inflow of inquiries, B2B businesses are expected to maintain the growth momentum. We remain optimistic about the prospects for the remaining quarters and committed to creating long-term value for our stakeholders. With that, ladies and gentlemen, I'm done with the opening remarks. I would like to now pass it on to -- back to the moderator, and we'll open the floor for questions. We'll try to answer as many questions as we can. And to the extent we are unable to, we'll get back to you via e-mail. Open for questions now.

[Operator Instructions] The first question is from the line of Lavina Quadros from Jefferies.

Congrats on a good set of numbers. I just wanted to understand the INR 1,000 crores that you have raised in the QIP. Could you just outline your investment CapEx plans for the next 3 to 4 years? And in which areas would you be spending? If you can give a broad sense as well, that will be great.

So Nitin -- sorry, Nikhil will be...

So Lavina, the -- if you see over next 2 years, that is F '24 and F '25, we expect the overall manufacturing investments to be in the region of around INR 650 crores in that range in various segments that we are invested in. We are building capacities. As you are aware, there is a Sri City Phase 2, which is being invested. We are going up from 600,000 to 1.2 million. We are also investing in sub-300-liter deep freezers, and we are also investing in other new products which we are launching. So that's the kind of manufacturing spend which we will be having. We will be also investing in research and development. That's the first area and both in terms of building labs as well as in terms of product development, which is going to happen. Besides those, there's investments happening on the digitalization front, so that's another area. Incremental working capital is always going to be there as the scale-up is happening and as the volumes go up, that is one area which gets used up. So that's the kind of spend which we will have. This spend will be happening over a period of 2 years.

Okay. And just on the sub-300-liter deep freezer market, right? Daikin is the #1 player there, are you all #2? Just to understand the market share dynamics there a bit better.

In the room air conditioners?

Deep freezers.

No, no, in the deep freezers, commercial refrigeration.

Yes. So the -- first of all, I will now give a background behind this. Number one is deep freezer is typically used for any frozen product, but that usage is expanding beyond ice-cream. That is the growth driver, like ready-to-fry stuff, et cetera, gets stored there. . Second insight I want to give you is, typically, the deep freezers, they are in 400 liter, 500 liter capacity and 300 liter capacity coming into play in the past 4, 5 years, that quantity becoming significant. What is actually happening is now with the expansion of deep freezers into smaller markets -- sorry, expansion of ice-cream consumption into smaller markets, you do have smaller-capacity deep freezers market size growing, like 150 liter, 250 liter, so on and so forth. The -- this category will continue to grow at a CAGR in my view of -- in excess of 20% because of this. And also, out of that, the lower-capacity deep freezer demand is significantly growing. Third is, compared with the hardtop, glass top deep freezer consumption beginning to grow in a much faster way. Now there were deep freezers which were getting imported from China at tariff barriers as well as non-tariff barriers like the QCO making that business model unviable for many small manufacturers or the dealers here. So in the process, domestic deep freezer market promises good growth potential. We will continue to invest in expanding our manufacturing footprint as well as far as deep freezer manufacturing is concerned. Practically, any type of deep freezer and any capacity, we will be in a position to manufacture. Currently, we should be enjoying a market share of close to 28%, and we will continue to improve that market share.

Sir, lastly, just on this China imports, how much approximately of the market was it earlier, the China imports?

In deep freezer, my guess is till last year, would have been -- 50% of the deep freezers consumed in India would have been from China. Many people like even an ice-cream chain may end up directly importing. There were many local players who are importing and branding it. While -- Blue Star itself imported less than 250-liter capacity from China only. And so that business model is no longer viable.

The next question is from the line of Ravi Swaminathan from Spark Capital.

Congrats on a good set of numbers. My first question is with respect to the room AC market. You had mentioned that we would have grown at 39% in this quarter. Your sense on what can be the market growth for FY '24 for the entire room AC market? And how much more market share potential gain is there for you over the next couple of years in the room AC space?

