Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Blue Star Limited Q4 and FY '24 Earnings Conference Call. We have with us today from the management, Mr. B. Thiagarajan, Managing Director of 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. Welcome to join this particular briefing from Blue Star Limited for the Q4 FY '24 results and FY '24 consolidated results. You might have seen the results declared yesterday after the Board meeting. And we are happy to report that as in the past, we have closed the financial year on a high note with an impressive performance in Q4 FY '24. As you may recall, the financial year began with huge expectations during the summer season of 2023. But then due to rains, it was a quarter that was impacted. But even then Q1, there we exceeded the -- or outperformed the market estimate. From then on, Q2 and Q3, you have seen our results, it was an all-round performance, both in the B2B businesses as well as B2C businesses. During the financial year, our investments continued in manufacturing capacity expansion as well as research and development and marketing and distribution. Of significant importance is our QIP fundraising amounting to this INR 1,000 crores for funding the growth. We are happy to inform that the financial year FY '23 also has begun with huge demand -- unprecedented demand in the room air conditioners category due to ongoing summer season. I will hand it over to Nikhil for an update on Q4 FY '24 and FY '24 financial performance and post that, we'll be happy to answer your queries. Thank you.

Thank you, Mr. Thiagarajan. Good morning, ladies and gentlemen. This is Nikhil Sohoni, and I will be providing you an overview of the results of Blue Star Limited for quarter ended March 2024. Coming to financial highlights. The company ended FY '24 on a high note with a revenue growth of 21.4%, operating profit growth of 34.9%, record carryforward order book amounting to INR 5,697.3 crores against FY '23 position of INR 5,073.2 crores, and a strong balance sheet. In an all-round performance, all businesses performed well, getting market share, and the company improved its operating margins by 70 basis points. In FY '24, we have reported an operating margin of 6.9% versus 6.2% in FY '23. The company continues to invest for future growth with a focus on research and development, manufacturing, sales and distribution, digitalization, talent development and capability building. Coming to quarter ended March 31, 2024, financial highlights for the quarter ended on a consolidated basis are summarized as follows: Revenue from operations for quarter 4 FY '24 grew 26.8% to INR 3,327.8 crores as compared to INR 2,623.8 crores in quarter 4 of last year. EBITDA for quarter FY '24 is INR 241.9 crores, a margin of 7.3% as compared to INR 179.2 crores, EBITDA margin of 6.8% reported in Q4 of last year. PBT before exceptional items grew 46.4% to INR 214.1 crores in Q4 of the current year as compared to INR 146.3 crores in the Q4 of last year. Coming to year-end results. On a consolidated basis, the revenue from operations for FY '24 grew 21.4% to INR 9,685.4 crores as compared to INR 7,977.3 crores in the corresponding last year. In EBITDA, if you look at excluding other income for FY '24, it improved to INR 664.9 crores, a margin of 6.9% of revenue as compared to INR 492.8 crores, margin of 6.2% of revenue in FY '23, recording a growth of 34.9% mainly due to impact of sales. PBT before exceptional items grew 44.9% to INR 557.2 crores in FY '24 as compared to INR 384.6 crores in FY '23. Tax expense for FY '24 was INR 142.8 crores as compared to INR 154.7 crores in FY '23. The effective tax rate was 25.7% in FY '24 as compared to 27.9% in FY '23. Net profit for FY '24 grew to INR 414.3 crores, a 4.3% of revenue compared to INR 261.49 crores, 3.3% of revenue. And this is excluding the profit on sale of Thane land, which was reported as an exceptional income last year. In view of the record revenue and profits earned by the company, a dividend of INR 7 per share against INR 6 per share decline in FY '23 is recommended by the Board of Directors of the company. This figure of FY '23 is adjusted for a bonus of 1:1. The carryforward order book as of March 31, 2024, grew by 12.3% to INR 5,697.3 crores as compared to INR 5,073.3 crores as of March 31, 2023. Capital employed as of March 31, '24 stood at INR 2,156.7 crores as compared to INR 1,542.3 crores as of March 31, 2023, primarily owing to capital investments. In September '23, company completed a successful fund raise of INR 1,000 crores through its maiden QIP issuance, which witnessed strong response from existing and new marquee foreign portfolio investors, sovereign wealth funds at top domestic intuitional investors. In June '23, the company had issued bonus shares in the ratio of 1:1 that is 1 bonus equity share of INR 2 each for every fully paid equity share of INR 2 each. On the back of a strong operating cash flows, coupled with QIP inflows, the company reported a net cash position of INR 455.9 crores as compared to -- as of March 31, 2024, as compared to a net borrowing of INR 208.4 crores as of March 31, 2023. Coming to business highlights, segment 1, that is electromechanical projects and commercial air conditioning systems, revenue grew 20.3% to INR 1,506 crores in Q4 FY '24 as compared to INR 1,252.6 crores in Q4 FY '23. Segment result was INR 112.5 crores, 7.5% of revenue in Q4 of FY '24 as compared to INR 99.2 crores, that is 7.9% of revenue in Q4 FY '23. Segment revenue for the year grew 17.4% to INR 4,715.5 crores as compared to INR 4,015.6 crores in FY '23. Segment result was INR 341.1 crores, 7.2% of revenue in FY '24 compared to INR 276.8 crores, which was 6.9% of revenue in FY '23. Order inflow for the quarter reduced by 7.8% to INR 1,226.8 crores as compared to INR 1,329.9 crores in Q4 FY '23. This was