Blue Star Ltd
NSE:BLUESTARCO
Earnings Call Analysis
Q3-2024 Analysis
Blue Star Ltd
The company experienced robust performance with a significant 25% increase in operational revenue and an impressive 72% surge in net profits. These positive results reflect the success across all sectors, with B2B and B2C businesses thriving due to festive demand and possible pent-up demand for room air conditioners. Furthermore, there was a notable performance boost from infrastructure projects and continued success in smaller tier cities. The company's order book reached a new high at INR 6,038 crores.
The financial health of the company is solid, with a 25% jump in revenue from operations, reaching INR 2,241 crores. EBITDA margins have improved from 5.8% to 6.9%, thanks to better scale and higher gross margins. Pre-tax profits climbed 67.9%, and net profits reached INR 100 crores. The earnings per share (EPS) advanced from INR 3.03 to INR 4.89. Investment continues in R&D, digitalization, and increased manufacturing capacity, bringing capital employed to INR 2,298 crores, up from INR 1,505 crores the previous year. A healthy net cash position of INR 157 crores was reported.
The Electro-Mechanical Projects and Commercial Air Conditioning segment saw a revenue increase of 17.9% to INR 1,182 crores and improved margins of 8.2%. The order book for Electro-Mechanical Projects stands at INR 4,648 crores, signaling ongoing project execution momentum. The commercial air conditioning systems are bolstered by demand from various sectors, including health care and education, especially in smaller cities. The company maintained its leadership in ducted air conditioning systems and scroll chillers while ranking second in VRF and screw chillers.
International business witnessed a 35.5% revenue increase to INR 955 crores and a steady margin profile despite a slight dip to 7.1% from 7.4%. Success can be attributed to robust festive season sales, stability in raw material prices, and cost management initiatives. A strong room air conditioner market with an estimated 13.75% market share, coupled with growth in the commercial refrigeration business, has contributed positively to the segment's performance.
The Professional Electronics and Industrial Systems segment experienced a 20.1% revenue increase to INR 103 crores with a margin rise to 14.7%. The Non-Destructive Testing business gained traction, and the health care business profited from infrastructural expansion and investments. However, muted demand persists for data security solutions due to a shift towards cloud-based options. The company maintains a positive outlook, with expectations to close the fiscal year on a strong note despite regional conflicts posing some concerns.
Looking ahead, the company aims to cement its strong performance with vigorous execution of its substantial B2B order book. The products business is poised for growth, driven by low market penetration and heightened demand from smaller cities. The goal is to bolster the product portfolio while striving for expansion both within the country and on the international front. Despite geopolitical challenges in certain regions, the company forecasts ending the financial year optimistically.
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Ladies and gentlemen, good day, and welcome to the Blue Star Limited Q3 and 9 months FY '24 earnings conference call. We have with us today from the management, Mr. B. Thiagarajan, Managing Director, Blue Star Limited; and Mr. Nikhil Sohoni, Group Chief Financial Officer, Blue Star Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. B. Thiagarajan. Thank you, and over to you, sir.
Thank you. Good morning, ladies and gentlemen. It's a pleasure and a privilege to talk to you today over this earnings call. I am in a car in a highway. If it gets disconnected, Nikhil will continue the conversation. As you are already aware, we had declared our Q3 results yesterday. You might have noticed that we have posted a revenue growth of close to around 25% and net profit growth of around 72%. All businesses of Blue Star, whether it is B2B or B2C, have done well. We have witnessed a significant growth due to festive demand and perhaps the pent-up demand that would have been there for the room air conditioners business. Tier 3, 4, 5 towns continue to do well, and the businesses from light commercial as well as large infrastructure projects continues to be good. The carried forward order book stood at a record INR 6,038 crores. During the call, Nikhil will explain to you the highlights of various businesses. Post that, we will answer your questions. We have also declared yesterday that Mr. Vir Advani, will succeed Mr. Shailesh Haribhakti as Chairman of the Board with effect from April 1, 2024. We have also inducted 2 independent directors, Mr. Vipin Sondhi and Mr. Murlidhar Gangadharan.