See, since it was last summer season, and the growth will be less than what was originally projected. If you recollect, that we all felt that the market should grow by at least 20%, and Blue Star should grow by 25%. I would -- I had maintained after the summer, that still at the end of the year, we will end up with the market growth. It will not be a degrowth. And my estimate is that, it should be at least 10% market should grow and we should grow by 15% compared with the market, and that's the estimate. There is a possibility that it can even register 15% growth. As you know, the entire thing will depend on how the climate conditions are in February and March. It depends on onset of summer season that's what we would estimate.

Okay. And the non-room AC business also, you had talked about deep freezers. As an entire subsegment, non-room AC business, can it grow at a faster pace than room AC, driven by this deep freezer and other products? Or...

Always it has been growing, but that -- weightage of that is very small, right? So you're talking about market -- a product category like room air conditioners, this is INR 20,000 crores, okay, compared with some INR 2,500 crores deep freezer. So it has been growing much faster than room AC, but it will never be able to catch up with the room AC market size.

Got it. And sir, in terms of profitability front also, there has been jump in the gross profits. That's because of the mix improving or commodity prices going up, operating leverage at the EBITDA level, your thoughts on that?

Multiple things. Number one is scale itself helps. Number two is connected with the cost management program, both in terms of product design, product portfolio realignment. And the third thing is connected with the quarter has lower advertising spends. And you may say that last year also advertising would have been there, but the industry as a whole if you look at it, advertising spends are coming down, you might have noticed that, the category itself. And so these are the reasons. So it is the scale. It is -- in our case, product portfolio changes and redesigning and repositioning the products, which improves the gross margin. The third is operating costs are kept low, specifically even advertising expenses. But I equally again tell you that the consumer finance-related costs, which is part of the gross margin, that has significantly gone up, and it will continue to go up for the reason that more than 45% of the sales are happening through consumer finance in case of room air conditioners.

[Operator Instructions] The next question is from the line of Sanjaya Satapathy from Ampersand Capital.

Sir, my question is on the profit margin on your construction side of the business. That is MEP. If you can just tell us like what are the levers available to you? And what kind of sustainable margin that one can look at in that particular segment considering that the order growth is so strong?

So first of all, the guidance is 6.5%. We keep saying that do not look at one particular quarter margin for that business, for the simple reason, it may be a particular project getting executed or a set of projects getting executed in one quarter compared with certain other projects getting closed in different quarters. Second thing is that the segment 1 comprises, there is Electro-Mechanical Projects. And within that, there are buildings, there is infra, there is factories, there are data center, each one of them comes with a different margin profile. There is a second segment, which is packaged air conditioning, which is VRF and ducted systems. There is third associated service business within that. Now we do believe that at a steady state, we may be able to deliver 6.5% margin in that. Anything above 6.5% is dependent on a particular quarter and what is happening. It will be a project which is getting closed. It could be the mix of the packaged air conditioning orders which are being executed. The good news is that our own manufactured packaged air conditioning, VRF, we are in a quarter where the commodity prices are stable, exchange rates are stable. And we have carried out our design optimization and other improvements and the scale itself, this is benefiting. And the service business, as you said, is a steady one. So there is nothing to worry about it. Now the levers that we have got are, a, stay focused on quality of the project orders and free cash flows. That is the secret to improving the margins there. In packaged air conditioning or VRF, we should continue to invest in R&D and continues to look at design optimization initiatives. And scale itself will help us to improve the margins. So therefore, the -- our guidance remains 6.5% to 7%. And we are confident that we will maintain our market leadership. We will continue to grow faster than the market. And we will keep you updated if there is a huge shift that is going to happen in terms of margin, I mean upwards. And again, I would like to reiterate, as far as the projects business is concerned, that we are not chasing the market share there. We are chasing profitability, we are chasing cash flows, and we will scale depending on the opportunities that is available, which is today, in factories, data center and infra projects.

Understood. Sir, will you also be using part of your fundraising, et cetera, to reduce debt considerably? Or that is not something which we are looking at right now?

