Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the Blue Star Limited Q2 and H1 FY '26 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] I now hand the conference over to Mr. B. Thiagarajan. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. You might have gone through the results of Q2 FY '26. So it was a tough quarter. You are aware of the impacted summer season that continued through July. Post that, on August 15, we had the GST announcement. So practically from 15th of August till September 22nd, not only the Room Air Conditioners business and also some part of, or some segments of Commercial Air conditioning business were also impacted. Because we are a company having interest in B2B as well as the B2C segment, we could deliver modest growth. On the whole, it was a tough quarter, and the fundamentals are strong. The growth story for the industry is strong. And even if you look at the CAGR from FY '20 or you ignore the COVID years, you take from FY '22, the industry has grown and Blue Star has grown in double digits. So there is no doubt about the long-term prospects of this business. It is just that this particular financial year is tough. We had mentioned that it is probable that the second half of the financial year should be better than first half. We still believe so. But having said that, whether it will make up for the shortfall in H1, it is I doubt at this moment, going by what is happening in the market, considering the inventory levels of Room Air Conditioners that are in the market, you, one would think that if we close the year with industry being flat, we being flat, we should be very happy. I don't think we will be able to grow over the previous year at all given that it was a huge growth year. And it is also probable that the industry ends up with minus 15% over last year and Blue Star does better than that. It is also probable because we are dependent on just 2 windows now that's in December prior to the energy label change for a couple of weeks. And then you have to wait for summer season to set in the last few days of February and the month of March. That's all the window that is available as far as Room Air Conditioner business is concerned. Commercial Refrigeration business, it's smaller in terms of market size that grows, but it cannot make up for the shortfall in Room Air Conditioners business. Commercial Air Conditioning, it continues to do well, while the order inflow was lower due to the reasons I mentioned because GST impact is also affecting certain segments like, for example, government or educational institutions, so on and so forth. And we think that, that business will revive and Electro-Mechanical Projects business, other than the infra projects, all other segments are doing well, whether it is buildings or data center or manufacturing. It is the matter of concern in the slow execution of infra projects and the speed is not picking up there. So, it is a rain-interrupted match. As I keep telling it is all Duckworth-Lewis method. So we don't know how many overs are left or what is the asking rate. And so rain keeps interrupting on one side. And the other way to look at it is, it's first half of the movie was not that interesting. Intermission, post intermission, one hopes that the movie will be good. But on the whole, one will close the year with a great feeling. I don't think so because the momentum was somewhat disrupted. But I keep repeating that the CAGR you estimate for any period over the past 5 years, 4 years, 3 years, it is more than 15% for industry. So in this whole thing, we seem to have done well, better than the industry, gaining market share. But fine internally, I keep telling that everyone failed in that I failed with better marks is not the consolation. But we have done better than the industry. One more question that will come is the inventory in the pipeline. So while post summer, the inventory, we thought during festival season, it will get liquidated due to this GST interruption, it did not. For the period September 22nd till Diwali day, we witnessed as far as Blue Star is concerned, more than 35% sale. But post that, there is a lull period. Our inventory level based on the latest estimate as on date is around 65 days of sale. Ideally, it should be only 45 days of sales. And I do not know the industry level, but I know the inventory levels are much higher than 65 days. So which means it is going to be a period where all these inventory have to find way to the market. And so the channel as well as manufacturers' inventory liquidation will be a top priority. From 1st of January, the manufacturers have to produce new products or relabel the existing products depending on the energy efficiency levels. The signal that we want to give is indeed second half of the movie will be better. There is no doubt about it. And we will continue to maintain our fundamental principles, that is grow faster than the market, control the expenses, both operating as well as CapEx, find ways and means to maintain the margins or contain the deterioration of the margin and close the year hoping that summer sets in yearly. That's where we are. So I hand it over to Mr. Nikhil Sohoni for his 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 Blue Star Limited for quarter ended September 2025. Coming to financial highlights. In quarter 2 of FY '26, the company has reported modest growth amidst multiple challenges. The Room Air Conditioner segment continued to witness demand slowdown after a subdued monsoon-led Q1 FY '26 as prolonged rains and lower temperatures impacted secondary sales and delayed channel offtake. Also, the Room AC and Commercial AC demand was deferred due to GST rate reduction announcement on 15th of August 2025, which subsequently came into effect only on September 22, 2025. In Project business, execution of factories and data center projects remain steady, though the pace of new order inflows was subdued. Financial highlights for the quarter ended September 30, 2025, on a consolidated basis are summarized as follows: Revenue from operations for quarter 2 of FY '26 grew 6.4% to INR 2,422 crores as compared to INR 