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Ladies and gentlemen, good day, and welcome to the Blue Star Limited Q1 FY '24 Earnings Conference Call. We have with us today from the management, Mr. B. Thiagarajan, Managing Director, Blue Star Limited; and Mr. Nikhil Sohoni, Group Chief Financial Officer, Blue Star Limited. And there will be an opportunity for you to ask questions after the presentation concludes. [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. Thank you for joining this call. We had the opportunity to meet many of you on May 5 that was the physical meet at the Hotel Four Seasons after we had announced the results for FY '23.
So you may be aware in that conference and subsequently in many interactions, including television interviews, the concern about the unseasonal range during summer season and therefore, Room air conditioner sales may be impacted and what we are doing.
So we have said that this is not expected, but we will figure out how we go forward. At least we are in the room air conditioner business, we have to cope with this kind of uncertainties. It can always rain. And the industry was impacted, we were also impacted to an extent.
I had always [maintained] that given the penetration levels in the room air conditioner segment, the long-term prospects for that business will continue to be good. And we have gone on to even project from the industry or individually from Blue Star that for the financial FY '24, I think the industry will be growing by at least 10%. The 15% is still possible, and Blue Star grow faster than that, that are in the direction with which we have been working.
The important thing was there was a huge buildup to the summer because the IMD forecast was we have a very favorable summer season for companies such as ours. Fortunately, unlike the earlier years, where one will end up building inventory through the import route and you will find it difficult. Relatively, we are better off because of the component ecosystem that has evolved and the finished goods manufacturing happening in a much bigger way than what used to be in the past.
So therefore, you can be rest assured that there has not been an inventory pressure. And the inventory pressure can lead to dilution of prices, and we can -- one will take a longer time to recover when the festival season sets in. The second part is Blue Star's own business model there. We are not entirely dependent on B2C business alone. We have a strong B2B portfolio as well.
Fortunately, for us, the other businesses, which are electromechanical projects or commercial air conditioning, commercial refrigeration, these businesses had risen to occasion and to deliver and partially compensate for the shortfall that would have happened in the room air conditioners business.
The good news was that the month of June was far better than the month of May. And we are hopeful that the rest of the year, even the room air conditioner business, should come back to deliver higher growth than in the previous year, this is where we are. So you have seen the results. And I will hand it over to Mr. Nikhil Sohoni, who will take you through the highlights for the quarter. Post that, we will -- and sorry, [indiscernible] including the announcement that we will raise additional capital. And I suppose many of you will have questions related to that as well. Thank you very much.
Thank you, Mr. Thiagarajan. So good morning, ladies and gentlemen. This is Nikhil Sohoni, and I'll be providing you an overview of the results of the company. We entered the Q1 FY '24 on a strong note on the rings of an exceptional Q4 FY '23 with us [indiscernible] carry forward book and a promising summer season, with the projects business continuing to do well in the quarter and seasonal rents across the country resulted in a muted demand for industry products.
The company strictly took necessary corrective actions and tends to it's diversified B2B business portfolio delivered good results for the quarter. Financial highlights for the quarter ended June on a consolidated basis, are as follows. Revenue from operations for Q1 grew by 12.6% to INR 2,226 crores as compared to INR 1,977 crores in Q1 of last year. EBITDA, excluding other income for Q1 FY '24, improved to INR 145 crores, that has EBITDA margin of 6.5% as compared to INR 123.31 crores in Q1 of last year, which was an EBITDA margin of 6.2%.
PBT before exceptional items grew by 12.8% to INR 113.61 crores in the current quarter as compared to INR 100.7 crores in Q1 of last year. Tax expenses for current quarter were at INR 30.24 crores as compared to INR 26.34 crores in Q1 of last year. Net profit for current quarter grew to INR 83.4 crores as compared to INR 74.4 crores in Q1 of last year. Carryforward order book as of June 30 grew by 37% to INR 5,359 crores as compared to INR 3,901 crores as of June last year.
Carryforward order book for March '23 of [indiscernible] 31, if you remember, stood at INR 5,042 crores. As reported earlier, the company continues to invest in manufacturing capacity expansion as a part of its growth plans to improve profitability through localization. Consequently, the capital employed as of June 30, 2023, increased to INR 1,700 crores as compared to INR 1,018 crores as of June last year.
We also continue to invest and expand our R&D portfolio. Thus, we ended the quarter with a net borrowing of INR 283.5 crores with a debt equity ratio of 0.21 on net basis as compared to a net cash position of INR 81 crores as of June last year. Considering the growth plan and ensuring CapEx requirements of the company, the Board has approved raising funds by way of QIP to ensure a balanced and optimum capital structure.
