Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Blue Star Limited Q3 and 9 Months FY '25 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.

Good morning, ladies and gentlemen. It's a pleasure addressing you today. I have with me Mr. Nikhil Sohoni, our Group Chief Financial Officer. I'm happy that we could close the quarter ending December 2024 on a high note once again. And you may remember, it is almost 12 consecutive quarters. I believe we have delivered good results in quite a few quarters, we have even outperformed the market. I think Q3 FY '25 with a revenue growth of 25% and an operating profit growth of around 35%, we would have done better than the market and peers. specifically in the room air conditioners -- sorry, Unitary Products segment, which you all closely track, you have seen the revenue growth of close to around 22% and even margin expansion by around 100 basis points. The market continues to be good for this particular category, while quite a few other categories within consumer durables or FMCG are yet to witness the revival we continue to see offtake from the market. And the dealers are stocking up for the forthcoming summer season. And we are ready with the new products that are to be launched for the forthcoming season. Equally is the fact that there are quite a few headwinds, which we are preparing for. The number one is connected with the supply chain restrictions that continue to happen. And which is getting intensified post the U.S. elections. Escalation in the cost of raw materials and some liquidity crisis in the market. There is union budget around the corner, what it will have in store for us, we do not know at the moment. Most of the market segments are doing well, apart from residential segments. For example, manufacturing investments continue. Data center investments are continuing and Tier 3, 4, 5 towns, smaller shops, showroom, boutiques are doing well. We had a setback in commercial refrigeration, which forms part of segment too, which we had explained to you arising out of certain regulatory changes. Consequently, water cooler business not going the way we would have liked in the first 2 quarters. Third quarter, it has stabilized, and we are fully ready now for the fourth quarter. The Professional Electronics and Industrial Systems part, which is segment 3, there are headwinds. And the -- both in terms of comparing impacting that and the domestic demand yet to pick up because of the CapEx cycle. Overall, we have been not only managing the cost and the growing scale, we have also been focusing on preparing Blue Star for future. The investments in research and development, investments in digitalization, investments in manufacturing is continuing as planned. We are keeping a tight control on the operating cost and the profit margin improvement is attributed to the scale benefit combined with tight control on costs. Capital allocation is closely monitored by the Board. And we are happy to report the collections are being good. If there is a working capital in certain segments, it is due to certain types of projects that are being executed or it is connected with the scale, which requires working capital. We are confident that we will manage the balance sheet also well. On the whole, so far, we have done well, and we are on track. We are confident that we will close the forthcoming quarter also on a high note, which means the third year in succession we will deliver good results for the whole financial year. With that, I thank you for your support, and quite often interaction with you also adds value to us. And I will hand it over to Mr. Nikhil Sohoni for his opening remarks.