2,276 crores in quarter 2 of FY '25. EBITDA, excluding other income for Q2 FY '26 improved to INR 183.4 crores and EBITDA margin of 7.6% as compared to INR 149.3 crores and EBITDA margin of 6.6% in Q2 of FY '25. PBT grew 1.3% to INR 133 crores in Q2 FY '26 as compared to INR 131 crores in Q2 FY '25. Tax expense for the current quarter was INR 33.4 crores as compared to INR 35 crores in Q2 of last year. Net profit grew 2.8% to INR 99 crores in Q2 of FY '26 as compared to INR 96 crores in Q2 of FY '25. Carried forward order book as of September 30, 2025, grew by 7.9% to INR 7,120 crores as compared to INR 6,598 crores as of September 30, 2024. Carried forward order book as of March 31, '25, stood at INR 6,263 crores. The capital employed as of September 30, 2025, increased to INR 3,531 crores as compared to INR 2,550 crores as of September 30, 2024. Net borrowings of INR 417 crores as of September 30, 2025, as compared to net cash position of INR 185 crores as of September 30, 2024. Coming to business highlights for quarter 2, segment 1, that is Electro-Mechanical Projects and Commercial Air conditioning Systems. The segment revenue grew 16.5% to INR 1,664 crores in Q2 of FY '26 as compared to INR 1,428 crores in Q2 of FY '25. Segment result was INR 147 crores, which was 8.8% of revenue in the current quarter as compared to INR 119 crores, which was 8.3% of revenue in Q2 of last year. Order inflow for the quarter was flat at INR 1,922 crores in Q2 FY '26. In the previous year, it was INR 1,900 crores. Coming to Electro-Mechanical Projects business. While the inquiry inflows from buildings, data centers and factories were good, order finalizations during Q2 FY '26 was muted. As far as infrastructure projects are concerned, the company continues to be selective, owing to the strong order book and faster project execution billing growth during the quarter was strong. Carried forward order book of Electro-Mechanical Projects business was at INR 4,840 crores as of September 30, 2025, as compared to INR 5,037 crores as of September 30, 2024. It was a negative growth of 3.9%. Coming to Commercial Air Conditioning, the business grew in line with the market trends. However, billing pace moderated post GST reforms from mid-August until late September. The company continues to maintain its market leadership in ducted systems and scroll chillers and ranks among the top 3 in VRF and screw chillers. International Business, with the approval process and trial marketing having been completed for a few products in the U.S. market, the supply scaled in Q1 FY '26 and Q2 FY '26. The tariff-related uncertainties persist, and the business should accelerate further once India-U.S. trade deal is concluded. With the successful development of products for both U.S. and Europe, the company continues to be optimistic about the prospects for International Business. Overall, the segment 1 margins saw an improvement in Q2 FY '26, rising to 8.8% of revenue compared to 8.3% of revenue in quarter 2 of last year. The improvement in margins is a result of changing mix of business within the segment. Coming to segment 2, that is Unitary Products. The revenue degrew 9.5% to INR 694 crores in Q2 FY '26 as compared to INR 767 crores in Q2 FY '25. Segment result was INR 43 crores, that is 6.2% of revenue in Q2 of FY '26 as compared to INR 54 crores that was 7% of revenue in Q2 of FY '25. Cooling and Purification Products business, unfortunately, the Q2 FY '26 was also impacted and the only silver lining was the good secondary sales with effect from September 22, 2025. With the energy label change scheduled for implementation on January 1, 2026, it is likely that the Christmas and New Year sales would be good. Preparations are underway for the launch of new products for pre-summer and summer season 2026. Coming to Commercial Refrigeration business. The business experienced a modest quarter. With the GST rate reduction on various food products, we expect significant demand growth in H2 of FY '26. We are expanding our energy-efficient and IoT-enabled product range to meet evolving customer needs while deepening penetration in Tier 2 and Tier 3 markets through localized distribution and service support. The segment margins were lower as compared to previous corresponding quarter. In last year quarter 2, the margins reported was 7%, whereas in current year, the margins are 6.2%. Coming to segment 3, that is Professional Electronics and Industrial Systems. The revenue degrew 20.1% to INR 64 crores in Q2 of FY '26 as compared to INR 81 crores in Q2 of FY '25. Segment result was INR 6 crores, which was 9.6% of revenue in Q2 of FY '26 as compared to INR 5 crores, which was 6.4% of revenue in Q2 of FY '25. The degrowth is primarily due to uncertainties surrounding the current business model of MedTech Solutions business, pending the finalization of regulatory policy framework. Industrial Solutions continued its strong growth momentum on the back of manufacturing and testing demand. Data Security Solutions continued with steady performance driven by robust demand from BFSI and large enterprises. As the business navigates through challenging times, efforts on expense rationalization have helped to improve the margin. Coming to business outlook. We are optimistic about the prospects of Room AC business as the benefits of GST rate rationalization will spur the demand in quarter 3 of FY '26. However, unseasonal rains in several parts of the country continue to be a matter of concern. While the order inflow in Electro-Mechanical Projects business continues to slow, we expect a demand revival in Commercial Air Conditioning and Commercial Refrigeration businesses. Several initiatives have been undertaken for reducing both operating costs as well as working capital in order to substantially improve the H2 FY '26 performance. With that, ladies and gentlemen, I'm done with the opening remarks. I would like to now pass it back to the moderator, who will open the floor for questions. We'll try and answer as many questions as we can. To the extent we are unable to, we'll get back to you via e-mail. With that, we are open for questions.