Coming to business highlights. Segment 1, that is electromechanical projects and commercial air conditioning systems, the revenue for this segment grew by 19.1% to INR 949.12 crores in current quarter as compared to INR 796.8 crores in quarter 1 of last year. The segment result was INR 66.6 crores, which was 7% of revenue in the current quarter, as compared to INR 45.2 crores to 5.7% of revenue in the last quarter. Order inflow for the quarter was INR 1,224.7 crores as compared to INR 1,365.9 crores in the Q1 of last year.
So Electromechanical Projects business, while there are fewer than anticipated orders from the commercial building sector, we continue to witness healthy bookings from factories and data center sectors, driven by continued thirst of the government in encouraging manufacturing investments.
We also witnessed an uptick in inquiries from health care and hospitality sectors. Additionally, inflow of inquiries and tenders in railway electrification and metro railway sectors remain [indiscernible] throughout the quarter.
Major orders were received from Indusind Bank Chennai, Maruti Suzuki, just to name a few. carryforward order book of Electromechanical Projects business was at INR 4,038 crores as of June in this year as compared to INR 2,777 crores in June 3 of last year. That was a growth of 45.4%.
Coming to Commercial Air Conditioning Systems, continued traction from the government, industrial and health care sectors, coupled with increasing demand from the education and retail sectors, enabled growth in revenue during the quarter.
Demand from Tier 3, 4 and 5 cities continue to be encouraging with significant and high-value orders from these towns. We continue to maintain our #1 position in conventional and inverted ducted air conditioning systems as well as [screw chillers] and second condition in BIS and [indiscernible]. We also received many significant orders for the recently launched centrifugal [indiscernible].
Some of the major orders received during the quarter were from Foxconn Technology Analor IOCL Baroda, Mindspace business [indiscernible] just to name a few. Coming to international business, business and economy activities in the Middle East markets continue to remain upbeat with significant growth plan [indiscernible] policies by the South government, there have been huge investments in the region.
Consequently, we witnessed strong demand for our B2B products across territories. Despite delayed summers, we also witnessed a growth in demand for our room air conditioners as compared to last year. The pace of inquiries and order inflows at Qatar continued to remain moderate with economic activities in the country yet to pick up after the peak [indiscernible] income. The operations of the joint venture in Malaysia is slowly bouncing back after a prolonged slowdown and weak macroeconomic conditions in the country.
We are also in the process of developing advanced products and solutions for North America and Europe. Coming to the second segment, which is the unitary products. The segment revenue grew by 6.3% to INR 1,198.5 crores in current quarter as compared to INR 1,127.6 crores in the quarter 1 of last year. Segment results was INR 89.3 crores. That is 7.5% of revenue in the quarter 1 of this year as compared to INR 91.1 crores, which was 8.1% of revenue in the quarter 1 of last year.
In the cooling and purification cross business, due to unseasonal range, demand for room air conditioners remained flat. Our growth was modest and the market share was maintained at 13.5%. Margins for the quarter remained flat on account of subdued demand. We continue to invest in expanding our distribution footwear footprint across the country.
For the commercial differention business, The [indiscernible] witnessed traction across all segments with an uptick in demand from hospitality, pharma and processed food sectors. With the opening up of the education, institutions and commercial establishments such as malls, we witnessed strong demand growth for our storage water coolers.
Additionally, with significant investments in infrastructure for warehousing and logistics segment, we witnessed growth in Modular cold rooms category. We also witnessed increased traction for our kitchen refrigeration equipment driven by growth of QSR and the hospitality sector. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms. Some of the major orders issued during the quarter were from new parliament house, new Delhi, DHL, Chennai and Nestle India, to name a few.
Coming to segment 3, which is Professional Electronics and industrial Systems. The segment revenue grew by 48.9% to INR 78.43 crores in the quarter 1 of the current year as compared to INR 52.7 crores in the quarter 1 of last year. Segment result was INR 10.5 crores, which is 13.4% of revenue in the current quarter as compared to INR 5.9 crores, which was 11.2% of revenue in the quarter 1 of last year.
With a steady rise in corporate CapEx across segments, we witnessed growth across all lines of business. The nondestructive testing businesses continued to gain momentum. Increased penetration and investment in health care segment by both public and private sector continue to create opportunities for the health care business.
Major orders were resumed from Tirumala hospitals, FIS paying solutions, Bushan Power Steel and Bank of Baroda, to name a few. Coming to business outlook. With continued investment in infrastructure sector and with the capital invesment cycle playing out in a significant manner in many sectors, including manufacturing. The demand for our B2B products and solutions is expected to be robust.