Thank you, Mr. Thiagarajan. Good morning, ladies and gentlemen. This is Nikhil Sohoni, and I will provide you an overview of the results of the Blue Star Limited for the quarter ended December 2024. Coming to financial highlights. On the back of unprecedented growth experienced in the earlier quarters of this financial year, in the current quarter as well room AC business continued on its exceptional growth trajectory benefiting from the strong festive season demand. The room AC industry stood as an outlier amongst all consumer durables. Other key businesses also delivered robust growth, supported by demand from some key sectors. The growth in revenue and profit is achieved due to our continued focus on expanding distribution footprint, investments in innovation, R&D and digitalization and strategizing supply chain. Financial highlights for the quarter ended December 31, 2024, on a consolidated basis are summarized as follows: revenue from operations for Q3 FY '25 grew by 25.3% to INR 2,807.36 crores as compared to INR 2,241.19 crores in Q3 of last year. EBITDA excluding other income for Q3 FY '25 improved to INR 209.38 crores, and EBITDA margin of 7.5% of revenue as compared to INR 155.35 crores, EBITDA margin of 6.9% of revenue in Q3 of FY '24. PBT before exceptional items grew 24.5% to INR 167.20 crores in Q3 of FY '24 as compared to -- sorry, in Q3 of FY '25 as compared to INR 134.29 crores in Q3 of FY '24. Tax expense for Q3 FY '25 was INR 46.53 crores as compared to INR 33.93 crores in Q3 of FY '24. Net profit for the current Q3 grew 31.8% to INR 132.46 crores as compared to INR 100.46 crores in corresponding quarter of last year. EPS for Q3 FY '25 stood at INR 6.44 as compared to INR 4.89 for Q3 of FY '24. Carryforward order book as of December 31, 2024, is at a record high of INR 6,801.99 crores as compared to INR 6,038.53 crores as on December 31, 2023. This was a growth of 12.8%. The capital employed as on December 31, '24 stood at INR 2,763.4 crores as compared to INR 2,298.9 crores as of December 31, 2023. Net cash position as on December 31, 2024, was INR 102 crores as compared to a net cash position of INR 157 crores as of December 31, 2023. Coming to business highlights. Electro-Mechanical Projects and Commercial Air Conditioning segment 1 revenue grew 32.2% to INR 1,562.41 crores in current Q3 as compared to INR 1,182.30 crores in Q3 of last year. Segment results was INR 118.7 crores, which was 7.6% of revenue in the current quarter as compared to INR 96.7 crores with an 8.2% of revenue in Q3 of last year. Order inflow for the quarter was INR 1,748.3 crores in Q3 of FY '25 as compared to INR 1,260.8 crores in Q3 of FY '24. Coming to Electro-Mechanical Projects, which is a part of Segment 1, in this quarter, there has been a good progress in order finalization from the factories and data center market segments. On the other hand, we saw muted demand from commercial real estate and infrastructure segment. The company remains committed to faster execution of projects while maintaining a strong focus on healthy cash flow. Carryforward order book for this business was at INR 5,146 crores as of December 31, 2024, as compared to INR 4,648 crores as of December 31, 2023. This was a growth of 10.7%. Coming to Commercial Air Conditioning. During this quarter, the commercial air conditioning business delivered reasonable growth compared to the same period last year, reflecting strong demand. Significant contributions from manufacturing, educational, retail and auditorial sectors fueled this improved performance. We further strengthened our market position, maintaining leadership inducted systems while maintaining the number 2 position in VRF and Chiller product categories. The market potential for Commercial Air Conditioning continues to be good. We are also witnessing liquidity issues in certain market segments and in the process, order finalizations are getting delayed. The profitability of the business may also experience volatility due to the impact of adverse exchange rate and material cost movements. Amongst this mix scenario, we remain committed to providing innovative and customized solutions by addressing the evolving needs of our customers. Coming to international business, we are focused on positioning ourselves as a manufacturer of innovative and reliable products for European and North American markets. We have been successful in developing and getting a few products approved by 3 OEMs and the initial shipments have commenced. However, slowdown in European market and uncertainty around U.S. trade policies is likely to have some impact on the potential scaling up of these businesses. We are committed towards our international strategy. And as these external factors settled down in future, we are optimistic that our global ambitions will bear fruits. Segment 1 margins at 7.6% were in line with the long-term guidance that we have provided for this segment. This segment comprises of both projects as well as products. Each business having a very different margin profile, which influences the quarterly returns. Coming to segment 2, that is Unitary Products, the segment 2 revenue grew 21.9% to INR 1,164.4 crores in Q3 FY '25 as compared to INR 955.4 crores in Q3 of FY '24. Segment result was INR 94.8 crores, which was 8.1% of revenue in Q3 of FY '25 as compared to INR 67.9 crores, which was 7.1% of revenue in Q3 of FY '24. Cooling and purification products segment, buoyed by successful festive season and sustained strong demand our Room AC business continued on its unprecedented growth purchase trajectory, achieving remarkable growth during this quarter. The strong demand for our products helped us improve our market share for the quarter to 14%. We are proactively addressing the supply chain challenges arising from regulations and nontariff barriers and are confident that our planned investment in strategic inventory will enable flawless servicing of demand that the forthcoming season will provide. Coming to Commercial Refrigeration, the regulatory issues faced in water coolers and big freezers in the previous quarters are behind us, and now we are focused on preparing for the forthcoming summer season. We are expecting the upcoming quarter to be promising one as market demand is likely to be strong. The quick commerce and food delivery market segments are driving growth from modular cold rooms. Apart from deep freezers, the market for visi coolers is growing with many retailers across the country investing in upgrading their stores. Overall, margins in this segment registered a strong 100 bps improvement in the current quarter and the return, as you have seen, was 8.11% in the current quarter as compared to 7.1% in the last corresponding quarter. This was fueled by strong revenue growth in Room AC business, which has led to the benefits from economic of scale. Coming to segment 3, that is Professional Electronics and Industrial Systems. The segment's fee revenue degrew 22.1% to INR 80.6 crores in Q3 of FY '25 as compared to INR 103.5 crores in Q3 of FY '24. Segment result was INR 6.2 crores, that is 7.7% of revenue in Q3 of FY 25% as compared to INR 15.2 crores, which is 14.7% of revenue in Q3 of FY '24. In this quarter, while the Industrial Solutions business continues to show momentum and growth, both the medtech and data security business have been muted. The operating cycle in these businesses are yet to revise, which is impacting order inflow. The challenges in this segment continues to impact revenue growth and profitability, and we expect to revive in FY '26. Therefore, we are focused on controlling costs and managing working capital. Coming to business outlook. As we close this quarter on a positive note, we remain optimistic about the growth prospects and the favorable look forward -- and favorably look forward to opportunities the forthcoming quarter will provide. The coming quarters should benefit from 3 drivers like onset of summer season, potential reviver in government spending and accelerated CapEx spending by private sector. However, there are headwinds owing to depreciation of Indian rupee, escalations in commodity prices and possible supply chain disruptions due to huge demand. We have strong mitigation action in place to tackle these challenges and continue to deliver value to our stakeholders. With that, ladies and gentlemen, I'm done with my opening remarks, I would like now to pass it back to the moderator, who will open the floor to questions. We will try to answer as many questions as we can. To the extent we are unable to, we'll get back to you via e-mail. With that, we are open for questions.