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

First of all, congrats on a resilient set of numbers. My first question is on segment 1. Commercial AC. So Commercial AC, which is a higher-margin business, witnessed loss of sales as per your opening commentary. Overall, also, execution has been slow on account of rains. Yet your top line growth was, I mean, your top line growth was moderated to 16.5% versus 30% run rate before. Now this segment saw margin expansion, and it's also above our broader guidance of 7% to 7.5% range. So, can you explain how margin expansion happened? And sequentially also, it's been a sharp improvement. So, were there any favorable terms with our vendors here? That's my first question.

So, thank you for asking this question. This will benefit others as well. So, you are right. This segment comprises Electro-Mechanical Projects as well as the Commercial Air Conditioning and also the Service business. All the 3 are there. Now the margin in a particular quarter will depend on which are the segments that have done well broadly, yes. So, the weightage of Commercial Air Conditioning or the weightage of Electro-Mechanical Projects, how it is. Second part is connected with what kind of jobs in projects got closed, what kind of -- or segments played a very major role. Broadly for your guidance, the margins are good in Manufacturing Data Center segment. Margins are not that good in Infrastructure project segment. Again, in Commercial Air Conditioning products, we have ducted or Packaged Air Conditioning, which are conventional. We have got chillers. We have got also VRF systems. Again, each one of them have different set of profit margins. So, in the quarter, whether it is 7%, 7.5%, sometimes 8%, you should not actually worry at all. What is the outlook? The potential for this business is just 7% to 7.5%. It can be 7% in some quarter, 7.5% in some quarter. Our guidance for the rest of the year is also the same, 7% to 7.5%, that's how it will be. This segment is not going to be dramatically improve the margins in the coming quarters at all because there are quite a bit of investments that are being made to enhance the reliability of the product. So therefore, we are putting money into the product. And normally, one will say that we are reengineering the product, and we are going to be improving the margins by value engineering. That is not the case because the product is becoming very digital with the electronics content being very high as the sophistication is being built and quite a bit of the products are being, or components are being sourced from India and many manufacturers are there for the first time. So, the guidance as far as segment 1 is concerned, it is 7% to 7.5%. That's what you should go ahead with.

Understood, sir. My second question is on segment 2. So, our top line has degrown by 10% and both Commercial Refrigeration and Room AC has declined. Again, your UCP margin has shown resilience. And what is surprising is Q-on-Q, it has actually improved. My question, and in conjunction, if I check your creditors, you've also made very steep payment to your creditors. So, my question here is, did we avail some good cash discount from our creditors, which actually protected our UCP margins?

A number of things. The very first thing is that in Q1, if you look at it, we were all investing for the summer season. And when April, it is not happening. Second half of April will happen, then we said May, it is going to happen. Weather forecast was also like that. So we didn't get into any cost-saving measures at all. Plus advertising expenses, it was heavy, like we were in IPL, that commitment was made. We had to continue with that. Now subsequently, when summer has not happened, you do many things. The very first thing is connected with advertising, which is easy to do and in-shop demonstrators, for example, and you go ahead and focus on manufacturing cost reduction, and you will be also seeking discounts wherever it is possible. But the significant part is connected with the cost reduction. That's what had happened. Now the going forward, again, you should ask this question, what margin we are likely to end the year with for your benefit, for rest of the analysts, fund managers who are all joining this call, we have been, first of all, the history is as follows that 9% to 9.5% margin outlook was there, then we toned it down to 8.5% to 9%. When the summer failed, we said that still 8% is possible. And as I see it now, as I keep in mind what is likely to happen in the coming months with huge inventory in the marketplace, I think we should be very happy if we end the year anywhere between 7% to 7.5%. And we will work towards 7.5%. It can as well be 7%. It all depends now on that February, second half, March. And the inventory has to move out before the energy label change. That's the outlook for that.

Got it, sir. One last question, if I may ask. You lowered your guidance from positive 5% earlier to now flattish. You had also recently addressed the media sometime around the festive period saying that our sales have been good, and we maintain our guidance. So just wanted to understand what really changed in the interim that we've, there's a cut in our guidance in just a couple of days.