The demand for commercial refrigeration products continued to grow at a healthy pace, while the summer season impacted the room air conditioner category. Given the penetration levels, we hope the demand will revive in the festive season. As in the past, we will remain agile and implement necessary cost correction strategies. We are optimistic about the prospects for the rest of the year.
With that, ladies and gentlemen, I'm done with my opening remarks. I would like to now pass it back to the moderator, who will open the floor to questions. We'll try to answer as many questions as we can. To the extent we are unable to, we will get back to you via e-mail. With that, we are open for questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Bhoomika Nair from DAM Capital.
Yes. Sir, my first question is on the Unitary Products segment. We've seen about a 6%, 7% kind of a growth. And if I think just some color on how the actual RAC and the other commercial refrigeration that as the business has done, because we understand the market has been seeing actually a bit of a decline. And we mentioned that our market share has been fairly steady. So is it possible to get some color on the breakup of the revenue growth of how these 2 parts of the business have performed within the segment?
I'm trying to understand your question. This Thiagarajan. You are saying that there are room air conditioners did grew and that is compensated by commercial refrigeration. Is that your question? .
Yes, sir. Yes, sir.
It will again become a selective disclosure. For a simple reason, you are not aware of what it was last year also. I'll put it like this. I think the industry would have been grown by 10% in the room air conditioner business. That is my estimate, okay? And I think we would have grown much lesser because the institutions they do a larger share, then you can draw your own conclusions.
Got it, sir. Understood. Understood. So is it fair to say that means that we have gained market share because we've obviously not [indiscernible]...
Very, very marginally. Very marginally. So the other thing in this market share debate a lot I can do for 6 hours. -- you are all seeing the market share based on the numbers, the revenue, correct? It is not based on the volumes.
So quite a few data that will be available in the public domain is based on the volumes. Now there had been a valuable change, and there had been a repositioning of our products itself say from [indiscernible]. Our average price penetration per the unit would have come down because we are into affordable segment as well.
So you will not be -- unfortunately, what about the data architecture, data ecosystem that is available in this country, you won't be able to figure out any of this at all. But we want to be transferring to the extreme possible without violating any of the regulations. In that context, I can tell you that even though our volume would have grown in the value terms, I think we would have gained market share. It would have remained the same is our assessment.
Okay, sir. Understood. So my second question is related to the funds that was brought up. What is the requirement for this? Or where are we looking to kind of utilize these cash flows? And would it be in value to equity or given that we are largely debt fee, there would be a mix of debt and equity as well?
Nikhil will answer that.. Yes. So in fact, this particular question since many of you will have, you can -- he will elaborately answer this question so that the others can use their opportunity for some other questions .
So unit, what the intention of the fund raise is to ensure that the company always has an optimum capital structure. So we have -- of course, this raise will be primarily equity -- that is what we are targeting to do. And with that, what will happen is what you see is a net debt level. So the net debt level was INR 284 crores around in this June. Because, as we said, last June, around INR 87 crores cash position. So there is a slight increase in debt. And at a gross level, the debt is at around INR 600 crores.
So we want to ensure that as we grow, we have had a substantial CapEx, which we have done in the last 2 years, which has primarily been funded by internal accruals. And while that will continue to fund CapEx going forward, we also want to ensure that we have sufficient net worth available should the growth capital be reached by way of debt going forward. So there will be CapEx, which will be happening over the next 3 years, which we need to fund. We have to ensure that we have sufficient balance sheet strength to raise debt going forward. All of that requires us to have a very strong balance sheet, which will which this equity raise will kind of enable. And that's why this fund infusion has been thought about.
As of now, equity is what we are targeting for. But of course, the resolution, the Board that approval has come is open. And by way of QIP, we can do debt or an equity, but primary intent is equity.
Okay. And the [use of] funds for what will be -- I mean, we started our [indiscernible] facility. So where will this CapEx be utilized towards?
So the CapEx is a continuing thing. So current year, as you are aware, we are also investing in sub 300 liter capacity at Vada. We are also investing in the city. We have kind of a capacity which goes up to 300,000 today, which will [indiscernible] which will go up to 600,000 as we go forward. So CapEx is a continuing thing which will happen.
As with [indiscernible] the volumes go up in value terms, given the working capital requirements are going to be there. Between the seasonal industry, you're aware that at June level, when we are seeing now, it is perhaps the lowest level of the inventory. And as we go forward, working capital also has to be built up for to support the scale. We will also try to see if we can retire some debt, which is there on the books, which is [indiscernible] be slightly high cost.