Over to you, Nikhil, for your opening remarks. Post that, I will come back for questions and answers. Thank you very much.
Thank you, Mr. Thiagarajan. So good morning, ladies and gentlemen. This is Nikhil Sohoni, and I will provide you an overview of the results of Blue Star for quarter ended December 2023. So coming to financial highlights, there was a healthy demand for room air conditioners and refrigeration products during the festive season, combined with the growth in commercial air conditioning business that has resulted in a record growth revenue in Q3 of FY '24.
The company's focus on total cost management initiatives, product portfolio optimization and scale benefits has resulted in significant growth in profits. Financial highlights for the quarter ended December 31, 2023, on a consolidated basis are summarized as follows: revenue from operations for the quarter grew by 25% to INR 2,241 crores as compared to INR 1,794 crores in the Q3 of last year.
If you look at the EBITDA, excluding other income, for the current quarter, we have improved to INR 155 crores, which gives an EBITDA margin of 6.9% as compared to INR 105 crores last year, which was an EBITDA margin of 5.8%. So this improvement is due to scale and higher gross margins. PBT before exceptional items grew 67.9% to INR 134 crores in Q3 of the current year as compared to INR 80 crores in the Q3 of the last year. Tax expense for the current quarter is at INR 34 crores as compared to INR 21.6 crores in the Q3 of last year.
Net profit grew to a healthy INR 100 crores as compared to INR 58 crores in the Q3 of last year. And hence, EPS stood at INR 4.89 as compared to INR 3.03 in the comparative quarter of last year. The carryforward order book as of December 31, '23, grew by 24% to INR 6,038 crores as compared to INR 4,861 crores as of December last year. As reported in the preceding quarters, the company continues to invest in expanding manufacturing capacity, accelerating R&D, and digitalization as a part of its growth plan and profitability improvement programs. Consequently, the capital employed as of December 31, '23, has increased to INR 2,298 crores compared to INR 1,505 crores as of December last year.
Net cash position as on December 31 this year was INR 157 crores as compared to net borrowing position of INR 396 crores, which was a debt-to-equity of around 0.36 last year as of December '22. Coming to business highlights. Segment 1, that is Electro-Mechanical Projects and Commercial Air Conditioning. The revenue grew by 17.9% to a healthy INR 1,182 crores as compared to INR 1,002 crores in the Q3 of last year. Even the segment results at INR 96.6 crores in the current quarter, giving a margin of 8.2%, higher as compared to INR 71.6 crores, giving a margin of 7.1% in the Q3 of last year. Order inflow for this quarter was at around INR 1,260 crores as compared to INR 1,680 crores in the Q3 of last year.
Coming to individual businesses within this segment, the Electro-Mechanical Projects, while the slowdown and delay in order finalization in commercial building sector continues, inquiries and order inflows from factory and data centers continue to remain healthy. There has been a slowdown in tender inflows in the infrastructure sector. However, execution of the existing projects continue at a healthy pace. The company continues to be focused on profitability and healthy cash flow projects. The carryforward order book of the Electro-Mechanical Projects business was at INR 4,648 crores as of December as compared to INR 3,685 crores as at last year December end. Coming to Commercial Air Conditioning Systems, the industrial, health care, education and retail sectors continue to fuel the growth in addition to significant increase in demand from Tier 3 and 4 cities. The company continues to make significant investments in R&D and upgraded product portfolio. During this quarter, the company launched this new range of state-of-art indigenously manufactured centrifugal chiller. The first batch of chiller equipped with variable frequency drives was delivered and commissioned to Tata Electronics for its manufacturing facility in Krishnagiri. We continue to be the market leaders in ducted air conditioning systems and scroll chillers and remain #2 in VRF and screw chillers category.