on account of delay in finalization of orders. Coming to Electromechanical Projects business, driven by strong demand from manufacturing, data centers and infrastructure segments, the business continues to do well with improved margins and healthy order book. The demand from commercial buildings and real estate sectors are yet to take off. We continue to be focused on prudent project management and healthy cash flows. During the year, quite a few major orders were received from factories, data centers and infrastructure segment and the carryforward order book for the business stood at INR 4,343.8 crores as of March 31, 2024, and this compares to INR 3,892.9 crores as of March 31, 2023, a growth of 11.6%. Coming to Commercial Air Conditioning Systems. The revenue growth was majorly driven by product portfolio and channel expansion. The growth is driven by demand from industrial, health care, hospitality, retail, educational institutions and data centers. The launch of VRF Light has enabled the company to address the premium residential segment, the inquiries and demand for newly launched centrifugal chiller remained strong and we continue to maintain our #1 position in conventional and inverter ducted air conditioning systems as well as scroll chillers and strong second position in VRF and screw chillers. Coming to international business, due to global disturbances, international business, which is at a nascent stage, saw a subdued performance. We are focused on product exports, and hence, we are investing in R&D to expand our product portfolio. Our subsidiaries in U.S. and Europe are engaging with customers, and we expect the business to pick up traction soon. Segment 2, that is Unitary Products segment. The revenue grew 34.8% to INR 1,708. 9 crores in Q4 FY '24 as compared to INR 1,267.7 crores in Q4 of FY '23. Segment results improved to INR 141.4 crores, which is 8.3% of revenue in the current Q4 of FY '24 as compared to INR 106.9 crores, which was 8.4% of revenue in Q4 of FY '23. Revenue for the year grew 26.6% to INR 4,592.2 crores in FY '24 as compared to INR 3,626.9 crores in FY '23. Consequently, segment results improved to INR 360.3 crores, which is 7.8% of the revenue in FY '24, as compared to INR 282.31 crores, which was also 7.8% of the revenue in FY '23. In Cooling and Purification Products business, which is part of the unitary products, momentum gained during festive season in Q3 FY '24 was further bolstered by a stellar performance in Q4 of FY '24. The exceptional strong demand in the southern region and the product diversification, especially with the range of affordable room AC helped us surpass the milestone of 1 million units. Our market share during the year improved and is estimated to be at 13.75% compared to 13.5% in FY '23. The launch of new inverter split air conditioners under flagship model like heavy-duty ACs and super energy efficient ACs aided substantial revenue growth. It is anticipated that with enhanced product range and prevailing hot summer weather conditions, the growth momentum will continue in Q1 of FY '25. Coming to commercial refrigeration business, the commercial refrigeration business witnessed excellent traction in the quarter with strong demand witnessed from OEMs, hospitals, offices and educational institutions. Increase in outside the home consumption remains one of the major drivers of the business growth, especially in the perishable food sector. Blue Star became the first Indian company to receive India design mark for its 300 and 600 liters deep freezers and also got a BIS certification as well for deep freezers. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms. Coming to Segment 3, there is Professional Electronics and Industrial systems. The revenue grew 8.3% to INR 112.1 crores in Q4 FY '24, as compared to INR 104.5 crores in Q4 FY '23. Segment result was INR 13.6 crores, which is 12.1% of revenue in Q4 of FY '24 as compared to INR 19.8 crores, which was 19.2% of revenue in Q4 FY '23. Segment revenue for the year grew by 12.8% to INR 377.7 crores as compared to INR 334.8 crores in FY '23. Segment result was INR 51.5 crores, which is 13.6% of revenue in FY '24 as compared to INR 50.5 crores, which was 15.1% of revenue in FY '23. The market for nondestructive testing business has grown due to Make in India-related capacity expansion as well as the introduction of high-quality standards and specifications in various industries. The health care business is benefiting from expansion of countries semirural health care infrastructure and increased investments. The data security business continues to face challenges as customers move from on-premise IT infrastructure to the cloud. Coming to business outlook, robust demand across business and geographies, buoyant festive season, new product launches and hotter weather conditions enabled us to end the year on a high note with healthy revenue growth and margin profile. We continue to invest in expansion of our distribution network and our R&D and manufacturing capabilities to strengthen our brand recognition in the market. The company continues to be acknowledged by the Government of India for adopting greener technologies that are ahead of its curve leading to sustainable growth. In FY '25, the company will continue its focus on maintaining and improving margins, prudent cash management and effective talent management. Given the weather forecast, projecting a robust summer ahead with our new and resilient product portfolio and focus on aforementioned key levers, we are optimistic about the business prospects for Q1 FY '25 in particular and FY '25 in general. With that, ladies and gentlemen, I'm done with my opening remarks, I would 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 and to the extent we are unable to, we'll get back to you via email. With that, we are open for questions.