Yes. So how it will happen is that definitely, on an immediate basis, the money will go to spend for debt repayments. What it also allows us is that it gives me a capacity to raise going forward, when we actually do the spends. So keeping money idle would not be definitely a good financial proposition, and therefore, it will go to repay the debt. But the ultimate end use is what we already defined is manufacturing, R&D and digitalization. And by repaying debt, we are creating capacity for that.

The next question is from the line of Dhananjai Bagrodia from ASK.

Congratulations on excellent set of results. This is just on your UCP business. Is this 8.4% in an unseasonal quarter? Is this something which is now a base which we could be using going ahead as compared to other competitors, this is the highest...

Sir, your voice is not clear. You may have to speak louder.

Is this better?

Yes.

Perfect. Sir, congratulations on a fantastic set of results. Just on your 8.4% UCP margin in an unseasonal quarter, is this something now steady state which will be there going ahead? And what have we done differently this quarter to get these margins in UCP business?

I'm not very sure that I'll be able to commit it as steady state. But you are aware of the background. We felt that this business can give 9% to 9.5% margins. That was the one pre-COVID we all felt and we ourselves have delivered in some quarters. And in the recent past, I've been saying it more looks like a 8.5% to 9% EBIT margin business that I have been categorically stating even in television interviews, basically because the competition is improving -- increasing and manufacturing capacity is expanding. And obviously, with the seasonality factor, one will be in a position to assume that 9% to 9.5% is not going to be feasible. That is the background. Now this particular quarter, it is due to, a, significant growth in the revenue. So this business, the elasticity with regard to scale is very high because you are carrying the operating cost constant. It's not that you will be able to reduce your sales and other operating expenses. Second is we do have the repositioned products, which in line with our -- you remember, we were a premium player. We became affordable premium. We have introduced affordable rates. So the product repositioning is helping. Third, we have been saying when Blue Star Climatech commences production, we will be able to provide certain margin improvement, and that is what is happening because the Sri City is now operational, at least 30% of the quantity of air conditioners sold are coming from Sri City, which will start services from Blue Star Climatech Limited. And guidance, we think we will be somewhere between 8% to 8.5%.

Okay. Fantastic. And secondly, sir, now regarding our CapEx. So now how much would be the total CapEx we expect for this year and next year? After now with this new -- this and maybe a follow-up to that. How are we thinking about using our capacity now to maybe do for exports because now we've had some time, any thoughts on those?

Your -- Nikhil will answer. If you're asking specifically about the room air conditioners, you are asking Blue Star as a whole?

Sir I'm asking for exports now. Are we using -- are we going to be using our capacities now if -- additional capacities to even export? And any thoughts on how we plan to go about that when we enter new regions and new countries?

Okay. So again, I'm -- it is -- your earlier question was related with room air conditioners. This question is on the Blue Star as a whole. So first point I want to clarify is, our international footprint expansion program is not through room air conditioners in this phase at all. The very first phase of our expansion is connected with the commercial air conditioning systems and solutions which are basically the larger air conditioning systems. We will be -- we will one day be exporting room air conditioners. But today, it is not our intent for the simple reason, China is a very large player in the global market. I do not think we will be able to succeed there at this point of a time. You have to build the scale, you have to build your reputation to become that. But our clients are connected with the commercial air conditioning systems and in that, again, each country has got its own design standards, energy efficiency is different, voltage frequency is different. So we are attempting Europe and North America. We have certain leads. We are in the process of developing, prototyping and testing our products. And again, we are not selling in our own Blue Star brand, we are going to be making it for international brands. That is the direction. And our existing capacity will be used there. And we are expanding the capacity as the market grows for domestic as well as international markets.

Okay. Perfect. And sir, what would be a CapEx number for this year, next year?

So as I said, the CapEx -- total CapEx, including maintenance and everything will be in the region of INR 650 crores over 2 years.

The next question is from the line of Amit Mahawar from UBS.