It is good that you asked this question. So the question was that I repeat what I had been maintaining that whenever summer fails, I said the second half does well festival season as well the subsequent summer season buildup in Q4. Therefore, there is always a possibility that you can make up and grow even by 10%. That's sort of the beginning statement. When the GST cut came in, fine, we have to wait and watch how fast this GST implementation will happen. And post that, we will see and the 10% growth we had said full year, 15% potential was there. That was the thinking. The secondary sale movement between September 22nd and October 18th, 19th was 35% in our case, actual sale to the consumers from the channel. Post that, it is dull. The movement is not taking place. And the window that will happen will be only before the energy label change. And the rain continues all across the country. And so, the festival season has not gone well despite the GST reduction. It has helped to reduce the inventory. But what I could make out is that all the players are carrying inventory. In our case, I told you, we would have preferred it to be 30 to 45 days. Last year, it was 34 days as of now. But unfortunately, it is 65 days of inventory is there, if you add up what is in the channel and what is with us. So this will lead to the sale happening to the channel and the channel carrying the inventory even till February. So therefore, I am, even though I may be hearing on a wrong side, it is probable that February, March is so very great like last year, everybody is stocking up because there will be shortage of material in summer. I don't think that will be the situation. So therefore, one should be happy if it matches last year number. Even with that, the CAGR, if you look at it, will be some 18% for the industry, slightly better for Blue Star. And I'm also cautioning that it is now dependent on that 6 week in Q4. So yes, it can as well be a growth, which is minus 15%. It could be. So, the range could be minus 15% to 0%. But as of now, I am still hoping that we will, one can attempt to if there is going to be a good summer outlook. That's the change. The festival season has not gone on as one would have expected. And I also would think that there is a comparison that is being made with auto Sector. And obviously, that industry was not growing. And in this case, you are comparing with a huge previous year. And in terms of hierarchy, people may be putting that money in their hands into auto ahead of air conditioners, they will wait for the summer season, it is probable. Last line is I don't see any problem in the long-term growth outlook at all. It is just that this is a rain-affected year. Thank you.

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

The question is on the Commercial Refrigeration part of it. Last year, we have seen some challenges out there and there was a muted growth or even a decline in that segment. Could you kind of speak about how the growth has panned out in YTD on that segment, just to understand either qualitatively or with some numbers, whichever manner that you can speak about? And secondly, in terms of the RAC segment has said that there's a lot of inventories, et cetera. As we get into the year-end before the BEE rating changes, do you think there could be some pressure on margins as the industry tries to liquidate the inventory prior to the rating change by December? Could that be a bit of a challenge? And lastly, if I may also squeeze in on our working capital has seen quite a bit of an increase on our net cash levels going to net debt levels. As these inventories wound down by the year-end, do we see us coming back to the net cash levels?

On the cash part, Nikhil will explain. The cash is not connected with working capital alone. There's a CapEx that has to be incurred for long term that will also determine that. So the first perspective is when we talk about growth, we have to keep in mind, we are talking about growth over unprecedented year. That's what is probably giving a wrong picture. I again repeat that you calculate the CAGR, the industry has been growing, Blue Star has been growing even in Room Air Conditioners. So first, I will answer the Room Air Conditioner margins. If the inventory levels are higher in the market, and there is -- demand will be there basically because the energy label change is there. And once the energy label change is implemented, the prices will be higher for the new energy labeled products. So the demand will be there. So it is a question of the demand versus what is available and one's aspiration for the market share. There will be all players would like to reduce their inventory levels. And there will be pressure on the margins. And as far as Blue Star is concerned that we want to grow faster than the market. We have been disciplined about the margins. And we have the track record of maintaining the price discipline. So we will attempt to hold on to this margin level. But the same way, at the same time, we have indicated to you, we will, we would like to close the year between 7% to 7.5%. So the sum and substance is, there will be pressure on margins, but we have to deliver this, we will stay disciplined and find ways and means to achieve that profit level. But if the inventory levels are so very high, one should anticipate pressure on the margins. So this is the first part, the second part of the question. The very first question you asked is Commercial Refrigeration. Last year, yes, there were regulatory changes in terms of Bureau of Indian Standards in water coolers, and as well as deep freezer that had happened prior to March itself, but it impacted the rest of the period. Those are all over. But the growth, again, these 2 products are also impacted due to monsoon or rain, intermittent rains, but still it has grown. It has grown in the order of around 7% to 8%. But the market size being smaller, it cannot make up for the shortfall in the Room Air Conditioners. Outlook for that, that product, it will still grow. That's what we feel. And given that, that industry has gained significantly in the GST, the Food Products or Food Retail, they are all, our customers are all investing in huge expansion. So that should translate into business. And one can say that it will be somewhere around 7.5% to 8% growth at least should be possible in this financial year as a whole. Nikhil on...

Yes. So, coming to cash flow, as Mr. Thiagarajan also remarked, it's not just working capital. It is also CapEx that one has to look at in totality. And in this case, particularly, you will have to see over a period of time. You're right in saying that it was a net cash position last year and before that. And now we have moved to a net borrowing position. It has to be seen in light of last 2 years. If you see in 2023, we had a QIP, which, so there was a cash position which was available in '23 and '24 and '25 was an exceptional year in terms of sales. So you had very good cash accruals. At the same time, you had a working capital level, which were at a minimum. So all of that aids in cash generation. And you are seeing and comparing it with a year in which there is an inventory buildup, as we all know. So the working capital levels have gone up. At the same time, you have to continue with your CapEx. So given that, I think this kind of borrowing position that we are having is given. Looking at the projections by year-end, whether we will back be to the net cash position, I think a lot hinges, as Mr. Thiagarajan again said, on the last 6 weeks on how the February and the March turns out to be and how in December, the inventory levels can be brought down. If the year goes and well and the estimated kind of volumes do come back, there is no reason why we should at least not be, borrowing levels should not come down. But at the same time, if the last 6 weeks and December inventory levels don't come down, then we could see the continuing borrowing in the company's balance sheet. That's how it will be.