[Operator Instructions] The first question is from the line of Bhoomika Nair from DAM Capital.

Congratulations for a good set of numbers. Sir, we've seen a very strong quarter. And as a year as also -- for the quarter, we've seen 35% growth. And for the year, we've seen a 27% growth for the UCPL segment. So your -- how would have the RAC segment growth and the commercial refrigeration business would have grown. Can you please split that for us?

I think I am participating in the call for now 20 years. I think, the problem is this. I can emphasize with the investors with regard to this requirement on the breakup there. So what are all there. There is -- to recap, there is room air conditioners, very negligible volume of water purifiers, air purifiers, air coolers. Then you've got commercial refrigeration products, which are water coolers, deep freezers and the cold rooms. Now it becomes a selective disclosure. So I'm really not able to solve the problem. Now unless and until we decide to restate the complete thing, then it will make sense for -- but if I were you, I will be going by what is my market share in room air conditioners. And what is a room air conditioner market size. That is the only way you will be able to guess that. I don't want to get into selective disclosure. You have to bear with us for this. Internally also, we keep discussing this that whether some point of time, we should go head and break that up. See, in our internal MIS and other things, there is also constrainedly higher because the factories serve multiple businesses. There is the brand-related and there are common dealers, and this has been conceived. Originally, the conceived is on that basis. There is an EPC part of it and package air conditioners, which are commercial air conditioners there, then we kept this. As we grow, both the businesses are growing and whether at some point of time, we will give a breakup we will see. Just go by room air conditioners, our market share. That will then guide you that what portion of that is room air conditioners, what portion is commercial refrigeration. Profitability wise, you need not worry, both are same kind of profitability areas.

Got it, sir. Sir, as you mentioned that we're seeing a very strong summer and a very strong demand. What is your estimate that the industry will see a growth in 1Q of FY '25 and potentially in FY as a -- year as a whole? And number two, related question is that with the recent increase in raw material prices, have we taken any price hikes either in 4Q or in 1Q so far?

So I'll deal with it. Fortunately, because the demand is good, prices are holding. Between Q4 and Q1, there has not been any price increase. We launched the new products from January, and we have announced the prices and the schemes that is holding on. So there is no change in that. I don't think in the market also, you are seeing any kind of massive price disruption that way. Whether we are increasing the prices because the demand is huge and there is -- there are shortages in pockets. I don't think so because it will be -- that has not been the principal Blue Star has been operating just because we -- if there is huge demand and shortage, we should go ahead and increase. So that's not happening. Now coming to market projection. So from January, February onwards, I've been saying, the market can grow anywhere between 20% to 25%, we want to grow between 25% to 30%. That was my outlook. Now going back, even in March, that is what we thought till March third week, March fourth week, there was a huge surge in demand from the dealers. And despite the fact that there is ongoing election season due to which -- in the past, we have seen in 2019 as well as 2014. And we were not anticipating that kind of demand. The March to March alone, my estimate is the market would have grown or the primary sales would have grown by around 40%. Now April, my estimate, I may be wrong. I do not have the full picture, but my estimate is the market would have a primary sales of April alone would have grown between 65% to 75%. And if you take the secondary sales because March last week, enough material was there, I think anywhere between 70% to 90% growth would have been there in secondary tertiary sales in the month of April. Okay. Now second part, the peak had been May month, it moved to May 15. The peak over the years, I'm saying it moved to April -- May first week, the April last week. Now I have a feeling that people are -- because there is a huge consumer finance and other benefits is available and the people are going ahead and buying ahead. So it is quite likely that April, it has peaked. My own team may not like it, the industry may not like it. I have a feeling May demand may be lower than April, it may be unrealistic to expect that there is again around 70% kind of demand growth in May and then it will be June, July like that. Now keeping all this in mind, whether 25% to 30% growth holds good. I think it may be better than that when the summer eventually ends. And -- but equally, we are not believing at this moment, the growth can be summer to summer, that is take March to July this year. No, the last year is not comparable anyway. If you take the normal summer here, it will be 50% growth, we are not yet believing. It will be better than 30% for the full summer season. If you take Q1 alone, I think it can be 30% to 40% growth is my view. We have to wait for May 15th to revise that. Over the years, my experience is, it starts up like that. You would have seen last year reports, there was a report by an industry association and some of the players that it is going to be 90% growth. Market will double this summer, it didn't happen. So broadly, the summer has set in early and people have advanced their purchases. It will keep coming down is my view. But April primary change itself witnessed around 65% growth. And secondary, tertiary would have been anywhere between 70% to 90%. Keeping in mind, the material was there in the last week or delivered in the last week of March, and there are shortages in quite a few pockets.