On the international business, with our mission to expand our international footprint, apart from driving growth in Middle East and Africa markets, we are in the process of developing, testing and getting approval for our commercial air conditioning products for Europe and North America markets. We are in the right direction, and we'll continue to make investments in R&D and manufacturing in order to become a significant player, offering high energy efficient and sustainable products for international markets, both for heating as well as cooling.
During the quarter, the company commissioned Ashok Advani Innovation Center in Bhiwandi, which houses many first of its kind testing facilities for Indian and international product ranges, including VRFs. Coming to segment 2, that is Unitary Products segment. The revenue grew by healthy 35.5% to INR 955 crores in the current quarter as compared to INR 705 crores in the comparative quarter of last year. Segment results were at INR 67.9 crores, which is 7.1% of revenue as compared to INR 51.8 crores, which was 7.4% of revenue in the comparative quarter of last year.
Individually, within this segment, as you are aware, we have 2 divisions. One is cooling and purification products. So aided by good festive season, we witnessed a strong growth in room AC business. Even though the summer season 2023 was disappointing one, with a strong demand in Q2 and Q3, the revenue shortfall has been substantially made up. Stable raw material prices, exchange rates, and introduction of new entry-level products helped us to substantially maintain the margins in Q3. Our market share of Q3 FY '24 is estimated at 13.75%. Coming to commercial refrigeration business. Driven by strong demand for deep freezers and modular cold rooms, our commercial refrigeration business witnessed significant growth. As in the case of room air conditioners, stable commodity prices and exchange rate helped us maintain the margins. The total cost management initiatives helped improve the margin profile. The new energy-labeled deep freezers manufactured by the company have secured high degree of preference in the market. A new manufacturing line for small capacity deep freezers ranging from 60 liters to 200 liters has been commissioned and the products are expected to be launched in the quarter 4 of this year. The growing investments in warehousing and logistics sectors as well as the processed food segment is driving the growth for our modular cold rooms. We continue to maintain market leadership in deep freezers, storage water coolers and modular cold rooms. Coming to segment 3, which is Professional Electronics and Industrial Systems, the revenue grew by 20.1% to INR 103 crores in the current quarter as compared to INR 86 crores in the comparative quarter of last year. The segment result was at INR 15 crores, which gives a margin of 14.7% in the current quarter as compared to INR 11 crores, which was a 12.7% margin in the quarter 3 of last year. The Non-Destructive Testing business continued to gain traction with significant orders received during the quarter. The health care business is benefiting from the expansion of the country's health care infrastructure and the rise in private and public investments. With the data security solutions moving to cloud, the demand continues to be muted. Coming to business outlook, we expect to deliver strong performance with the continued execution of healthy carryforward order book in the B2B business. Low penetration coupled with increased demand from Tier 3 and 4 cities will continue to support growth in the products business. We shall continue to focus on strengthening our product portfolio and grow both locally and globally. While the conflicts in the Middle East region and Red Sea is a matter of concern, we expect to end the financial year on a high note.
With that, ladies and gentlemen, I'm done with the opening remarks. I would now like to pass it back to the moderator, who will open the floor to questions. We'll try to answer as many questions as we can. And to the extent we are unable to, we will get back to you via e-mail. With that, we are open for questions.
[Operator Instructions] The first question is from the line of Bhoomika Nair from DAM Capital.
Congratulations for a good set of numbers. Sir, on this EMP, we've seen a very strong margin expansion driven by very focused on the profitability aspect of it. Do you think that these margins are now the new normal around the 8-odd-percent and that's what we should look at going ahead?
You know, that part was segment 1 as Electro-Mechanical Projects as well as Packaged Air Conditioning and related customer service operations. So you may not be able to arrive at a conclusion based on every quarter. You have to look at full year what could be the potential margin? What is the margin outlook?