First of all, congratulations, sir, on great execution and impressive strategy. I have -- first question is, in the cooling segment, sir, what is the share of room AC revenues in the first half?

What is the revenue of?

Room ACs in the UCP?

We don't disclose that. It becomes selective disclosure of the segment 1 we can maintain.

Okay. Fair point, sir. Second question is, so you are moving from 600,000 to 1.2 million, broadly 12%, 13% of next 2-, 3-year annual recurring market demand can be our capacity share. It also implies we keep the outsourcing also high. So broadly on a medium-term basis, can you help us understand how much broadly will be met by capacity and what was going to be the outsourcing strategy because at 1.2 million capacity, right, which in Sri City 2 will come at 13.5% market share in the first half, which you have mentioned. On a 2-, 3-year basis...

You can make an assumption. Roughly around 10% is getting outsourced. So that is basically window air conditioners. And also certain like a vertical air conditioning systems. You would have seen the marketplace is small. It is not worthwhile to manufacture. That will be getting outsourced. And you can assume that 90% of the air conditioners sold by Blue Star will be made by Blue Star in its own factories. Either Blue Star or Blue Star Climatech should be manufacturing that.

Fair point. Very helpful. And I can assume of ex of compressors, the entire bill of materials is covered by Blue Star?

I -- we -- no, very few other items, which may be laid outside also. Like for example, there may be motors which we buy from outside. There are certain electronic components, which are our IP, we may get it fabricated outside. So the question is that it is not -- it is our own manufactured with whatever needs to be outsourced, it will be. Obviously, we do not manufacture compressors as of now. There will be many other components, which will be. It's not everything is made in-house.

The next question is from the line of Swati Jhunjhunwala from BOB.

Sir, just two questions on the UCP side. First, could you give us some color on the volume growth for the quarter? And second, you are saying that industry has grown at 30%, but since the players have reported a number around sub-20% growth. So any idea or any color you can provide on who were the major players who gained share during the quarter?

I will not do that. The question is that the important thing is that when we say our growth, it is over last year. So obviously, last year, how I performed and that determines this year growth apart from this year own performance, correct? But the question is compared with the market growth, whether we have grown faster? Yes, that's what we understand. Our internal estimates reveal that we have grown faster than the market in terms of the volumes. And the market growth is 30%, and we have grown by some 39%, that's what it is.

Okay. And can you -- just any idea on the volume growth for the quarter for the UCP business?

Volume growth only I'm saying. It's a -- revenue and volume today, you can assume one and the same because for the simple reason, see, when we -- there is a distinct change in the pricing or the product portfolio. I think both will be one and the same as far as this quarter is concerned. See, there was no step jump in terms of prices. There was no energy labeling that was taking place in this particular quarter. So volume growth or revenue growth should be more or less the same.

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

Sir, you talked about deep freezers growing faster than RAC. But let's say, if you look at the product business as a whole, so the non-RAC portion, now that you are doing expansion there as well and you're targeting exports as well, over the medium term, how do you see the non-RAC portion of the product business growing in terms of revenues for you? And would it also make any major difference to the margins versus the RAC business?

No. What you have to look at is in Blue Star's total portfolio, what is the room AC business? The -- our estimate is it should be in the range of around 30%, 1/3 of our business should be coming from room air conditioners.

Okay. And then the non-RAC, so let's say, when you say...

No. There is a projects business. And in the long term, that may become around 15% of our portfolio, 15% to 20%. The rest of it comes from commercial air conditioning or commercial air conditioning service or both domestic and international.

No, sir. What I was referring to was more of the commercial refrigeration business. So within the product business itself, so you have the RAC and the commercial refrigeration. So...

No, no, you are indirectly asking in -- within segment 2, how much is commercial refrigeration...

No, no, I'm not asking that sir. I'm not asking -- I'm simply asking what rate at which it will -- in your view, for you given the expansion which you are doing, what rate at which it will...