So all of that combinations will be done. So including working capital, CapEx, general corporate purpose, it will be diversified use of this money.
So to mention the Sri City, I will explain more. There are 3 phases there. What was what we had declared as commercial production is Phase I, which is 300,000 numbers. Total capacity it has got is 1.2 million. So there are 2 more cases that are supposed to happen in 3 cities.
In the meanwhile, the other information is also in public domain that the current factory is around 20 acres. We have bought 40 more acres of land in Sri City, which internally we call it as Sri City II that is meant for commercial air conditioning products, both for domestic and export markets. And after completing Phase III, we will commence the construction of the Sri City next plant.
So Nikhil might mentioned that it is basically for the capacity expansion in line with our growth plan. And it is also coming at a time where we had postponed this investment for many, many years, as you may recollect, it was in 2011, '12, we started with Jamu. And Sri City land itself was bought, and we waited and waited and waited for us to get the confidence that, yes, these capacities are required. And so primarily, i think this is a reason for our raising capital.
[Operator Instructions] The next question is from the line of Ravi Swaminathan from Spark Capital.
My first question is with respect to the ordering environment regarding the first segment. This quarter, we had seen roughly around INR 1,200 crores of order inflow, and it was more or less kind of flattish compared to last quarter -- corresponding quarter last year. And after many quarters of successful growth, there has been some kind of cost. Do you think this is temporary? What are the factors that are likely to grow, I mean, drive the growth further going forward. If you can elaborate on that, are there any large infrastructure orders which are there in the pipeline, which can drive this growth? If you can talk more about this, it will be very great. And also the quality of those orders in terms of profitability, is it improving at the same pace or probably even declining for [indiscernible]?
Sir, I mean, thank you for question. The simple answer is the construction cycle is on, very healthy inquiry pipeline is there, quite a few orders are under finalization. So be in that kind of a business. So there are many things that have happened.
Number one is that we have always maintained. We are not building a market share there. we are interested in profitable growth and free cash flows. That is the principle as far as that distance is concerned. That continues. There is no change in that.
Second is that we want to maintain our differentiation as a superior project delivery, the huge order inflow, which was beyond our expectations. We never anticipated last year, such kind of order inflows will be raised, which means we have to beef up our design execution team.
Imagine projects business is not like a factory where everything is in a controlled environment. And you have to mobilize people. You have to execute it. And there is a lot of focus that is going on. Because easily, you will get into a crisis where the customers are complaining or commercial controls are lost. So we were very clear in terms of building the order book. We will go in a particular manner. This is the second reason.
Third is that it is natural for any company. If you have healthy order book and you're just about able to execute, you should be looking at healthy margins, healthy cash flows, that is how you will end up booking the order, you will not go on and dilute. To answer your questions, any order that had been booked in [indiscernible] 2 of last year or this particular quarter or in the next few quarters will be of very high quality. That is very clear that comes under the ERM or the enterprise risk management, the Risk Committee's strict review itself.
So you are aware of -- much more than anyone else, you are aware of this business history, what the industry went through what we have gone through. So we are very clear about that as well.
Now in a particular quarter, you may end up losing an order. And because you wanted a particular price and or someone else quoted very attractively, it is always probable. But looking at the pipeline, there are quite a few segments which are doing extremely well in terms of inquiries and order finalization, these are manufacturing followed by data center, health care.
We are beginning to see hospitality sector coming in. Quite a few airport inquiries are going to be floated. And there is -- in the packaged air conditioning segment, Tire 3, 4, 5,000 are doing extremely well. There again, you are seeing small hotels or education institutions or marriage halls on and so forth. There is -- if we are looking at segment wise when we look at it, there seem to be -- again, we are not sure whether our conclusion will be right, there are better institutions to tell that. I think office space consumption has slowed down compared with last few quarters. But then our growth is not, in the past few years, we have moved away from real office buildings. I hope I answered all your questions.
Yes. Thanks a lot for the detailed explanation. Is the driver for the third segment very similar to the per segment or there are differences there? Are there structural growth trajectory [indiscernible]?
It is simply different. It is based on the CapEx cycle. It is driven -- in my view, it is directly related to the manufacturing-related CapEx and the banking financial institutions-related CapEx. The health care partners is not dependent on anything. It is a segment which continues to grow.
Got it, sir. And last question, what will be the CapEx plans next 2 years for FY '24, '25?
In the AGM, this is a similar question. My rough estimate is somewhere around INR 750 crores over the next 3 years. The -- much of it may happen in FY '24 and '25, the '26 will be lower. This is our rough estimate. But again, Blue Star has been very conservative in moderating it according to market demand or what we want to do. You can take it as some INR 750 crores.