The next question is from the line of Umang Mehta from Kotak Securities.

Sir, just wanted to check on your Commercial AC, particularly for data centers, data center chillers. So from what we understand, you had some start in the air-cooled data centers and you're developing something on liquid side. Possible to share any update and any outlook on that particular business? That's the first question.

First of all, in data centers, MEP part of it, we are leading. So that doesn't involve any equipment manufactured by us. We continue to be a preferred vendor in that segment. Second part is connected with which are the equipment that we can deliver. So we do have some chillers and some chillers are being developed. And on the liquid cooling part of it, we are exploring some partnerships, and we are continuing to explore. I don't think that these products will be launched before the end of this financial year at all. And these are high-tech products, and one will have to look at the proper field trials and commercializing that product category. So it is not going to be making any kind of a significant contribution in this financial year.

Got it, sir. And the second question was on your slight caution in terms of order inflows in MEP. Anything particular that is kind of dragging the inflow? Because overall, we are seeing quite a lot of tailwinds, right, on data centers and even private sector CapEx.

No, it is not a slight caution. It is a serious caution in the sense, look, for me, the inquiry inflow will indicate order finalization trend. Now inquiry inflows are lower, and order finalization are taking time in quite a few segments. And then the existing projects are infra projects basically. They are taking much more time than what one would have estimated. So therefore, we will be cautious. You know our principle there. We are not chasing market share there. We are interested in good margins and our reasonable margins and good cash flow. So therefore, the caution is, see, the issue will be this, right, that when you have the hypothesis could be you have a bad summer, therefore, Room Air Conditioner business or Commercial Refrigeration business is impacted. That should not lead to suddenly changing our approach to Projects business. Our enterprise risk mechanism is very clear that we will be cautious. That is the truth. Just because there is a problem in Room Air Conditioner business, it is not that we will go ahead and book any order and try to keep the revenue up. That is not the principle of, or the philosophy of Blue Star.

The next question is from the line of Sandeep Tulsiyan from Sundaram Alternates.

First question is pertaining to we doing better than industry, definitely points to some market share gains that we've had in the quarter. If you could speak more on the regional color, how your strategy of gaining market share in North is panning out, market share gains in first half of this year were more pronounced in North, South or any other specific regions?

The first caution is that I will not, the results of many companies are not announced. I will not say that we are doing better than the industry. But I know in terms of the volumes, based on our estimates, I think in Q2, the industry would have shrunk by around 17% and our estimate is in Room Air Conditions, we have shrunk only by 12%. In H1, our estimate is the industry would have shrunk by 15%, and we have shrunk only by 10%. To that extent, we may have done better. Again, it is all our estimate. So that disclaimer I want to play it. The second part is that we have indeed analyzed the growth is, or the extent of degrowth is same across all regions because it is not making a significant difference at all. The Northern region has been doing better than the previous year because of our own penetration had been lower there to that extent. But there is no significant -- you can't figure out a single market, which is doing extremely well, definitely not. All are impacted in some manner.

Sir, second question is regarding this average selling price increase due to BEE norm. When you guide for, let's say, 5% growth this year, you are guiding more in terms of volumes, is it? Or you are building in this price increase, and the volumes will be down by, let's say, 5% to 10% and that ASP, you might be 5% higher for the year.

No, I'm not today, in my case, the volume or the revenue, I'm keeping the same or whatever change has taken place. The, if you're asking post the energy label change, but what I'm comparing with, I'm comparing with the previous year, correct? And there wouldn't be any significant difference. So one can say that for the period, January to March, because the energy label change has taken place, volume to price or the average price realization may be higher compared with the Q4 to Q4, one can argue. But indeed, it will be so. But right now, I'm not getting into that at all. I am keeping the average price realization of last year and this year same. On the basis, I'm saying the growth. For this guidance, I'm not changing anything.

Okay. It will be better in case whatever that price increase comes in. Last question is, sir, on the payables, I think there was a very sharp increase of INR 1,000 crores. I mean, we paid much faster in the balance sheet. Just checking on that, any specific reasons why it's showing the INR 956 crores increase.

Honestly, I keep having this particular quarrel with the finance provisions. It is all on that particular last day. And how it will make a difference, I don't know. That too in the middle of the year. So your question is that when somebody can pay on 30th of September or 7th of October. And so according to me, that is not the measure, that's what I feel. Nikhil can explain.

Yes, I think you have covered it. See, basically, you are looking at over March, one has to see over a longer period of time. I don't think at the month end, it's a right reflection because whatever gets built up in March gets paid out in April, and that's how one has to see. So if you just look at March to September, it is more or less going to be the story every time if you see. And one has to realize that it is a seasonal nature. So in March, technically, you will have more buildup also happening. So that's the other reason...