This particular quarter, the Packaged Air Conditioners segment, which is ducted systems and VRF, that business has performed well. It is based on the production and the orders that are being executed for that particular category. Some other quarter, you will have a project getting executed more than the Packaged Air Conditioners. So quarter-wise, may be a difficult thing to arrive at, but our guidance will be segment 1, you can look at between 7% to 7.5% operating margin.
Got it, sir. Sir, coming to the Unitary Products segment, we've seen a very strong growth that has been ahead of the industry. If you can just talk about what the industry saw growth in the current quarter? And how are you looking at the upcoming season? And what are you hearing from the trade in terms of inventory stocking, et cetera?
And another question related to that would be the margin profile. This quarter, there has been a little small blip in terms of margins. Anything to read towards that? And should we be trending towards that 8.5% margin that we had earlier guided for?
First I'll answer the margin, then go back to the other parts of your question. I think the margin for this financial year -- this financial year, as you are aware, summer was a wash out. After that, we are trying to pick up. The margin should be 8% to 8.5% for segment 2. That's what we will guide you today. Now the market. In a year, when the summer is not strong, the festival season tends to do well. We have always figured that out. Why it happens? People decided to postpone, and at the opportune moment, they are trying to buy. Second thing is, post the summer season, if the inventory buildup would have been there, the plans are not going according to the annual targets, the prices fall. You have seen that on a number of occasions. So therefore, the festival season has done that. And I suppose, the overall economy was good, the sentiments were good. It is good for the industry that after we had a major hit in the summer season, the demand picked up during these months. The demand continues to be good even today. I had mentioned long ago at the end of Q1 itself, whatever happens, given the lower penetration in this room air conditioner segment, the industry should witness at least 10% to 15% growth. I think it will again end the year -- around 15% growth is my estimate as of now. And Blue Star aims to do better than the market. It should be -- our target is to do 20%. Remember, March will be a very significant month. Now this particular year is not an energy label change year also, that it happened in July. There is no energy label change. We are witnessing another trend in the market, which last conference calls also we have said that more than 50% of the sale is happening through consumer finance scheme, which means there is an element of consumerism that is taking place. People are boldly going ahead and buying this. Next thing is connected with the Tier 3, 4, 5 markets. Even though monsoon was not all that great, we continue to witness good demand from Tier 3, 4, 5 markets as well. The important element is, in the past, the dealers would not like to miss the summer season sale, they will end up stocking, right? They will be worried the companies will not be able to deliver certain models, there will be advance bookings, and they will go ahead and stock. I think that system has undergone a transformation.
They are managing their working capital well. They are looking at the total domestic manufacturing capacity and what could happen. Depending on the demand, their stocking has become monthly. And therefore, if you ask me, are we beginning to stock for the summer? No. Are they hoping that the season will be good? Yes. That is because the festival season demand has been good and the winter has not been strong in many parts of the country. So they think that there will be good sales, so they are optimistic about it. Next part is, we had discussed last year also that the peak, which used to happen at May end, advanced to middle May, advanced to May 1st week, and more like April is the peak for this particular category is happening. And if the summer is going to set in very early, March could be the peak, April may not be the peak. And on weather, nobody will be in a position to bet, but the overall outlook is that this category will continue to grow.
There could be some summer season mishap or there could be some other element that elections are going to happen, so on and so forth. But I can share with you the estimates show that India is the fastest-growing market for air conditioning and refrigeration. Room air conditioner demand is projected to be -- market size is projected to be around 50 million by 2040. This year, it may cross 10 million, then you can estimate what is in store for the industry in the future.
Sure, sir. Sir if I may just squeeze in one last thing. Obviously, given the strong growth projection that is there, is there any easing off of the competitive intensity between brands in terms of lower discounting and schemes, et cetera, being offered or dealer margins coming down, et cetera?