No, you can very easily assume. Next 5-year period, 25% CAGR will definitely happen in the business. It is a very small base. And so far, that growth was also coming from unorganized sector, which will dramatically change for the simple reason, no longer Chinese import is possible. So it should be a high-growth business.

Okay. And as you are expanding, is the competition also expanding capacities to cater to this now that the Chinese imports are not happening?

Obviously, anywhere scope is there, they all will be there. And when the market becomes significant, even multinationals will start coming in. Already, you have seen many small players being taken over by international players. And so that's part and parcel of the game. And in -- and it will be a good sign, right, if others are coming in.

Yes, sure, sir. Sir, the second question is for Mr. Sohoni. If you look at this quarter, the capital employed in the product business was significantly higher. I understand an unallocated portion was also higher because you have raised the fund, but why did the capital employed in product business go up very sharply Q-on-Q?

Yes, so in the current quarter, like the investments which are happening in Sri City Phase 2 plus the sub-300 liter, all of that investments are happening in the current year. So to that extent, the capital employed will go up.

Okay. So it's already reflecting in second quarter is what you're saying?

Yes, yes, yes. It's there in the balance sheet. So it will be the -- capital employed will have all that is whatever is the fixed assets, capitalization, CWIP, so even capital work in progress is part of capital employed.

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

Congratulations on great set of numbers. Sir, a couple of questions I have on the Electro-Mechanical Projects and Commercial AC segment. Sir, the product business that the company has within this segment, the VRFs and chillers, may I know what percentage of this business, product business comes from the project orders that the company takes or are largely both these business is independent?

No. I'm sorry, I wish I am able to disclose that. But the segments were defined in a particular manner. And we have been maintaining that. So there is absolutely no reason for us not to disclose that, other than the regulatory reasons, number one. Number two is, I keep talking about this even in the forums in which SEBI is present so what is the real issue? Real issue is that I'm a listed company. And my competitors are multinationals. So look at our disclosures, look at our integrated report and BRSR, all kinds of information that we disclose. And I won't be able to have access to any of this information. So my multinational competitors get access to enormous amount of information, okay? Now if that information is available, we will be happy to disclose every possible thing, including what is the commercial air conditioner, what is electro-mechanical projects, what is room air conditioners, what is commercial refrigeration. We have decided to do so. But we are not in a level playing field. So my hands are tied. Look at the my -- all my competitors will get every data you look at the BRSR, how much of information we have disclosed. Not even 10% of that, I will have access to that, whatever I do. So I keep telling SEBI, it is grossly unfair.

I'm not sure...

And there will be one Registrar of Companies disclosure. I'm only just be explaining why we are not further modifying the segment reporting. Look at even the Registrar of Companies disclosure, it will be one lump that will be given. So therefore, we are willing to do so, but it is not level playing field. So you have to forgive us. And we apologize for it.

No, no, no. Actually, sir, I'm not sure whether I framed my question rightly. I wanted to know, is the projects order you take that drives your product business or these are mutually exclusive business? That's what I wanted know. Not the mix of products and services...

That is very well I can tell you. Absolutely an important question that it used to be, some 10 years ago. Like, for example, project business will bring in around 40% of the product business, commercial like a chiller, for example, or air-handling units like that. But increasingly, there is no correlation whatsoever. It is not even 2% you get it out of that. If you ask me service, yes, there may be 20% service business may come because you are exhibiting a large project, not because your equipment is there, but it opens up the larger maintenance of a particular facility, you may be better place to grab that order.

Right. And sir may I ask you...

And to disclose to you further, large projects, they unbundle the equipment. Let's say, there is a big airport that is coming. He will go ahead and tender out the chiller separately, which I may be a bidder. I maybe still supplying the chiller to that project, but it is not due to projects order. Project bid is a separate package altogether.

Right. Now I understand, sir. And sir, last, I want to -- on the project part of this segment. How often does the contracts Blue Star takes have a direct contract with the end customer who is investing and how often it is with some master contractor who is in between you and the main company which is investing?

Roughly around 1/3 what you call as general contractors.