Got it. So sir, I mean, given this scenario, do we expect margin profile to improve. This year also, if you see the segment sales has been growing by about 27%, but our margins have pretty much held on at 7.8%. Do you think that this can possibly improve to 8.5%, 9% into FY '25, given the strong demand that we see...

At this juncture, we have another 11 months to go. There will be many twists and turns and all will take place. There is an important event will be the Union Budget. Important decisions will be made in terms of supply chain, what are the items that will be brought under QCO, like copper, which was there, it was -- time was extended. There is PCB-related announcements are expected. So in a business, there are many, many moving parts. All this will happen. But broadly, we are of the view that it can be around 8.5%. That is a thing that we are working with.

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

Just on the profitability of the UCP segment, can you answer this first. For this quarter when you are growing at 34%, last quarter, we grew 36%, our margins are like 7.1% and 8.3%, even in absolute EBITDA growth -- EBIT growth, you're matching your revenue growth. Can you first throw some light why this is happening? Because I mean, either there is no zero operational leverage in the business or we are trying to be more aggressive which doesn't augur well when you yourself saying industry has a very good tailwind right now because of the summer season. Can you just clarify why such low profitability?

Given that -- thank you for your question. But given the outlook that we had indicated, I don't think one should be unhappy. Where are you getting that. We had given an outlook, correct? So where is that coming from?

Sir, outlook, was given -- so for example, let's say, even I don't think that when the outlook was given you would not be expecting that Q4 will be a 35% growth, right? So my question is not on -- related to what has been the outlook versus what is given. Obviously, it's in your guidance range. But nobody knew in January that March and April would be such heat season and you yourself saying...

April has not come into picture. March alone has come in to picture.

Exactly, exactly. So you're growing at 35%.

You are talking about Q4 to Q4 margin of segment 2?

Yes, sir.

The segment 2's stand-alone margin for Q4, what is the figure.

8.3%.

8.3%, okay? Now you may ask compared with this for this year the revenue growth when it is not. We also note that huge advertising expenses has been there in Q4, right, because IPL started, advertising campaigns started. If the material is moving out to the primary channel, you have to support it with advertising. So there is an advertising expense research in that quarter, okay? Now you have to -- the right way to compare in a good summer here is Q1 margin, you have to look at it and Q4 margin, you have to look at it, and that gives a broad indication of how the full year will be. Now last year -- in FY '24, Q1 is not a quarter to be accounted for Segment 2 because it is a washout summer season. In Q4, the volumes, equally we have incurred advertising expenditure. It's not due to pricing or margins. The operating margin, the cost has come in.

Is ad expense optically very high deliberately in Q4, because that would be every Q4, right? So is this Q4 was quite high?

Not necessary at all. Like, for example, it depends on how you are -- if you're going to be in IPL and substantial number of matches are happening in the IPL and the package that you have got is that way it can and because of the elections, IPL number of matches and number of matches in which we were there would have been high. Advertising expense this Q4 is very high. And again you have to look at it that in Q3, it was 7.1%. So it is a 8.3% against 7.1% in Q3, which was also a good quarter. He is asking about the operating leverage. Assuming that the cost will remain the same, the additional quantities sold in March would have substantially improved the margin. In Q3, there is no advertising expenses. That comes in Q4. That is a problem, this year, especially.

Got it. Sir, just second question is on the export side, because I think we're doing a lot of R&D there as well, when do you see -- start seeing ramp-up of the export business? And any targets in mind over the next 2 years, how big this can become? That's my last question.

See, I think it will be at least 18 months. We are executing some trial orders. And then Europe, there has been a slowdown. And we view it as good for us because it will give us time to develop our products. And the U.S. market is expected to pick up only in the coming year post the election. I don't think before election, you will see U.S. ramping up with -- we are not selling the regular air conditioners -- air conditioning solutions, it is decarbonization, energy efficiency, improvement-related products, and therefore, the regulations and the brand there will have to ramp up. So there are trial orders. Trial orders are being executed. Necessary approvals are being obtained, and it is in 18 months, it should ramp up. Whether we have internal targets, we do have internal targets because if we are investing, we should be having tight targets closely monitored by the Board.