[Operator Instructions] The first question is from the line of Nattasha Jain from PhillipCapital.

Congratulations, sir, on a great set of numbers. I have 2 questions, both on the UCP side. So first question is, third quarter is usually an unseasonal quarter, but we have seen good growth on RAC mainly on account of -- to long summers. Now having said that, do you think the channel is a little cautious in terms of stocking for 4Q because there could be a chance of a prolonged winter and any which ways we're sitting on a very high basis. So how does that look to you?

The first part is, it is not due to prolonged summer. The summer had ended by July. It is demand that is -- that has been good during the festival season commencing from Dussehra, Diwali, New Year, it continued. Now many people keep asking this question, whether it's financial press or investors, fund managers, analysts, where an FMCG is not doing well or other consumer durables are not doing well, why room air conditioners alone should be? First of all, I wish this continuous. So I like the demand to slow down. As for my planning is first, this is the category in which the penetration levels are low. We obviously it will grow beyond 8% towards -- it should move towards 30% or something like that over the next few years. So the CAGR projected by various studies and at 30%, sorry, 19% to over the next 5 years in order to reach a penetration level that India should have. So 19% CAGR is the guidance, okay? Second part, one particular year, the growth can be 30% and in another year, it can be 10%, depends on various events like whether -- how harsh is the summer or how the economy is doing, how the disposable income is. Our forward planning are -- many other government programs, whether it is connected to refrigerant or PLI, supply chain, new -- so all are based on this 19% CAGR for room air conditioners. Second part is connected with the prices have remained stable, thanks to the competition, localization that is happening. The manufacturing capacity is almost doubling from what it was a couple of years ago. And therefore, prices are stable, and it is -- one will not like 8%, 8.5% kind of operating margin, but the industry is heading towards. Now third part is connected with consumer finance options that are available. People's attitude to avail that. There are more and more customers who are ready to go ahead and buy today and pay over 12 months. And that 35%, 40% of the sale in a year is at through consumer finance. Yes. The next reason is unlike earlier years where I can buy an AC by power bill who will pay, thanks to the energy labeling program, the power bills are affordable. If someone is using for 6 hours, 7 hours, that too on hot days, it is not unaffordable. Next is the urban heat effect or even in Tier 3, 4 patterns, how their homes are constructed. Hardly, there is cross ventilation. Humidity levels are going up. And one is we used air condition environment wherever they go, whether it's a restaurant or whether it is metro railway, whether it is car, whether it is office, they experience air condition in the non-air conditioned environment. They are not. So people are beginning to buy. Last season, this is my best subject. The disposable income substantially is taken away by smartphones and mobile phones, which are more than 2 at a home and there used to be a time when people used to keep buying mobile phones, once in 6 months, once in a year, but the people are using smartphones for a longer period now. And I understand as smartphone sale growth has moderated, which means the disposable income. The priority is for buying something what they do not have or essentially they need to have. So air-conditioning industry is benefiting. And in all categories I've seen, whether it's refrigerators or television or washing machines, there is a particular period when it will grow. And I think we are in the step change in penetration in room air conditioner is concern. And that other industry is also planning and moving forward. And the demand had held through Q3. Usually, before Q4, the dealers end up stocking. There is no inventory I'm seeing. The secondary movements continue to be good, that you might have seen the GSK report as well. And the key is how is the summer season going to be? And you mentioned about winter and North India people are disappointed that the winter has gone, and they are feeling that it should have lasted for some more time. And usually, we pray that the March 1st week onwards, there is summer and February onwards, again, stocking takes place. So the bottom line is it is for various reasons. This category is doing well. And much depends on how severe the summer season will be. But irrespective of what is happening in one season, one quarter, 19% CAGR is a widely accepted fever by multiple agencies. Thank you. I've taken more time because this question need not to be repeated later.