Okay. Yes. And lastly, sir, on the product business within that, how is the inquiry pipeline looking like?

Good. Good, except for the buildings. I don't think the buildings are -- by buildings, I mean an office, complex or a mall. These are not. And the factory, infra, data centers, health care, these investments are on. I think office spaces, they are largely unutilized. Post the pandemic, they are getting utilized, and there is a delay, number one. Number two, as you can imagine in the bigger cities, there is no space for any more complexes to come. So where it will develop you have to see. For example, it could be the like Gurugram came up at some point of time and Noida came at some point of time. Now I think it is the Delhi, Agra maybe even huge development. You will -- in Mumbai, you know it was the textile mills which released that kind of real estate. I suppose it will be the new Mumbai Airport, related development there, hotels, complexes that should be rising. So it should come back. Today, buildings are not.

The next question is from the line of Natasha Jain from Nirmal Bang.

Congratulations on a good set of numbers. Sir my question is a follow-up on the last participant's question. So...

You have to be louder. We can't hear you at all.

Okay. Sir, can you hear me now? Hello?

We can hear you. Please go ahead.

Okay. Yes. Sir, my first question is a follow-up on the last participant's question. While I understand that we've been moving away from the commercial building sector, sir, this quarter growth is kind of a deceleration because our historical average has been approximately 50%. So I just want to know that this decline in the growth rate is any other factor contributing to this? Or are we seeing any stress? Sir if you can throw some light on the quality of the order book as well as the geographical spread in terms of where we're booking the orders? Sir that's my first question.

In the projects business you are asking?

Yes, sir.

But you are saying the growth has decelerated?

Sir, so I have historically seen that you at least post a 30% growth because second and third quarter, you tend to do more order bookings. So this year, it's slightly tepid at 12%. So just wanting to understand has -- what has led to a slowdown in this growth.

We are not seeing a slowdown. I don't know how you are concluding. And if you recollect in the last conference call, I had explained this as well because there was almost similar question, I think it was from Ravi Swaminathan, I think that I had explained -- see, first of all, I told you. Point number one. Point number one. Blue Star will be interested in booking high-quality orders, which should be cash flow-based and profitability-based. This is number one. Number two is, it will be -- the orders are finalized that's different speeds, right? There some orders will get finalized this quarter and some orders this one this is not -- in the project business, you should not be looking at a particular quarter to be concluding about a trend, definitely not. Because suddenly one lump order will come in. INR 400 crore, INR 300 crore order can completely switch. Third is you are -- when you are saying quarter -- over last year quarter, it is dependent on what had happened in the previous quarter. What has to be really looked at? Internally, how we look at it, what is the carryforward order book, that is a historical information that is available. What do we look at it? We look at it at trailing 4 quarters, what is the order inflow. Trailing 4 quarters, what is the order inflow in the previous year. That is the other way of comparing it. So going by all of this, I am now with the figures that are available feeling that something has slowed at all. If at all we know from our market insights, orders from the building sector,, finalizations are not taking place. So Nikhil, what is the order...

Yes. So just as you see, when I kind of gave the analysis, our order inflow for segment 1, we said was INR 1,765 crores as compared to INR 1,198 crores in Q2 of last year, which is a 47% growth. So therefore, I was a little surprised when you say we're not there. So the growth was 47%, if you see. And if you're comparing it with what happened in last September over that September, so even the base is going up. So that is also what you will have to understand that...

Yes, but in any case, you have to look at pending order book or carried forward order book, whether it is growing or staying at that level, then it is a good indicator.

And carried forward order book, we told is at INR 4,600 crores, against INR 3,053 crores of last year, which is a 51% growth.

Understood, sir. I think that helps a lot. Sir my next question is on the RAC business. It's more of a macro-related question. Sir, our channel checks indicate that premiumization has been happening in the RAC segment. So we found out that Daikin has come out with more affordable category products. So over the medium term, do you think that there -- this could pose a challenge in terms of customers shifting to more of premium brands? And I basically want to know what our footing in the premium placement category is?