No, but I'm looking year-on-year, last year there was, let's say, INR 350 crores -- INR 1,000 crores suddenly seems very high. So that's the reason I wanted to check.

The next question is from the line of Aditya Bhartia from Investec.

Sir, my first question is on the inventory levels that you spoke about. Just wanted this clarification, the 60 to 65 days of inventory is the combined inventory that brand merge and channel is carrying. Is that so?

That's correct. You're right.

Understood. And within this, according to you, inventory is higher at both the levels. Even channel is already carrying much higher inventory. And to that extent, there may be some difficulty in selling inventory before December before the new energy efficiency norms come in. Is that the reason why you are anticipating some bit of pricing pressure?

Yes, 2 things being shared and keep in mind. First of all, you cannot stop the factory, correct, one. Second fact is that always for summer season, you start to build manufacturing and building the inventory from December onwards. You end up building the inventory. Now you have got, you do have inventory with you, inventory with the dealers. So you are regulating the production in such a manner that whatever you have produced, you will be able to sell, the dealers will be able to sell. Now the question is what dealers buy; they should liquidate it before the summer. You have to pass a judgment that what will be the summer season demand, and you can't wait for commencing the production in February for, or January for the February and March. And the new label products production also will have to be commenced. So it is a complex situation at the moment. Now fact of the matter is that the festival season have not gone on well. And one GST interruption, post that, there was good. Now you have got rains and disruptions, and it has to pick up at some point of a time around the 15th of December. That is why the caution eased. And I suppose all manufacturers are intelligent, they are not going to be blindly producing, correct? All of them will regulate. And it has happened in the past as well that is you do. But only thing here is there is a cutoff. I can't sell the, if you want to sell this product beyond 31st of December, you have to relabel that as per the new energy label norm.

So in that case, isn't it so happening that the new manufacturing we start doing as per the new efficiency norms because if we curtail production beyond a certain level, then unabsorbed overheads may also start hitting us.

All that in life, it carries on. The manufacturing planning is different. It is not, there are platforms, there are common components and how it has to be done. That is, we know how to do it. Exactly what numbers will be produced between now and 31st of December, that has to be closely monitored and done.

Understood, sir. And just the last bit on segment 3, which has been kind of struggling for some time. How should we think about this segment from a slightly longer-term perspective?

I don't think it carries a significant weightage to Blue Star's performance. It's a business we have been in for a long period of time. There are set of customers who are looking forward to Blue Star contributing in that particular segment. And it's not consuming any capital. And there are principals who are, who have a very long relationship. So industrial systems business, it will continue to grow. It is -- directly, there is a correlation with the manufacturing investments on the GDP growth. So one can say that at a CAGR of 10% to 12%, it will grow. The MedTech business, which is connected with diagnostic missions like MRI, CT scanner, right at the moment, there are regulatory uncertainty. They are yet to announce the regulations pertaining to the refurbished medical diagnostic equipment. That policy is in the making. Now we are not sure at all that how this policy will pan out. There is one Make in India requirement. Refurbished missions that obviously will have to be regulated in what form it will be regulated. We do not know. So to that extent, there is uncertainty out there. So the outlook is that till such time that policy is announced, which could be Q4 of this year, it is going to be muted. Industrial Systems with the growth in manufacturing or these products are consumed by even many laboratories, educational institutions that continues to do well.

[Operator Instructions] The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance Company Limited.

Just one question that is on Electro-Mechanical segment, so segment 1. Considering the slowdown in order intakes and order book, how should we think of growth for, say, next 3 or 4 quarters? And any qualitative color on anything is changing or anything is decelerating as far as growth is concerned? And in that backdrop, how should we think of profitability as well, not for this year, but say, probably next 4, 5 quarters?

For the segment 1, you are asking Projects.

Yes, yes, yes. Segment 1, yes.

Segment 1, there are 2 parts. One is the Commercial Air Conditioning. And I would say that, that segment has huge potential to grow again because it's a very large segment, where you have shops, showroom, boutiques, manufacturing, small hospitals, small health care and Tier 3, 4, 5, many such establishments getting air condition. My guidance will be, it will be having a CAGR of 12% over the next 5 years. So that is the industry. And we should do better than the industry, that is the attempt there. As far as Projects business is concerned, there will be plenty of opportunities to grow as infrastructure is growing. And as manufacturing is growing, as data center investments and data center growth also will begin because we are now having huge amount of inquiries, growing by 10% to 15% is very easy. But the question is that good cash flows, good margin. If that is the case, I would say that 10% growth is the guidance.

There is no deceleration. I mean, looking at the order book and order inflow, should we assume a couple of quarters or 3, 4 quarters, the growth rate may be lower?

No, it is not. I don't see a deceleration, definitely not. Right now, the order inflow was muted, but it should come back. That's not a problem. There is a reason. That business completely is cyclical in nature. So I will not look at a deceleration at all.