And my last question is on the EBIT margin side. Now if I look at both your segment 1 and segment 2 margins, you are already at peak as per your own guidances, specifically outperformance in your segment ones. So from here on, how does the margin growth trajectory look like given the fact that commercial refrigeration is yet to pick up. So what kind of expansion can we expect?

I want to clarify, commercial refrigeration, the issues are all over. We will pick up, there is nothing to worry about it. It's again a segment, which is expected to grow at 20% CAGR. The margin guideline where again, the 7% to 7.5% segment 1, 8% to 8.5% segment 2 is the guideline. And unless and until something dramatically changes. Let's say, commodity price is crushed, the margin can go up. And if there is -- let's say, let's assume, there is going to be escalation in commodity can significantly go down or the ForEx. As of now, I think 7% to 75.5%, 8% to 8.5% holds good.

We'll take the next question from the line of Nitin Arora from Axis Mutual Fund.

Just on the market share part. I know the kind of improvement what we have seen over the past 2, 3 years and now standing at 14%. How do you think this penetration, especially in the North market in the affordable category, which you did? How has been the response of the consumer? If you can talk about that. And you think that can further help you inching more? Or you want to calibrate your moves that this 13%, 14% is good enough and let me focus on the profitability, given there are some supply change disruptions, which are coming. I hope that's for the near term. So just your -- wanted your take how you think about your market share from here?

I understood. So the -- it is a category, which is growing and which will continue to grow, therefore, the competition will be intense. All the players have set up manufacturing capacity. And obviously, they will be interested in gaining market share. And unfortunately, only 100% market share is possible. Now our goal was to achieve a market share of 15% by FY '24, which didn't happen. And FY '25, we said that we will achieve a market share of 15%. But as you can see, if we reach 14% we should be happy. And 15% is what we will attempt. Our sense is that anywhere between 12.5% to 15%, you are a significant player. You'll be able to leverage many things and continue to grow. Now our immediate goal is 15% market share. Our goal is to keep that operating margin intact of 38.5%. You have to -- for this itself, you have to keep in mind, there are many other costs, which other categories may not have. So the first thing I explained in the earlier question is the consumer finance part of it. 40% of the sale is happening through consumer finance, you have to reckon that. Whatever be the reason the industry offers warranty of 5 years. So therefore, there is some warranty costs, there will be costs arising out of e-waste regulation compliance, which is the extended producer responsibility. Now the import tariffs will continue to happen, and one cannot help it because it's completely beyond control. What can be imported, what cannot be imported, what do you have to consume locally, how to find alternate materials? So there will be costs arising out of that as well. Now keeping all that in mind, we will -- our goal is to reach a 15% market share within a couple of years. And then keep delivering that 8.5%. That is what is our goal. If we do beyond that, that we will see. We will be very happy if we are able to reach this.

Second, I think Nikhil said that -- in starting comments that there is -- and you also articulated that the scale is coming in, which is helping the profitability as well. We understand there are challenges, supply chain challenges ahead of the industry, whether it's respect to compressors and all. But let's say, if the season goes good, okay, that's everyone's hope, do you think there are further levers because of the scale where you can improve your profitability going forward?

Multiple things are there. The scale has only begun. The -- as it continues to grow, that it stays, isn't it? So there is a scale advantage will be perpetual, will continue to be there, first part. The second one is connected with the affiliate customers moving up the value chain. And so we are very clearly seeing year after year heavy duty air conditioner or WiFi-enabled air conditioner, this going up. And so therefore, it is not -- you will be able to improve your margins in certain SKUs. The third one is connected with the ability to innovate and continue to enhance the reliability at the same time of final product in terms of input costs. And including alternate materials that may be possible like aluminum, micro channel in place of copper. For example, I'm saying. And these are the levers that will continue to be available. And -- but if you're translating into 8.5% margin will change to 10%, perhaps in some quarters, it could be but it did not because we are keeping in mind multiple factors, including competition and keep maintaining the growth.

Sir, your voice is breaking at times. Can I connect you back.