The next question is from the line of Rahul Gajare from Haitong Securities.
Sir, I have 2 questions. The first one is on the UCP business, basically. Given that we've seen a 6% growth in the segment and the industry has seen a decline and even the room air conditioning has seen a decline. Is it possible you can throw some light on how the regional sales have been for you? How the growth or decline has been across the regions? So that's the first question.
I think [Tamil Nadu] did well. But again, it was April, it did extremely well. May 1 half, it did extremely well. Andhra Pradesh also was like that April and May 1 half, you can say South as a whole. East, Northeast, throughout the season did extremely well. And Gujarat did well. And Mumbai was not -- Mumbai was one location where it was March and the April first 10 days. After that, it didn't pick up at all. See, the complete North would have been all bad according to me.
Sir, is it possible you could actually quantify how the growth generally was in the south for the quarter? And how bad was it in the north and so on?
Again, it is compared with the last year, you are saying, right? But last year, some locations would have done [well]. Say for example, Calcutta, when we say that it has grown by 40% over the previous year. How badly we did, we don't know in the East. And according to me, East was flat compared with the previous year. So I don't think that data is going to lead. And I am of the view whether the -- I'm increasing I'm coming to this conclusion even with the government or policymakers. The overall market size of room air conditioners was 8 million units.
That 8 million units should have moved up to 10 million in FY '24. So we should be worrying about whether 10 million will happen or not. That 10 million is supposed to become something like 13 million by FY '25. All the PLI schemes, the government working projections, everything is built on that particular one. The manufacturing capacity expansion of various companies also will be broadly based on these numbers. So I would be focusing on whether 10 million is becoming 12 million, not some location grew or didn't grow. I don't think it is going to give any kind of an indication. And I am of the view there is a possibility still that 8 will become 10 this year. And the Blue Star won't go [indiscernible] from 8 lakh numbers, what we did last year, we should do 10 lakh numbers. And what is going to happen is it will be festival season should do better than last year. because summer season, people are not bothering if you look back at the history, whenever summer has failed, festival season will always be looking good.
And it is very likely that January, February, March will be a big thing that will be happening. And otherwise, my number of East have grown by 40%. For example, Tamil Nada has grown by some 30% in our case. I don't think that is an indicator of the market.
And again, another thing in this. The whole thing is the primary sales. So whether it really got sold out in order to estimate, that's why I said this data ecosystem is something which is yet to mature in this particular industry. So best thing to do is whether 8 lakh numbers will become 10 lakh number, and I believe, though the data comes much later, thereof energy efficiencies overall data that what is a license fee, they collected for the DA labeling. This again, they don't publish it as brand wise or something like this but for the estimates of the government and the policy, they do share the data in a limited way. So my -- like Gujarat our growth, if I recollect, I don't have the papers in front of me. I think we grew by 20%. So in Q1, Gujarat growth of 20% is not going to be any indicator for any estimate.
Sure. Sir, my second question is on the projects business. We have a strong order backlog now. You did indicate given the analyst meet of your intention to go North American market, European market. Is it possible you could expect this order backlog that you have right now between domestic and international and the kind of profitability that you have in both these markets? That's my last question.
So first of all, the segment 1 is the electromechanical projects and the projects air condition. These 2 are there. The commercial air condition is parts in parcel of that. I think you know very well that our export presence today is Middle East and South Asia and the North Africa. This is the market.
Now the annual report very clearly gives you what is our export revenue. We are a miniscule player there. We there is a demand for our products in European market, in North American market. Therefore, we wanted to pursue these opportunities. We have set up [solely] 1 subsidiary in Europe as well as North America. I think I explained in the May meeting, in mature market, you cannot take an Indian product itself. If say, for example, As [indiscernible] said there will be a frequency itself is different. It's a 60-hertz product. It has to meet their energy efficiency norms, refrigerant norms and the brands to whom you want to sell, you have to get past the approval. So the R&D testing -- all this happens over a 12- to 18-month period.
There will be some trial orders that will be given to you for you to produce and they are to validate the product, and we want to be satisfied because we want to enter the United States market with a product, which is [of] big because our interest is much, much bigger interest and ambition there. It may take 5 years, 10 years, but we want to build because we are not going to be getting into at least we explained to you, we are not going to be in refrigeration, washing machine. If it is and conditioning and refrigeration, we want to do it as a global player in a big way.
That is the direction for us. So therefore, in this quarter, revenue or in this backlog, there is nothing that is significant from United States or Europe. It will be some trial orders. And I don't think it will be even $2 million or $3 million a day.