The next question is from the line of Manoj Gori from Equirus Capital.

Sir overall, when I look at the commentary throughout the call, so somewhere definitely, there has been caution. So just want to understand whether this is the near-term caution that we are seeing because you also talked about the demand momentum getting disrupted or probably you believe that this can actually your outlook for FY '27 also probably has been impacted and probably now your view has changed a bit. So if you can throw broad color on the overall because if you look at today on the commentary, we have found more cautious on Commercial ACs as well as on Room Air Conditioners. So just want to have a broad understanding about how we look at the things from near term, that is H2 and from FY '27 point of view.

Yes. So the Commercial Air Conditioning, there is no caution at all. It is that 12% to 15% kind of growth has been the story there. It is not suddenly going to become 25%, 30% and all that. It is never that industry has grown like that at all. And there is no caution there whatsoever. It is just that there were disruptions this year, and it is not summer dependent again. So there is absolutely no caution whatsoever in whatsoever in Commercial Air Conditioning. Projects business, we have been always cautious. The, ever since 2011, we are very clear that you won't chase market share. It has to be based on the free cash flows and margins. That's how it is. And that business is fully dependent on the order book that you have, order inflow that you are seeing. Now order book you have seen, that is not a significant expansion in the carried forward order book and the order inflow is dependent on also the inquiry inflow. Going by that, we are telling you we are cautious. And added to that, we do have, let's say, we have explained this earlier. There are infra projects, which are electrification, railways, metro railway, airport, water like that. There are data center factories is another segment. There are buildings as another segment. Buildings will include even hospital sorting. Now within these 3 buckets, we are, it's a derisking factor. What kind of orders I should have. And in that particular part, while the buildings or factories, data center, they are all getting executed as per the time frame, infra projects are taking time. Therefore, I am not able to release some headroom for taking other orders. That's about all. So therefore, we are cautious. I am summarizing. Room Air Conditioner is the largest part of the business. It is a summer impacted year and the rain keeps interrupting. There was a GST disruption. And even if you account for it, CAGR is 18%. And the CAGR outlook for that business is 19%. There will be a year in which it will grow by 25%. Another year, it will be minus 5%. It doesn't matter. And the outlook is positive, and we are, we have gained market share. We will move towards 15% market share. And by FY '27, we should get to 15% market share. That is a goal there. And Commercial Air Conditioning, by nature, it will be only 12% CAGR growth. And there, we will grow ahead of the market. So there is absolutely no problem. The Electro-Mechanical Projects, we will maintain it only at around 10% is there. The cash flow and the profits are important. So the caution is, you may be getting that feeling because I am changing the outlook. I said Room Air Conditioner, for example, can make up for the summer and still grow 10%. That has been the history so far. That is looking very unlikely. And if February, March does well, one can look at matching last year's market size. And quite probably, it may be even lower at this juncture, that's all I can say.

So sir, in this case on Room Air Conditioners, so keeping aside FY '26, obviously, this is a year with a lot of uncertainty. But if I look at a 2-year CAGR, let's say, from FY '25 to FY '27 when we have been talking about 15% CAGR growth, this indicates in FY '27, we should grow by close to around 30%, 35% for that 15%, 17% CAGR growth.

CAGR, you can't be doing 2 year, excluding 1 year. That's not the way to do it. According to me, if you look at the FY '20 to '26, it is 16%. FY '21 to '26, it will be 24%. FY '22 to FY '26, 21%. FY '23 to FY '26, it will be 15%. By many estimates, FY '25 to FY '30, it will be 19%. So don't worry about it.

The next question is from the line of Nirransh Jain from BNP Paribas.

I apologize if this question is already covered. Firstly, I want to better understand how we are expecting the secondary demand to pick up during the weak winter season on the account of energy rating change, given that the demand has already weakened post festive despite at least a 7% to 10% cut in the retail prices. So do we mean a pickup in the primary sales by brands as they liquidate their old inventory or the higher discounts to drive the secondary demand during this Christmas and New Year period?

So first part, the growth we are talking about is over the previous year, previous year also winter, this year also winter. Previous year, there was no energy label change. Now there is the energy label change. What is the significance of energy label change? So you're buying a 5-star air conditioner. The 5-star air conditioner, which is before 31st of December and post 31st of December, there may be a 7% to 10% price increase. Of course, the new 5-star will be highly higher energy efficient, but the consumer will think that I'm buying a 5-star air conditioner, which is a 5-star air conditioner of 2025. So therefore, it comes as one added thing. Second is that the GST has brought down the price and there was lull post Diwali. So what has gone wrong? Nothing has gone wrong, right? The penetration levels are lower, and people want to buy air conditioner. And it is, because last year was a huge year, we are feeling the pain. Otherwise, I don't think there is something fundamentally has changed, or some other product has replaced this product. So therefore, in Q3, whether compared with the previous year, yes, 10% growth should be looked at by all means you should look at it, and it can happen. The caution is only there is already enough inventory there in the field that has to get liquidated and the dealers' working capital level should permit them to stock other products for me to post revenue. That's where we are.