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

Congrats on a good set of numbers, sir. My question is with respect to the first segment. The order inflow kind of has seen a bit of decline over the last 2 quarters. And I think for the full year also, it has been kind of slightly subdued compared to the last year. How do you see the industry, how the industry would have grown in FY '24 over last year? And how is it likely to grow which are the subsegments which are promising in terms of growth. And why the softness for us, are we kind of a bit conservative in taking orders? You had mentioned that there were some kind of finalizations -- the delays which were there. Will we see a better lumpy kind of orders flowing in post elections, if you can throw your thought process on this, it will be great.

Thank you. I think you are the only person who have monitored this other than Blue Star management. The -- your questions are valid. We have been seeing a slowdown in some of the segments. Basically, the commercial building segment, there has been a delay. Some of the infrastructure projects also, there is a delay. And our understanding is that post elections, it should pick up. And there are quite -- there are enough tenders. And the openings of the tender negotiations and finalization of commercial terms, these are all getting delayed. The growth primarily is now driven by the manufacturing and data centers. And so therefore, those orders cannot compensate for large infrastructure projects. This is our first answer. Second one is that you are very clearly aware that we are not chasing the market share there at all. We are very clear that it should be free cash flows and how timely execution will take place to the extent possible. And the industry, it will be the same. It's not that there is some new players to whom we are losing the orders. It's not so. And yes, it is -- it should revive some time in Q2. Again our direction here is there is no point in sitting on huge record carried forward order book. It doesn't help in any manner at all. In fact, it is dangerous to be having a huge order book because while you have price escalations, you may not get everything out there. And so we are now focusing on a, data center manufacturing, that kind of project, wait for the infra projects to get the order finalization cycle to begin. In the meanwhile expediting the speed of the execution and collection.

Okay. And is there a mix in terms of our advantage as of now, like certain subsegments like data center of manufacturing, which carries better -- do they carry better margins than the overall average? And because of that profitability, which is like 7% can go back to 10%, which we used to do into 10, 11, 12 and all. Is there a possibility of that happening, keeping in mind on the [ prepayment ].

So 3 parts. Number one is, are there jobs of manufacturing data center are more profitable? It will be for the simple reason, they are fast-track execution projects. And therefore, it should be. Compared with the infra projects, which is 3 years to another [ year ] like the Metro Railway or [indiscernible] airports and all that. And obviously, the answer is yes. And the second part is connected with the segments. See, at some point of time, we will do. We couldn't do this in this particular con call. We will try to give a breakup of comparison of last year as well as this year, key segments what has been. We will provide that in the subsequent quarter when we engage with you for the Q1 results, we will indicate that. The margins, I do not think it can be 10% at all. Even though there is a significant amount of package air conditioning where the VRF that in coolers that part the manufacturing and sales service part is part of Segment 1. Even then, I do not think so. Because the EPC business, it can only be a 4% to 5% EBITDA there. It is pushed up because of the manufacturing and service elements that come in that segment. So our outlook for this segment remains 77.5%.

And growth wise?

Segment 1 is 77.5%. Segment 2 is 8% to 8.5%. In a good summer year, it may be around 8.5%.

Okay. And growth for the first segment, what -- how do you envision that next 2 years?

See, we are working towards at least this financial year, we are attempting to grow the revenue by 25%. Internally, that's what we are working towards. We don't know what will happen. That is our aspiration. I am -- overview that the segment 2, there is no problem. The growth should be a good summer year, full year growth to exceed 20%. So we should do better than that. Segment 1, there is enough order book, order inflows will come in. And given that -- see, we are selective, that market size is huge. The number of projects that are happening. So it may not be difficult to do 20% growth even in Segment 1.

The next question is from the line of Pulkit Patni from Goldman Sachs.

Sir, in line with what I think Nitin had asked earlier. We are seeing one of the largest players in this sector being extremely aggressive in terms of pricing and that is something we've heard across the board. Is that something that is having a bearing on profitability? So since volume numbers are so much better, we understand you're spending on advertisement. But is that also an element which a, has kept the margins under check despite such strong volume growth? And as we look at the first quarter of this year, which again you are indicating is very, very strong in terms of volumes, could the margins for you and the broader industry be under check because of one player going very aggressive?