I don't think. The competition will be intense. Just because growth is there, it's not going to. Because everyone would like to consolidate their position and improve their market share. That's how the consumer durables industry operates. So I do not think that it is going to be divided. There will be intense competition.
[Operator Instructions] We take the next question from the line of Pulkit Patni from Goldman Sachs.
Sir, I'll just extend what you said. One is that November, December obviously was much warmer than usual and the benefit we could see in your numbers. But on the contrary, it seems January is much colder than usual. Is that something you think that will have a bearing on Q4 in terms of demand? The second part of the same question is, you mentioned 50% of the sales happens through consumer financing. And clearly, all the consumer finance companies that have reported results, their commentaries seem to suggest that they are pulling back in terms of lending to the sector in general. So don't you think there is reason for demand to be actually much more muted at least in the near term based on these 2 trends? And maybe just continuing this how is the inventory in the channel? We understand that there's also been quite a lot of push of inventory into the channel in this quarter. If you could just comment on that as well.
So the first part is connected with the our -- we monitor weather across the country. And while the specific thing of January is colder is true only in some parts. Quite a few other parts, it is life as usual. So the January demand compared with last year, we expect it to be the same. I don't think there is a degrowth in the particular segment.
And the new models which are meant for the season will get launched, okay -- from now on. Many brands will release in January, February, March. So what tends to happen is that the dealers switching to the other models -- because in a consumer durable business, whenever you say it is something new, there is a customer pull. So that will begin to happen. So I'm only stating what is happening today. As on date, we are not seeing any demand growth slowdown at all. Equally, I am aware of the fact that there are small appliances where there is stress. FMCG, there is a stress. If you ask me whether it will catch up with that, I'm not able to say that from what I'm seeing in the market. The demand continues to be good. Whether it has the potential to slow down? Always there is a potential for it to slow down. The second part is consumer finance related. It is connected with the regulation of the RBI. As of now, they have not pulled back. If they are going to pull back, it will be a level playing field. It is not only meant for Blue Star. But equally, I'm seeing another fact that there is interest by many NBFCs to grow their market share in this consumer finance space. So there is intense competition, which will mean players like us will have to negotiate and get the best out of them, whomsoever wants to participate.
The third part of it is connected with the inventory. Always it happens, I told you, that you push into the trade, and the belief is that only if you push, you will get it. If you are not pushing, somebody else is going to push. That's how the sales guys operate in this sector. But the dealers have become smarter. Dealers are managing their working capital exceedingly well. I mentioned that this is a big transformation. Unless and until there is discounting terribly happening for a limited period, or someone will have to complete the scheme in order to qualify themselves. But overall, across the country, the dealers or the distribution channels have learned to manage their working capital well.
Another important point. I'm taking more time in initial questions, so that these fundamental factors are not repeated again and again. So broadly now, you have got the modern retail, you've got regional retail, you've got e-commerce, then you have got distributors and single outlet players. Significant amount of sale is happening through the modern retail, regional retail, e-commerce. So if you look at that, that part of it will be more than 50%. So these players are very organized and professionally manage and tracking store by store what is the inventory level. So therefore, the industry pushing it and the demand not going to be there in the subsequent month is incorrect. It is more or less that will give an indication of whether the secondary movement is happening or not.
So therefore, summary is, as of now, the industry is doing well. Blue Star is doing well. Prospects for summer is, the outlook is good, and the penetration levels are lower. And we think that the demand will continue to be good. And even if it is not going to be, which I keep telling often, the long-term direction is this industry is in its golden phase. What happened in China is happening here. It is the fastest-growing market. It will become the largest market by 2050 in terms of market size. That's where we are moving. And all other policy planning, whether it is energy, sustainability, e-waste, everything is built around this particular expectation.
The next question is from the line of Ankur Sharma from HDFC Life.
Two questions. One was, as you said, typically, we launch, and actually, the industry launches new models before the upcoming summer season. So do you think we would be looking at any kind of price hikes to be taken with that? Or do you believe that given where RM prices are and the correction that we've seen, or maybe because competition is fairly intense as well, there may not be any price hikes which could come through? That's one.