Yes, you can.

Yes, sir. I'll connect you. Ladies and gentlemen, please hold the line while I connect the management again. Ladies and gentlemen, thank you for patiently holding. The management's line has been reconnected. Over to you, sir. Sir, we'll take the next question from the line of Aniruddha Joshi from ICICI Securities. [Operator Instructions] We take the next question from Aniruddha Joshi from ICICI Securities.

Two questions. One, there was a WJ Towell, our partner in Oman, and that was around INR 461 crores, INR 462 crores. So any update on that? And any likely impact considering almost 6 months are over post that now? And then second question is in terms of the Professional Electronics. So we have seen a significant margin deceleration in this business almost for back-to-back third quarter in a row now. This used to be the highest profit-making segment -- profit margin segment for us. So where do we see the margin outlook for this segment? And in general, in a revenue recovery also in this segment, any color that you can share maybe FY '26 or H2 FY '26. Any update on that? Yes. That's it from my side.

I'll take the question on WJT. So that arbitration, as you are aware is in progress. There is a certain time line to which the arbitration is working. As for that time line, we were required to file a statement of defense, which we have done. There are certain things on which the submissions have been done. And of course, we are confident as we have told earlier also, that this company in which we were joint venture partners and which we had kind of exited almost 7 years back, we have a very strong case and the same things holds today too. So I don't think there is any risk on that count. Of course, we'll wait for the arbitration to play out, but the necessary time lines are being adhered to and we are doing the filings as per the time lines.

Okay. Sir, in terms of time line means, any -- is there any particular end date or -- there or...

As for the time line, it will go for another around 12 to 15 months. On our P&I, that is the second -- the third segment. As we have mentioned, see the earlier the segment used to return the profits when the data security business, et cetera, were kind of doing quite well. Today, as we have mentioned that there are certain headwinds in both data security as well as medtech, while Industrial Solutions is doing good. So the margin profile for each segment is different. And accordingly, the margins get influenced. So that is the reason why you see the margin kind of moving in a particular manner. The current drop in the margins is because out of the 3 segment lines that are there within that segment, 2 are not doing well, and 1 is doing well. So as we said, we expect the revival to happen slowly over next year. And by that time, probably the segment margins could improve a little.

So sir, in near term, maybe next 2, 3 quarters, we believe the status or the similar weakness in the 2 subsegments may continue and 1 segment may continue to do well. Is that right?

The whole thing will be for -- as for the segment on segment -- segment 1 is concerned enough order book is there. This momentum should be maintained. Segment 2, it much depends on the summer season that depending on the summer, there are years in which the growth is only 10%, there are years in which more than 50% growth we have seen. Segment 3, the -- in certain segments, the CapEx cycle will have to revise. And this can be beginning with the union budget announcements how the sentiments change. That's how we will look at it.

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

One, I just wanted to check if I missed out the volume number growth for both 3Q and 9 months. And second, in terms of continuation on the UCPL, the base is very high for last year, both for us and also the industry. So while the outlook is strong, do you think we can continue to, as an industry to grow at 15%, 20% plus, particularly in view, not so much in terms of demand, but also in terms of the supply chain issues where compressor availability is a bit of a challenge is what our channel checks tell us. So if you can just throw some light on this aspect?