So thank you for your question. I mean for a particular quarter or a particular season, the answer may something different, okay? Likewise, for example, in a huge summer season days, there were shortages, pricing may not be an issue at all, okay, for anybody. Now this has to be taken as strategically given the fact that India is the largest -- India is a market with huge potential. India is the fastest-growing market. India's penetration levels will more than double in the next 3 years to 4 years. And by 2045 or 2047, India has the potential to overtake China in that backdrop. For the room air conditioning business, you can plot what is the demand growth? How the competitive landscape is likely to pan out? What is the manufacturing capacities that will be created under the existing under investment, what will be created? What are the supply chain constraints? What are the competitive things and the caps? If you keep that in mind and going by certain other information that is available from other durables like what happened in refrigerators or washing machines, for example, or 2-wheelers, automobile, you can easily conclude that the demand growth is given. You need not worry about it at all. There may be a bad summer in between, that's fair enough. Demand will continue to grow. Second, it is -- the growth is driven by aspirational middle class, clear. There are -- the cost structure is impacted by a few other things, which is not applicable for other categories. Like, for example, once in 2 years, energy labeling upgrade. The refrigerant-related regulations that are supposed to come in. The highly seasonal nature of the product, therefore, the inventory that you have to hold or the manufacturing capacity utilization throughout the year, it's indeed obligation for the e-waste. Consumer finance at its peak like 55% of the sales are happening through consumer finance. If you keep all those elements, and the advertising that is needed for occupying the share of mind and after knowing which are the markets which are beginning to grow in a big way like tier 3, 4, 5. I am of the opinion that it is a market with a 8.5% operating margin. It is -- I do not think it is 10.5%, 11% operating margin market at all. And keeping in mind all the durables odd margins they are making, okay? Now one may say extensive backward integration is happening and therefore, but then you have to make, again, R&D investments and many other things, learning curve, et cetera, are there before you are able to improve, but then in a growing market, the competition will also be interested in growing their market share. And I do not see anybody being shaken out and thrown because in every country, the players are there, it is known. In that backdrop of it is 8.5%, if we are lucky, it can go to 9% at some point of a time. I do not think so 9% is possible is my view. In that context, somebody is pricing lower in particular year, somebody is gaining market share, somebody is losing market share. We are indifferent to that. We will go ahead and tactically price in some markets, but we are very clear that profitably, you have to grow the business and we know eventually it will settle down. If we are to be getting into the game of that I will drop the prices to gain the market share. One quarter, 2 quarter, it may happen, it does not yield. Historically, I am not paying an evidence. Somebody dropped the prices. You can change the game through a product or technology. And lastly, I don't think we have that culture at all. Our direction is very clear. We know what this -- what the potential revenue possible in this market. What is the margin possible within that set our goals.

Sir, can I ask 1 more?

Yes.

Yes. Sir, my second question is, we've, for a long time, waited for that J-curve in India's AC demand. I mean if you look at the last 10, 12 years, despite some good, some bad summers, as an industry, we've grown at that early 12%, 13% kind of rate. Do you think we are at that stage where we are either already hit or hitting that J-curve where that growth rate could be much faster. I mean I'm saying keeping in consideration the strong real estate demand we are seeing the low penetration. I mean, are you of the view this is still an industry that will grow between 12% to 14% on a normalized basis? Or we could see a 5-year period where we could grow fast?

[indiscernible] is my view. It is going to explode in the next 5 years.

And why is that?

It will explode. It is exactly like in China, what happened post to 2005. And it will be a very high growth market for this category.

The next question is from the line of Dhruv from AMBIT Capital.

I had a question on the VRF segment. So we've seen that a lot of premium housing projects have been launched and seeing good traction there. So is the trend of VRF being installed something that you are seeing something that we've also seen in the developed markets? And how should we think about this category growth in the next 4 or 5 years? And also if you could just talk a little bit about the competitive dynamics there.

Yes. So the -- in -- so where the VRF comes into play, the VRF comes into play for a very high energy efficiency in the commercial establishment. In residential segment, if it is an apartment, we -- first of all, let us understand it. In India, residential segment is far bigger than the commercial segment. Unlike said, another market where the commercial segment can be much, much larger. Now the calculations will show, keeping in mind the energy labeling program and the energy efficiencies that we have achieved. If you are looking at a 3-bedroom apartment, 5-star inverter installed in 3 bedrooms will have the potential to deliver more energy efficiency than a VRF. If you have to look at the cost because that market size is huge, and therefore, the price levels that are operating, again, room air conditioners, 5-star 1.5 ton installed. In this particular example of a 3-bedroom plus hall, so that will pay back faster. If you are to look at the ease of operation, in an Indian home I think all bedrooms, halls are not occupied, and it is limited usage in the hall for the dining area, the living room. Again, we are not seeing any kind of a great advantage. Yes, I'm going purely by the calculations of payback, given that it is a developing market, and it is driven by aspirational middle class. It will -- it is not -- it will not maybe commercial sales yet in the residential sales -- because of the price levels at which 5-star 1.5 ton air conditions are available. But having said that, there are customers who need sophistication and who are looking for different kinds of solutions. And these may be even larger homes beyond the 3-bedroom, 4-bedroom, VRF is an application. So this is about residential part of it. And commercial part of it, definitely, VRF provides far superior benefits in terms of the energy savings, given that they are all 18 hours, 24 hours, 20-hour applications. And most importantly, compared with the central air conditioning, the installation lead time is very, very faster. There is no -- that the installation, so many other things take place. Generally, VRF installation can be done very, very faster. And therefore, VRF will continue to grow, but not necessarily like room air conditioners. In India the market size will be far lower compared with residential application.