Second, I was just trying to understand your market share gains a little better. Clearly, we've outperformed the industry for quite some time consistently over the last couple of quarters. So if you could help us with your -- I don't know, either your region-wise market share, where have you taken the most share, what have you done differently? That would be very helpful.
So first I'll answer the market share part of it. It is 13.75%. And I think we continue to do well in South, West and East. In North, we have got scope to improve. And we do not have yet the data on market-wise, what will be -- region-wise, what will be our sales. All that I can tell you is if the all India average is 13.75%, it will be 200 basis points lower in the northern region.
Now we do have store-wise information. That is competitive. I will not be able to share. We know outlet-wise what is the size and what my share in that counter is. That data is available, I will not be able to share because it is competitive information.
Now the question on price increase. Price is dependent on the competition. I have a market share goal. I have an operating margin goal. I have to play around with this. Now I foresee that the price is remaining stable, okay? It can drop if there is going to be demand slow down, like it has happened in small appliances or FMCG, some parts. It can happen, but it will be known on -- perhaps February second half onwards, you will begin to see what is going to happen.
The new models are being launched basically to fill the gaps where at a particular price point, at a particular margin, you are not able to compete with your key competitors. Good news is that we are able to see distinct difference between -- the truth is that more than 90% are first-time buyers, that our entry-level products are preferred by them. 3 Star continues to be the dominating product category. 5 Star is only around 25%. Now there are clear emerging demands for heavy-duty machines in markets such as Punjab and North India. And you do have products which are smaller in size, like 1-ton. And I am seeing a trend where the 1-ton model -- or the demand for 1-ton expanding. That may be because the second or third AC for a home, that purchase is beginning to happen.
So the pricing obviously is going to be based on these factors. Like do I have a heavy-duty product? Do I have a competing 1-ton product? Do I have a product which I have fully localized. You are seeing still in places like Sri City, the factories being inaugurated. People are localizing. All these will impact the cost, and therefore, the pricing. And PLI scheme claims will have to be made and the people will now keep an eye on the PLI, which means they have to show a growth over the base year. This is a summary of it. As of now, margins -- sorry, the pricing seems to be stable. You have to watch February end, March, what is going to happen. Margins are being improved by us by various things, as Nikhil had explained.
Right. Sir, just a follow-up on the market share. Actually, my question also was what's driving our outperformance versus the industry? Clearly, that was my bigger question.
So the first one is connected with the items -- we are continuing to deliver highly reliable products, which are world class. While we have entered the affordable segment, even with an affordable segment, I would like to believe that our products are superior in terms of quality and reliability and performance, the first factor. Second factor is the Blue Star brand and the third is the aftermarket investments that we are doing.
The next question is from Ravi Swaminathan from Avendus Spark.
Congrats on a good set of numbers, sir. My first question is with respect to the first segment, the projects business. If you can throw some light on how the outlook is in terms of ordering for some of the subsegments there like infra industrial, commercial real estate, et cetera, that will be great.
Ravi, I think Nikhil stated that we are witnessing a slowdown in commercial buildings in terms of order finalization. And infrastructure segment, we would expect the focus to be on the pace of execution. With the elections around the corner, many projects are being accelerated for execution, and therefore, one can expect new projects will wait for finalization until July or August.
So we take it as a good sign for the simple reason, record order book, this is a comfort to predict what it will be, but at some point of time, I think this slowdown in inflow of Electro-Mechanical Projects orders is good for us. We can focus on execution, focus on tight working capital management, and then prepare for picking up the orders. So I anticipate that -- right now, there is a slowdown in one sector. I think a few other sectors also will slow down. What will keep growing is manufacturing and data center. That investments will continue to happen.