So first question volumes, I don't disclose any of the volumes that you do have the data from GSK indicating all that we know. See, first of all, GSK is only one part of our business. We do have very large institutional share being a company, which is much focused on that as well. Now all that we know is that the months of October, November, December that we seem to have performed exceedingly well, much, much better than the industry. So volumes, we do not disclose at all. All that we know is that it is very likely the industry closes above 15 million, and we will close much higher than 1.5 million this year and that we are more or less aware that guidance can be given. Now coming to whether the growth will be, yes, I'm saying, the growth of -- if the summer season is good, even if 25% growth has to be achieved. We have enough raw materials. Right now, they are not only to -- all players should have secured their components for the summer season because it's planned much in advance. I -- if you are hearing about -- I want to clarify on the issue of supply chain in general. What is the direct -- direction of Government of India and the DPIIT has been create the component ecosystem, that's why PLI was brought in. Almost all components have been indigenized. Important item like inner grooved, the copper tube, also the factories are coming up. Imports are restricted basically because, one, we'll have to create high-quality components, not because it receives some poor quality comes into the country. Second is that look, under made in India, people will have to make it here. Now if there are restrictions that are there through what is known as the BIS license or the quality control order, it is kept in mind what -- whether it is available, not available, whether the quality standard is the reason import, depending how the government keeps extending those licenses. So there has been no problem, but it is a headache to be watching this, whether -- you can't take for granted, it is going to be available. But at the same time, there's been a shortage so far. It's not the issue. But the government will keep telling that, look, how long I should be allowing this, why it is not happening within the country. Electronics, enough manufacturers are available, which is next important item, which imports are been coming in. Now in electronics unless and until there is a global shortage of microprocessors, which will be an event of a different nature altogether. But otherwise, air conditioner related electronics, there is no supply chain constraint at the moment and we can see that. Compressors, the domestic capacities are coming up. It will take 3 years time for it to meet the country's demand as a whole. There are imports delivery and there are enough sources that are available. The question here is whether the industry and any other technology support or investment support in order to -- for the future is ask from the government, rightly so, and the industry has been working with the government. What kind of other measures we should do. So we are completely self-reliant. This is coming from the fact that, we are the fastest-growing market for air conditioners. We are the fastest -- we are going to be the world's largest market by 2045 to 2050, we should be the largest in the world. And therefore, the government is insisting to create this ecosystem. As far as Blue Star is concerned, our stand has been very clear. For us to make compressor, we have to reach somewhere around 2.5 million. And the investment that you make will have to pay back. The investment that you make should be able to deliver compressors, which are meant for the future because the energy labeling norms will keep becoming stringent. So the compressor designs are very important, keeping in mind. If we are investing, that investment should take into account new refrigerants that will have to come in future. Keeping in mind the Kigali Paris agreements. We have to keep in mind that the country will continue to consume products that are affordable. Therefore, the technology should be something that is not very expensive as well. Lastly, Indian consumers would like the product to be highly reliable. So therefore, we should be. Now keeping all these parameters in mind, we don't see at the moment we have a right sale. We will take a decision to get into that also. This question had been -- many of you have been interacting with us for more than a decade. VRF, when the technology came, what Blue Star will do and where is this technology going to come from? We are leader, in fact, in VRF, we are #2. And the inventor came what Blue Star will do. We have mastered the inverter. So the focus is actually to grow profitably. And the focus is to also keep ahead of the curve. So there is no tension. But with the tariff restrictions that are happening across the globe, and it is a very unpredictable situation who will stop supplying what to whom and that is -- that one will have to -- the whole world is undergoing this tension, especially since January. We will have to go through this. There is no other go. Summer season, the material is secured. There is nothing to worry. Thank you. This will clarify for many of the other participants as well.

Sir, the second question is on our capacity addition where we're doing the second phase of expansion at Sri City. So one is obviously the CapEx and the time line. But second, I also wanted to understand how is the first phase kind of helped us in terms of margin expansion as also go to market from meeting the demand in a much more timely manner production sector, if you can throw some light and what we can expect as we ramp up this would benefit us.

The second part I will answer. First part, Nikhil will answer. There has been no market kind of delay or concerns or anything like that at all, that when whether there is energy labeling or our own decision to be competing on all price points with affordable, affordable premium and premium products. Our heavy-duty machines or WiFi-enabled or in commercial refrigeration, lower capacity for import substitution, or sophisticated cold rooms or chillers, including centrifugal chillers or certain chillers mean for data center applications that we -- our investments are the largest in the country in R&D, and we continue to deliver. There is absolutely no doubt about it. If at all, the question will be whether to which product line first we introduce and how we go ahead and expand the product line. Always, that will be the case. So we may introduce to move to glass top, curved glass top in cases. That may be the thing that we'll be doing. But otherwise, I don't -- it is a well-oiled mission in that respect. It is for this reason, we are not promising or committing into some unrelated lines we want to get into. Let's say, often the question is, will we get into consumer durables as a whole, all categories are not. In air conditioning, refrigeration, we are deepening and deepening, becoming stronger and stronger. So there has been no problem. As far as the CapEx is concerned, Nikhil will clarify?

Yes. So coming to CapEx, we have told earlier also, our investments are modular in nature. So capacity is not a constraint. And as and when we see demand coming up, we are ready to invest -- so the capacity at HP plant was already in the region of around 600,000. And in the Sri City, we were investing -- we started with 300,000. We have now reached up to 600,000. And as and when we want, we can scale it up. So in the current year also, the capital investments have happened, and this will keep happening as you see the demand. We can go up to around $1.8 million, $2.4 million as the demand scales up.

So the CapEx amount for FY '25 and likely in '26, that's it.