Got it, sir. And sir, I had a question on commercial refrigeration. I think in your opening remarks, you mentioned that, that segment has done very well. So just wanted to understand till when do we have the import substitution tailwind [ or to be ] as related tailwind that, that we saw? Have the imports substantially dropped? Or do you think that next 2 or 3 years will continue to grow at a very healthy pace here?

I think it has fully stopped. There is stopped in the sense that there is a QCO regime. And in that regime to go and get approval and those QCO approvals are of limited validity period. So it is not practically to be doing it here. There are only very few categories which are all less than INR 25 crores market size, it may be some wine coolers and some [ esoteric ] applications or it may be connected with some health care-related refrigeration products, specialty. Otherwise, the entire deep freezer segment has moved to localization, there may be players who are getting some subassemblies and trying to put together something that maybe a inefficient way of doing that it's our view. It is like room air conditioners, where you are importing some of -- some specialty air conditioners, some outside here again, that's what is happening. It is fully stopped.

Got it, sir. And sir, just had a small question on unallocated expenses in the segmental piece, right? So you've seen a lot of variation quarter-on-quarter so just clarify a little bit on that.

I think they want you to come back on the queue. They are taking just 2 questions, I think.

The next question is from the line of Anupam Goswami from [indiscernible].

Sir, my first question on the overall strategy wise, where do you think Blue Star market share is? And how do you gain market share from here, let's say, from the Korean players, is there a strategy to look and expand market share in that premium segment?

No first spot is that I suppose you are looking at room air conditioners. The second part is you're looking at the category as a whole. It's not premium alone. I do not have within premium, what is our market share. I do not have that part of it within room air conditioners. But the thing is in room air conditioners, our estimate is that it's 13.75%. It may be slightly higher than that, but it is what it is. And we believe we gained market share in -- even in FY '24. And going forward, we have stated that we would like to reach a market share of around 15% in FY '25. So the clock has begun and let us see, the gaining market share has been one of the important goals and the every year from 2011, we have gained market share. So let us see.

So our strategy is to look -- gain market share in the premium segment or more in the affordable segment?

No, look, I'm talking about the full category. The growth is driven only by affordable segment. Premium segment is growing, but that is not going to -- if you have to gain market share, you have to address the bottom of the pyramid. These are all -- 65% of sales is from tier 3, 4, 5 markets.

Okay. Sir, lastly, do we face any competition from Daikin? They're being producing more affordable ACs now, do we face any threat from them? That's it.

See, no. We face competition from everyone, including Daikin. I won't use a word threat. Competition is supposed to be there in a growing market. We face competition from everyone.

The next question is from the line of Sanjaya Satapathy from Ampersand.

Such strong market share gain as well as growth. Sir, my question is that can you just give us a flavor of the states that the company is taking to improve the qualitative aspect of its products, because whenever I'm going and taking out in places like Amazon and other places, I kind of see a mixed signal in terms of quality of the company's product.

I'm not sure by going to Amazon, how will you understand the quality. You may be talking about whether a product is a entry-level product is premium, product is next generation. I am not sure you will be able to judge whether the product quality is good or wrong. If you have come across, please let me know. It is impossible to be assessing. Now on the other hand, if there are some customers who have posted about the delivery or something rather than the customer rating, we do monitor, and it is when they are crossing some 1.1 million of air conditioners. There will be complaints, but it is negligible. So I -- so we are very clear that the products will have to be a world-class quality and reliability, these are strong pillars forming part of our business operations. If you come across, please let us know. To the extent today, hour to hour, what is the installations that are happening in the summer season, whether we are able to install within one day. The time is getting extended because of huge demand or unprecedented demand. And during summer season, the number of calls may be also high. This is monitored around the clock, hour to hours. I get a report of the pending installations, pending calls and which location. So i.e. If there are, I would request you to let us know. But on the other hand, by going to Amazon, you saw an entry-level product. You use the word mixed signals. Is there a product comparison, it depends on a particular day strategy out there or what I'm pushing some particular ball in that strategy that could be. But on the whole, I do not think -- I do not think we are reasonably sure because these are -- even the third parties have been engaged to certify that. Our products will never be second to anyone at all that we make sure.

Just additional thing that I just wanted to hear your view that when Blue Star came into this unique product, it kind of gave a clear message that you are getting office kind of comfort at home. And now that you are getting into more and more entry product. But overall, as a brand, are you really going to be positioned more of a premium brand and aspire aspirational brand or you're getting a bit of mass product where like you will be catering to almost everything?