We will then -- we have significant order wins, we will be happy to report that this is the win that we have got. So right now, it is depending on nothing will be there. Depending orders comprise pending order book comprises Electromechanical Projects business and the commercial air conditioning business which are ducting systems and inverter VRFs -- inverter ducting and VRFs. This is it, yes.
The next question is from the line of Ankur Sharma from HDFC Life.
I'm not sure if this question was answered, but if you could talk about the channel inventory given the fact that, as you said, the companies and the challenge of preparing for a good summer and clearly unseasonally enforced.
So when will the channel inventory house that. And more importantly, we heard there is some price up, in fact, to clear out inventory as well. So if you could just talk about what have we been hearing what is competition doing and so forth?
Obviously, I can talk about our sense right. the inventory is not what it used to happen 3, 4 years ago. That is not the case. Because we are able to quickly moderate the inventory level. So it may be slightly higher, that's about all nothing alarming or nothing significant to worry about there. In fact, if we are to look at the working capital deployment, July of this year versus July of last year, there is nothing no significant change. It is more or less, let's say, working capital turns and remain unaltered.
Industry, there are some pockets. There are inventory. And now fortunately, this year, the dealers did not buy. They were also regulating their cash flows. Fukusawa had bought in May. They could buy only after clearing out their inventory. It has -- they have been also very prudent. On the whole, there may be pockets and some brands may be carrying an inventory, but I do not think See, the -- compared with the past, I'm also witnessing the industry has come to terms in their define it is a bad summer season. So what we will carry off. That's what I'm seeing a much different. Otherwise, they all will be running, crying here there, in the past, we go and say that reduce the [indiscernible] do is do that or not. I don't think so.
We have come to terms with that. And therefore, my conclusion is it is not a big thing. There may be some inventory. I do not think it is something impacting the industry in a big way and definitely not Blue Star.
Okay. And just second question on your guidance for the full year in terms of sales growth and margins for the UCP segment. Any changes there?
you know that this -- if you -- in January, I felt that FY '24 should be 20% growth and Blue Star should grow by 25%. Summary in April, I had said that it should grow by 15%, and we should be growing by 20%. And I think it will be somewhere around between 10% to 15% is my latest estimate. [Blue Star] should be growing in the same way.
And margins?
If we want to maintain the EBIT projections, which we have said, it will be for a full year basis, it is 8% to 8.5%.
Okay. So you're viewing the margin largely around the days [indiscernible]?
We said we will be always be concerned about that. If you are falling in margin 1 quarter again fall, but we are very clear that on a full year basis, we should be attempting. Again, this also had clarified that 3 years ago, pre years to COVID, pre years to [PLI scheme], we always felt that it will be 9.5% to 10% or at least 9% to 9.5%. No longer we are saying this, which you may take note of it. I think the -- with the capacity expansion that is happening and the new competitive landscape, one should be happy if we did the 88.5% .
The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.
I want to dwell a little more on the capital raise plans [indiscernible] due to it on that the balance sheet strengthening is the primary cause. But when I look at all the parameters today and the fact that we have done INR 600 crores of CapEx in the last 2 years and the next 2 years will not be that substantial. I'm still not able to understand why to raise capital unless there is a big plan on some investment because the DNA of the organization is quite disciplined on the working capital side, whether it be project business or whether it be the UCP business.
So just wanted to understand more, where is this money going to be? Or is it the experience of COVID where we at one point, were a little bit in a bit of a [pickled] situation. Is that leading to days of capital? Just that will help because equity comes with its own cost?
Yes. So thank you for the question. It's good that you asked that question as well. First of all, there have been -- this is a different question. You know That in my 10 interactions, 7 used to ask why you are not raising capital, how are you going to be funding this CapEx growth.
So it argued with. Look, it will grow, and you have been very considerative, we have to expand capacity. We have not been aggressive in expanding the capacity. And you know very well, they were the first one to come and share my room air conditioner plants under the PLI scheme in the industry and in Sri City. Now the -- we have been very clear that as corporate core competence, manufacturing, value addition is very important.
And for margin improvement, given our past margin profile, we felt that it is important for us to go ahead and invest in manufacturing. Third is that regulatory requirements call for you. If you have to operate profitably, you have to be doing it. Now the other important reason in room air conditioner, which is highly seasonal, where you start building inventory from December. So in the earlier conversations, you would have heard that even if the year 2017, '16, is this kind of a summer thing, we would have been stuck with huge inventory because the orders would have been placed, the LCs would have been opened and these machines will be. COVID year, that's what happened in 2020.