So the CapEx amount that we have already told -- we have told over a period of around 3 years, and so that over a period of 3 years, if you see our CapEx will be in the region of around INR 750 crores to INR 800 crores. And that, that will be moving towards both manufacturing as well as product development. And certain amount of digitalization. So all of these 3 will be the end use of this CapEx.

We'll take the next question from the line of Naushad Chaudhary from Birla Mutual Fund.

Congrats on a decent set of numbers, sir. Again, clarification. And on the margin side, so 2 things are the AC energy rating changes due in next 1 year, plus step-up capacity coming in this time in the AC industry and it is slightly different versus what historically it has been this time, the OEMs bringing the capacity in the market. Along with these 2 points, what gives us confidence that we should be able to maintain 8.5%. Do you also fear or have some risk on the margin side because of these 2 things?

No. One, there is no questions on fear and how fear will help, it is not. So the -- it is about what all can happen. So the -- if you look at it -- first of all, the energy labeling is due on the first of January 2026. The product meant for that is already developed. So there is nothing to worry about it because energy labeling sufficient time is given for people to develop. And the -- it is always a discussion with the industry by consensus, then what table change has to take place, that is and it is an ongoing discussion. Going forward, it can even become much more stringent because the installed population is going up. And it is in the interest of the regulators. It is in the interest of the industry. We don't want the industry to grow. But in summer, power cut is there, how is it going to help us? It used to be the story when I used to be young. Come summer season means there will be power cut. AC sale will be impacted. We don't want that. So energy label change will be a continuous program. And when we plan our strategy, we keep in mind that we have to continuously invest in technologies, which will improve the energy efficiency at the same time remain competitive. The margin management is connected with first to the scale. If the market will have to grow, and we have to ensure that the growth is maintained. So the entire industry will have to also play a role in that. The second part is connected with your ability to manage the total cost. The -- how you're deciding the product, what values in the business happened? Where are the procurement sources? How you're driving down the cost which we have demonstrated over the years. And definitely, your focus air conditioner, which is player, we believe that we understand the subject. We continue to learn what all can be done. The third one is that the -- in the value chain, there are other costs and the customer expectation also changes. That A, you should be able to buy through consumer finance; B, I need the delivery the same day, they quick commerce will force them to think differently. How often -- how quickly I'll get the product, how quickly it will be installed and it is part of a large plays an important role. And D, the renewability will have substantially improved so that you reduce even though it may be a 5 -- year warranty, how the warranty can be check. So multiple factors result in the margin management. Now the question has been the other way around. The scale is happening, industry is growing, local manufacturing, backward integration is happening. And you had a factory in North earlier. You also have a factory in South now. There should be a logistic saving, why this 8.5% should not become 10%. We are saying it is because of the competition because many other things have to be done. We are not guiding today. If it happens 9% or 9.5%, one will see.

Sir, 2 follow-ups on this. You're indicating about the scale, but we have seen the scale player also not able to enjoy that kind of margin. Can you be a little more specific, which specific cost line items should help you once you scale up and that should help you in the margin?

I'm saying that, like I say, for example, our -- in room air conditioner, full year, let us say, are growing over 35%. It is not necessarily advertising expenses goes up by 35% or the headcount goes up by 35%. So the scale benefit comes through that. Now if -- when your scale is high, you will be -- you'll drive down the input cost also because you have got a purchasing power and the logistics cost of incoming material comes down because of that scale. So the scale is an important lever. So this scale should obviously improve the margin, but I'm saying that we are not telling you this 8.5% will become 10% or something like that is basically because there are certain new costs that are coming like e-waste, consumer finance. These are new costs and there is competition. So the prices will be under check because of the competition.

And this time, if I'm not wrong, especially on the OEM side, capacities would be PLI linked. So they would be having more incentive in terms of pushing the revenue. They would be having time line to achieve that. Shouldn't that...

This is an old story, right? Because all of us also -- they are also in PLI. All players are in PI. Finished goods guys as well as component manufacturer. The question is that all will have to grow their revenue in order to earn the PLI, the market is growing. So there is no problem. It was known for earning the PLI, you have to show incremental sales over FY '21 figure and all will be -- it is not deterrent in my view. It is good.

[Operator Instructions]

No, I can -- we can extend by another 15 mins. I'm available.

Sure, sir. We'll take only 1 question from the participants now. So that everybody gets a chance to ask questions.

One from per participant, yes, okay.