In 2015, itself, so we moved out of that office like cooling for the simple reason. The entire 3, 4, 5 markets, office itself, they're not exist, right? They won't be able to relate to office like cooling. We are migrated to different value propositions than it is a fast-cooling AC. And the -- from -- we were only in premium, we went affordable premium. And now we are in premium, affordable premium, and affordable. And if you have to grow, you have to be in all the 3 segments. So we are there in all.

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

Congratulations on a good set of numbers. Sir, I have 2 questions. First question is I understand that Blue Star gave 80 months comprehensive warranty from 1st of March, I think, until 30th April, and that has significantly contributed to your 4Q volumes. Now 80 months is close to almost an entire replacement cycle for an RAC. Sir, I want to understand what kind of warranty cost should we be looking at as a result of this? And any kind of conversion -- mathematical conversion you can broadly say in terms of 1 unit of RAC sold entail to what percentage of ASP as a probable warranty cost down the line?

I don't pay attention to this particular subject at all for the simple reason. This is a onetime for the 80th year. So what all this goes on in the market, some stabilizer free, the installation free, so on and so forth. But somebody have to take the company has to cost of this. This is connected with Blue Star completed 80 years on September 27, 2023. Connected with that. When we launched new products, there was a huge demand that there are 2 demands. One is -- is there a 80th year edition. If it is 75th year, there was a platinum jubilee edition. If it is a centenary, there will be a special edition centenary. But there is no edition product. But whether you will be able to make some consumer offer, so as a part of that, their way, like, for example, pay INR 80 and take home an air conditioner or 80 installments you will be able to get it or it is a 80-month warranty like that. So it is a onetime offer, which is over already, it is not. But as far as the warranty cost policy is concerned, it is based on the past data what is the number of units that were sold and what has been in the field as a population. And within that, what is the cost we incurred based on that calculation for the future sale provisions are made. This could be the potential warranty expenses. And this is continuously monitored by the auditors. Now whether here -- whether the -- it is also kept in mind what the industry is doing. Now whether our sales went up because of this, I do not think so. There was a general demand. It is a onetime offer.

Understood, sir. And just one last question. So what I understand is specifically on the MT channel side, now MT wants to stop more of nonseasonal brands. And when I say nonseasonal, I mean brands like LG, Samsung, Haier and Havells, who have presence across white-good category and they sell throughout the year. Now while our strategies to be an HVAC-focused player. Sir, do you think such a change in strength and impact a seasonal brand like us? And how do you read this in the medium to long-term? That's it.

Compared with any other player, I think we are less seasonal to direction because we are in B2B space and we are a strong B2B player. See, our pedigree is B2B, right, our share of marketing and institutional will exceed 30%. And the -- whether it is an office, whether it's a restaurant, whether it's a shop, whether it is a boutique, whether it is the airport, whether it is an ATM, we are present everywhere. The specific question of room air conditioners has a summer cue, which is common for all companies.

The next question from the line of Dhananjai from ASK Group.

Most of my questions are answered. Congratulations firstly on the fantastic set of results. Just a quick, on the UCB part, which is non-RAC, how do we see that in, let's say, the next 3 to 5 years in terms of growth? Would that be something would be even later than RAC and growth-wise? Or how would that be?

So the commercial refrigeration in a developed country can be as large as room air conditioners market. Okay? First of all...

Market size or market volume?

Market size. Because it is driven by the volume, right? So the question is in a developed country, the commercial refrigeration market size can be as high as room air conditioners. Today, the room air conditioner market size may be around INR 24,000 crores or so. It can -- but whereas today in India, that market is only some INR 5,000 crores, commercial refrigeration. The second part is it is highly fragmented. It can be a water cooler. It can be deep freezer. It can be a dispenser. It can be ice cuber. It can be a cold room. I can a ripening chamber. And there are multiple categories here. So therefore, it can be different. It is dependent on the individual consumption levels. Like U.S. consumes a lot of ice in everything. So the ice cuber is a very huge market growth like that. And the third insight is that India is -- India's population is very huge. India's homes are smaller in size. And therefore, room air conditioner market will continue to grow, that we are only, I think 7% to 8% penetration level. It will continue to grow. And it is in India, the frozen food consumption, processed food consumption is negligible. And locally, quite a few vegetable foods are available. And in the process, the commercial refrigeration penetration will take a longer time. But because the base is smaller, we continue to grow anywhere at 13% to 25% every year.

Okay. So that growth will also be as strong as what we have.

Yes.

And would we ever look at maybe acquiring other players to improve our market share in these segments have a foothold from before?

I do not think so. That is -- we don't need that at this moment. We are well placed.

Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to Mr. Nikhil Sohoni for closing comments.

So 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'll be happy to provide you additional details by e-mail or in person. Thank you.

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