We had more than INR 450 crores of the inventory, and the more than 900 containers are coming in. And if you know that quarter, we paid some INR 8 crores of M&A charges alone, we took for holding that containers.
Now it is important in this business that you have that flexibility of moderating the inventory buildup. So manufacturing is important for that. The commercial refrigeration business, the more than 60% of the products we sold were sourced from China, that's how it was. It is a volume [indiscernible] product deep freezer and low-cost product.
The -- that particular product, something like 7% of the cost is in packaging. And then, the [indiscernible] and the transportation all put together was huge, some 16%, 17%, you end up spending for that.
Then you have the exchange rate going up. So that business will not be, you will not be able to justify importing anymore. You have to make it here. So therefore, we invested in developing capability, how you will develop that product at a Chinese cost. And we reached year before last at the Chinese landed cost, I will be able to develop a product.
And I can manufacture, that's how the deep freezer investment came in as that was up to 300 liters capacity, 300, 400, 500. Ice cream industry is growing. And when they are reaching Tier 3, 4, 5 or the process to food, it is calling for lesser capacity, 250, 200, 150, which is even more competitive in our every INR 10 or INR 20 will matter there. So we develop that capability, and we are investing there to go ahead and manufacture those smaller capacity. Now room air conditioners, we are very clear that this market will continue to grow. I don't -- what are we talking about? We are now talking about some 10 million units.
Hence, market size, domestic market size of 90 million units in China or a total capacity that is manufactured 130 million in China alone. So where is 10 million? 10 million will become 20 million within 3 years. 20 million will become 40 million within another 3 years. So there -- one summer season, all this will happen, but the direction is very clear.
Therefore, that capacity is required. Now one has decided that I will be only air conditioning and refrigeration company and you will go outside and sell. And we believe that we have the right to win business in Europe and in United States of America. There is absolutely no doubt about it because we hold those IPs, whether it is a VR system, whether it is the inverter, we have mastered that.
And in that context, if you want to sell, there is nothing there. We can't import from somewhere else And we are very clear that it is not necessary. Our calculation clearly shows that it is not necessary for us to set up a manufacturing unit overseas. It is not at all necessary for Europe or United States. And in that context, we need capacity. So it is mainly meant for our capacity expansion.
Now it is not to do with there will be another COVID. I think that's what it implies that we want some resilient capital in hand, If another COVID comes or something like that. When it may [indiscernible] happen, but this plan is not connected with that.
The question is when we have become INR 8,000 crores, INR 8,000 crore to INR 10,000 crores, INR 10,000 crores to INR 12,000 crores is a reality. And in that reality, what is the working capital need you will? Under our balance sheet had been [indiscernible] the very question of yours as answer. How will this network, you will be able to fund for the growth. And this is the background and Nikhil [indiscernible].
Yes. Just to elaborate, like you said, while there was a INR 500 crores CapEx in the past, the guidance that we have given now is around INR 750 crores over the next 3 years. of which also large orders which will happen in '24 and '25. So that's the primary reason why this fundraise is there.
Okay. Now my only -- I understand the entire argument on that. My only point was that net debt to trailing 12 months EBITDA is still half a time, and some debt is always good from a disciplined perspective from a corporate side.
So this will not become debt-free because our working capital financing will continue by way of debt, and that is going to happen. It's not going to become debt free. We will have the it is up INR 2,000 crores. So we are trying to bring in that optimum capital structure, which is required. We have taken an approval of INR 2,000 crores on the board, depending on our requirements over the next 2 to 3 years is what we are able to plan out.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Just 1 question from my side. [You have said] you have invested in captive compression facilities, given the reason that technology changes will be rapid, and that will be in our competitive edge, while Blue Star has stopped noting the commercial gaps and the [indiscernible], why would you believe it will not be a competitive disadvantage for you?
Thank you for the question. See, the commercial air conditioner has huge varieties of compressors. So the problem of this problem in India, it is a growing market. It is to reach optimal size. We are again in commercial is a miniscule country in terms of consumption. Now overall market shares are small.
Within that, you will have some 60 to 70 types of compressors. So it is impossible for India to be manufacturing that, nobody can manufacture. And globally, there are commercial air conditioners, commercial refrigeration compressor companies. There are plenty of them. And it is prudent for you to depend on. There is no reason for you to be doing captive. When you don't have the scale, it is ridiculous actually, the scale that there is some 300, 200, 100 compressors. You cannot set up a [indiscernible] all. These compressors are distinctly different applications. okay?