Sure, sir. Very helpful. Secondly, sir, I just want a clarification that when we say 65 days of sales approximately at the channel and brand, so is it possible to quantify this in terms of approximate volumes? Asking this because like when we say 2 months of sales, whether it is the 2 months during summer season or the average monthly sales for the entire year. So how do we look at it?

No, no. When I say this, it is estimating the sale during this winter season only. It is not summer. In summer, this will mean that 15 days of summer inventory. We don't do that at all. When I say as on date and looking at the winter season sales and how much more is there. And I said that normally one would have been happy with 45, it is at 65.

The next question is from the line of [ Bhagyashree ] from Kotak Securities.

So I assume the Unitary Product segment includes the cassette ACs and the tower ACs, which are used in projects. So just one confirmation whether this is a part of the UCP business? And can you help us with the growth numbers, particularly for Room ACs for quarter 2 of FY '26? And what is the year-end outlook for the same?

So cassette AC will be used by many parts, even the Commercial Air Conditioning will use it. So the factories produce and in the Commercial Air conditioning product, even a Room Air Conditioner may be there. So that's fine. So you cannot say Commercial Air Conditioning is reported under, sorry, cassette air conditioner is reported only under Commercial Air Conditioning. It is reported, if it is part of that application, it will be. If it is part of Room Air Conditioner, it will be. So that is the first part of it. Now I have stated this a number of times that Unitary Cooling Products comprises Room Air Conditioners as well as Commercial Air Conditioning products, and it is difficult for us, it will become a selective disclosure. But if I'm to look at the industry volumes, based on my estimate, I think the industry volumes more or less the revenue degrew by 17% and Blue Star volumes would have degrown by 12% in Q2.

The next question is from the line of [ Sucrit Patil ] from [ Eyesight Fintrade ] Private Limited.

I have a forward-looking question on Blue Star's long-term direction. As more players are entering or may enter the cooling and refrigeration space, what is Blue Star doing to build a strong edge, not just through product range or distribution, but something deeper like a way of working or thinking that grows over time and makes the company standard amongst the peers?

No, it will be applicable for all companies, all products. So the very first thing is that whether you are in a growth segment and whether you have got leadership there. And we have been a long-term player there, and we have good reputation for being there. If it is so, I, when the industry is growing, I should be growing if I keep doing the good things. That's the first part of it generally. The second part of it is that how you continue to grow or expand your market share. So you said that other than the product range, product is very important that whether your products are innovative, products are reliable, products are available at all price points, and it is able to compete and overall competitiveness, therefore, that you have to continue to invest and build because in a fast-growing segment, there will be many competitors, all of them reputed, all of them trying to grow their own market share. The third part is that the intangibles, how you will excel. The important part is the customer experience, whether it is in delivering a product, in installing a product, and in the lifetime, how you look at the consumer. And next is that how you improve your operating efficiency through digitalization. And therefore, you are able to improve your profitability. A lot of things together have to be orchestrated in order to maintain your leadership position and grow. And this will be same for all leaders in all categories. And we want to stay ahead of the curve in anything that if innovation is going to take place, whether you are ahead of that, whether energy label change is going to take place, you are ahead of the curve, whether refrigerant change is happening, whether you are ahead of it, whether there is a digitalization, whether you are ahead of it, AI, whether you are ahead of it. So that's how you play.

Okay. My last final question, again, a forward-looking one on margins and cost planning. As GST changes and weather disruptions keep on affecting demand, how are you planning to protect the margins? And are there any smart internal methods that you are going to be putting into place that helps you keep the delivery quality high without putting any pressure on the profits?

Yes. So broadly, how you will weatherproof your business because the weather can spoil the game. So there is no doubt about it. And so, you will, each time this happens, you will try to become smarter, and I'm not claiming we have become smarter. The question is whether there are other portfolios which will protect you, which means equal attention to B2B products as well as B2C products. The second is even Room Air Conditioner, there is a significant amount of consumers who are B2B within Room Air Conditioner, how you will enhance your share from those customers. The next part is connected with how you will have the inventory production management in such a manner, you are able to manage the disruptions without saddled with a huge inventory. And that is beginning to happen because earlier, we, the industry was dependent on, Blue Star was dependent on imports, in which case the material would have arrived because you are now manufacturing in a big way, you can at least curtail the production. And component ecosystem is evolving, so you are able to curtail and manage the component ecosystem. Still whether you have mastered that, I wouldn't say so. And because it is that 3-month window is very significant. Any business that is seasonal, there will be some pain if the season is not happening, but we continue to work on various initiatives. Like, for example, you might have ended up advertising in IPL anticipating that there is going to be a summer season, if summer sales, you will be. But next time, we will be very clear. I may not go ahead and incur the expenditure in advance, and suffer. I will have to change my marketing expenses mix substantially in order to weatherproof ourselves. So these are the pictures.

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.

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.

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