I'm -- I will clarify, but I wish to understand affordable product is not premium. Affordable means opposite of premium.

Sir, no, I meant that Daikin was not in the affordable category, but from the premium it has come to mid-premium segment by cutting prices or even rolling out products which are not that expensive. So broadly in a comparison basis.

Yes. So very clear. So I will try and say for your benefit and others as well. Point number one, growth in -- we are reading news articles. There are luxury cars sale going up or the premium products are being consumed, the large-sized televisions are being consumed like this. It is true, but it is not the mass of the market at all. The question is India's market, category after category, whether it is the FMCG or government or it is consumer durables, in automobile, biggest market is in the affordable segment. And the growth is coming from aspirational middle class, growth is coming from Tire 3, 4, 5 towns. And therefore, for a brand to build market share beyond a particular percentage, it has to come from affordable segment. And the Blue Star was a player in -- with the premium product till it was around 10%, 11% market share. We understood from there to move further, we have to bring in affordable premium. Then we have moved to affordable. So therefore, we do have affordable, affordable premium, premium. And the premium products constitute less than 10% of our total sales today. You take any one, it will be the same. That is why you will have -- you take airlines category, who is #1? You take automobile, who is #1? You take washing machines, who is #1? You take refrigerators, who is #1? You will find a common denominator. They are players serving the bottom of the pyramid. Now Blue Star started playing in this segment, but we have not repositioned the products, so our margins took a beating. So by design, by intense, by strategy, we announced that we have repositioned our product so that without sacrificing my margin, I will be in a position to deliver products for every price point. And that is one of the reasons for our being able to maintain growth and improve profitability. So it is not for air conditioners, no, no, in any category, you look at it. You have to become a player who can serve the bottom of the pyramid and the growth in India will come from, if it is B2C, it is the aspirational middle-class Tier 3, 4, 5 towns. If it is B2B, it is the MSME start-ups. And if it is geography, it is very clearly smaller towns. I'm not saying bigger towns there is no sale, but that is not properly your growth. The growth is actually happening elsewhere. So most importantly, things like e-commerce in any category, whether it is food consumption, movie ticket, travel or consumer durable or books or groceries, the fact is you are being driven towards low cost and the technology is also inculcating that habit. And so it is not cheap product is deliver, you have to have the brand, you have to have the ability to develop a product at that cost to be competing at that price point. So all of us will do. And the long-term implication, all players who are capable of doing that will survive. And the fact of the matter is even if you take the energy label, 5 Star remains only 25%, 26%. It's all 3 star, 2 star is the major consumption.

Understood, sir. Sir, that's again very helpful. Sir, just last -- one last question. So again, this is more on the longer-term prospect. Sir, one of the listed player and the market leader in RAC is now planning to scale up or rather venture into the commercial AC portfolio. Sir, given that you are very favorably placed in that segment over the long term, how do you see the landscape changing in terms of commercial AC and the competitive intensity there?

Look, India's penetration levels are lower. And it is the -- it is a fastest-growing market in the world. It is going to be a fastest-growing market for many decades to come. So obviously, many players will be coming in. Many existing players will become aggressive. And we have to fight. We have to grow in this environment. And we have done so for so many years. So we hope it is -- by the way, for your benefit and others that Blue Star's real growth started when -- our Indian AC industry growth started when LG, Samsung came into this country. And Blue Star's whole growth started when the VRFs got introduced, we have to compete with the multinationals like Daikin. So for a company to reinvent itself and move forward also that competition is important. So competition will intensify. I have no doubt about it at all. Why, when it is growing, nobody is going to wait and watch.

We'll take that as the last question. I would now like to hand the conference back to Mr. Nikhil Sohoni for closing comments.

Thank you very much, ladies and gentlemen. With this, we conclude this quarter's earnings call. Do feel free to revert to us in case any of your questions are not fully answered and we'll be happy to provide you the additional details either by e-mail or in person. Thank you.

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