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

With respect to the UCP business, I don't know, given that the energy efficiency norms are changing from January, what is the price hike that you would have to take given that the growth momentum is strong and easier to pass the higher prices. And connected with this, I want to know if the third quarter had any prebuying because of the change of energy label. Were you able to identify that?

No. The energy label changes is from 1st January 2026. And 1st January 2025, no change has happened. And what can happen potentially is somewhere in festival season, it can be prelaunched, that the future ready like that, that can happen. So right now, there is no energy label change.

Sir, on the PLI, how much of the P&I that was booked in the third quarter and 9 months? And whether this is the reason also that can be attributed to the higher operating profit of the UCP business? That's the question.

No. The question is that, look, we are -- alI that I'm saying is that we had indicated earlier that we are eligible for somewhere close to over a 4-year period, INR 78 crores of PLI benefits for an eligible investment of somewhere around INR 155 crores or something. I don't remember the exact figure, but it's in the order of around -- between INR 75 crores to INR 80 crores. And we are on track on that. We will be fully receiving. And these applications are made on a yearly basis. At the year-end, we'll be. Then what PLI benefit we received for a particular year, we can disclose in the May call. Right now, it is of no relevance whatsoever. But I'm committing to you that for our scale and our investments, we will fully avail what we are eligible for in the Phase 1 off. You might have read that in Phase 3 of the PLI also, we are an applicant. We have to begin the investments on that.

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

Congratulations on amazing set of results. Sir, you briefly commented on outlook for some of the key end markets in your projects business. May I request to please elaborate that a bit more for some of the end markets?

In the projects business, you are asking?

Yes. Like the manufacturing data center, commercial. Can you please elaborate a bit?

Yes. So the portfolio there, if you're looking at segment 1, first clarification, it comprises Electro-Mechanical Projects, it comprises the Commercial Air Conditioning projects like Packaged Air conditioning System, Ducted Air Conditioning System, VRF systems, chillers, data centers chillers so on and so forth, processes and all. There is a third thing is the aftermarket revenue. All these are B2B in nature. And we are leaders here. Number one, in quite a few, we are #2 in quite a few. And in the Electro-Mechanical Projects, we do the electrical part of it. We do the air conditioning, we do firefighting, we do plumbing. These projects are executed for office complex. So it can be an IT park or it can be an airport, it can be a hotel, it can be a hospital, it can be an airport, it can be a metro railway system. Now the direction for this business is focus not on market share, focus on profitability and focus on free cash flows. That's the direction. And in that, the emerging segments, in the past couple of years has been also the manufacturing at the data center, in addition to what all I told you. And so it is broadly categorized into 4 verticals. And one is the infra projects, which are metro railway, around water distribution project or airports, et cetera. The second big one is build commercial buildings. These are malls, offices, ITES, this part of it, which are generally done through developers. The third one is manufacturing units or factories, the fourth one is data centers. Now what we indicated is that the -- depending on the vertical, your margin profile or the time taken can see in infra project, it is 4-years, 5-year kind of project generally. It can be even a 3-year one, but 3 to 5 years loss. In case of commercial building, the entry barriers are low. It's a huge competition and your margin profile may not be good. And you are -- you may be relegated to your number 3, 4 level because there may be a builder, developer who gives it a -- general contractor who is doing everything and out of it, you're one part of it, kind of. Manufacturing is a sweet spot because these are time bound. The owners decide and data center is another segment where there are stringent quality norms and specialization is required. That's -- this is the segmentation. And we, over the past couple of years have been putting our energy behind these manufacturing and data center and the infra projects, which are time bond where we have got some unique value to add. Therefore, our profitability and cash flow can be good, depending on the customer profile. That's where we are.

The next question is from the line of Naushad Chaudhary from Birla Mutual Fund.

Sir, just a follow-up on my previous question. So as most capacities are PLI led people would focus on us, they would be having some target to be eligible for the PLI. If at all industry doesn't -- if the cycle goes down or cycle doesn't go in our favor, do you think this time the margin pressure could be worse than what we have experienced in the past because this would be OEM-led capacities?

Obviously, right? If the demand is not there, whether PLI is there or not. People would have planned, this is my summer, they would have already begun manufacturing, would have ordered the component. And we have seen it. We have seen it once in 3 years, 4 years, the summer won't be good. There will be a growth issue, there will be inventory issue. It is part and parcel of the game.

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

Yes. So thank you very much, ladies and gentlemen. With this, we conclude the earnings call. Do feel free to revert to us in case we have not fully answered your questions, and we'll provide additional details either by email or in person. Thank you.

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