So therefore, commercial AC, our commercial refrigeration is not a concern. Come to room air conditioners. The [indiscernible] is a high technology product. And as I clarified a number of times, Blue Star is no longer concerned about the technological capabilities. Yes, it is a difficult job. We will have our own the learning curve to be developing a particular product at a particular price for a particular margin that we have to realize. I'm not undermining that challenge, but it is not impossible for Blue Star to do.
Our concern is connected with what is the breakeven volume that you should have. Now if Blue Star is making compressors, you can imagine, I cannot sell that to any other manufacturer because quite a few manufacturers have their own compressors coming from abroad. They are not going to buy from me. My competitors will not buy because there are compressor manufacturers also outside or why they should [indiscernible] very clearly competitive, which [indiscernible] the time of PMI has tried this, whether Indian companies can come together to set up a compressor manufacturing venture.
Calculation showed that for this case, it is really not possible. My view is that if you boost our when it reaches 2 million units in room air conditioners. This year, hopefully, we will be doing 1 million. So when we reach 2 million, you can evaluate whether at the cost, that It is viable for you. And as of now, with this 1 million or 1.2 million next year, 1.5 million, I don't think it is prudent for us to get into compressors.
The next question is from the line of Aditya Bhartia from Investec.
So my question is, again, on the fundraising plan. Even if you are spending, let's say, INR 300 crores, INR 350 crores annually over the next 2 years, we should be generating EBIT, which is going to be higher than that, actually significantly higher than that. Which should take care of your CapEx requirements as well as working capital requirements. Even if the net debt goes up, it will go up by a fairly miniscule number. So just unable to understand why exactly are we going for an equity risk.
Yes. So see, if you look at the debt number, today, my gross debt number, as I said, is around INR 600 crores. And net debt is around INR 285 crores. If you see as the company increases its scale, therefore, I just try to relate it to the earlier number where last year, it was a net cash position of INR 87 crores.
So as the scale goes up, the requirements are bound to go. The CapEx plan, which the company has until now, we are continuously funded from internal approvals. Going forward, as we said, we want to continue with this backward integration journey with the increase of product portfolio also, which will require investments in R&D. All of these investments will require us to spend around INR 750 crores.
Now If I had to use that kind of money over the next year or two, then I need to have leverage capacity, which will be available to me because that is not going to be the end of it. So you have to see the balance sheet, which will be ready for my future growth also after that. I have to see over long term.
As we said that we have invested in Sri City in one more land, which will be a Sri City 2, where we will look at expanding the commercial air conditioning after a year or 2. I think it is with the long-term intent that this planning has been done for balance sheet. It's not something which is only for next 1 year.
Okay. It is so, sir, that you don't want to have much debt on the balance sheet and at least on a net gearing basis, you want to be net cash positive at almost all times? Is that how you're thinking about?
We want to be prudent as far as debt is concerned, we never like to over leverage ours.
And sorry, just to harp on this, when you say over leverage up to what level of debt are you comfortable? And when I'm speaking about debt, I'm basically referring to bad debt levels.
So see, I would say that our net debt position anywhere above 0.225 to 0.3, makes us very uncomfortable. Also because this is -- the one thing we have to understand is in terms of rating, in terms of balance sheet strength, all of that, it becomes very important.
This is a seasonal business. So you need to ensure that your position is right through the seasons also. Suppose the season is bad, we are not influenced by high debt levels at that point of time. So you have to have that optimum balance for the capital structure. You can't be over leverage and then suddenly gets a problem over there.
Understood, sir. And sir, my last question is on the exports potential while what we're doing in North America, Europe sounds very encouraging. Just wanted to understand what are the kind of internal targets that you are having? are you thinking of these markets shaping up? And can they become a meaningful part of the business, let's say, over [indiscernible] year?
See, with U.S. and Europe, it is still just a dividend. As we said, we have communicated it will come out with the strategy in some another 6 months' time. We have got some anchor customers with whom we are talking.
We have already been present in the Middle East through which we are in touch with few of these customers. The market, of course, are promising, and that is why we have formed a subsidiary over there. At present, as we speak, we are connected with a few of them, and we feel that this market does hold a good promise. There is an immense potential there. of Course, we have to deliver on that potential. And we are confident [indiscernible] which makes us kind of very positive for this entire whatever start we have done in those geographies.
We'll take that as the last question. I would now like to hand the conference back to Mr. Nikhil Sohoni for closing comments.
So thank you very much, ladies and gentlemen. With this, we conclude this quarter's earnings call. Do feel [indiscernible] to revert to us in case any of your questions are not fully answered, and we'll be happy to provide you with additional details by e-mail or in person. Thank you.
Thank you very much. On behalf of Blue Star Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.