And do you see some last ticket orders in the pipeline, sir, across any of these sectors? So which can change the inflow phase in '25 or '26?
There are many tenders that are there like Chennai Metro and all that. But I'm not very sure that a number of them will get finalized before June, July.
Okay. And how do you think about the competitive landscape here compared to, say, 10 years back or something of that sort, especially in large orders? Do you see that stable or probably...
So it's a mad competition. The thing is that there are always players who will offer lower prices and much attractive terms. There are many players. So it's not that it's a comfortable competitive landscape. These are tenders, right? You have to compete and you have to be lowest one in private sector, manufacturing, or data center if somebody is going to be providing a premium and if you can demonstrate that you deserve that. Otherwise, it's an intense competition.
The next question is from the line of Abhishek Shah from Ambit Capital.
Congratulations on a good quarter. So a couple of quick questions. One was on the order book. You mentioned that we have a INR 6,000-odd crore order book currently. So what is the expected time line for execution? And secondly, what would be the current utilization? And any CapEx plans you have going forward?
The execution, you can take it as -- just kind of an order book, you can take it as around 24 months, specifically the Electro-Mechanical Projects ones. This order book will include the Unitary Products also, but predominantly, close to around INR 4,500 crores of orders, you should take it as around 24 months of execution time. On the other part, Nikhil will answer.
Yes. So coming to capital spend. See, we will be continuing to invest, as we have said, when we raised the QIP also. The spends will be going towards manufacturing, will be going towards R&D, digitalization. So all of these are on the lines. And as we grow, these investments will also be happening on a continuous basis.
Current year, we expect the spend is in the region of around INR 350 crores as of now in 9 months. And one good part is that all our manufacturing investments are modular, which means that as we see the demand go up, we can kind of continue investing in that capital expenditure. Same way, the product development is going to be the focus area and one of product diversification and growth, both for geography as well as for the domestic markets over years. So international geographies and domestic markets, that will be the focus area. And take advantage of digitalization. So CapEx is given. You can take an annual CapEx in the region of around anywhere between INR 250 crores to INR 300 crores, going up to INR 350 crores at times, but that kind of capital expenditure will happen in the company now at least over the next 2 to 3 years.
And just lastly on the current utilization?
Utilization of the QIP?
Just in terms of your current capacity, what levels are you at? And how much...
Okay. In terms of manufacturing capacity. So manufacturing capacity, I will say that probably we should be running at around 80% at least in Sri City, around. And XP also will be running at almost full capacity because of the demand which is there. So the capacities are running very good because the demand that you have seen and the revenue growth, which is getting translated because of that.
To further substantiate that, the room air conditioners part, this year, we should be closing -- we want to close with 1 million units and around 600,000 will be coming from Himachal and some 350,000 to 400,000 we should produce. I'm not talking of the sale, because you may be producing for the subsequent month as well. So what Nikhil mentioned as modular [Audio Gap] supposed to be growing at 3, 3, 3, in 4 phases. Himachal, it is at its full capacity, more than 600,000 it cannot produce.
The next question is from Natasha Jain from Nirmal Bang.
My first question is on the commercial refrigeration side. Sir, while we had done our channel checks, we found out that present counter for your refrigeration products was sold out. So just want to understand what's the current capacity there? How are we ramping up the capacity? And when can we expect better rollout or faster rollout in terms of your commercial refrigeration products?
See, first of all, the commercial refrigeration products are not sold through channels in large quantities at all. It is meant for very niche residential purchases. So first of all, which are the products we distribute, like the bottled water dispensers and deep freezers small in capacity, okay? Now our commercial refrigeration business comprises modular cold rooms, deep freezers of all capacities starting from 60 liters to 500 liters capacity. Now majority of the deep freezers get sold through the OEMs, whether it is Amul or Mother Dairy or Arun Ice Cream, like that. So it will not be sold through the channels.
The smaller capacity deep freezers, 60 liters to 200 liters, that was not manufactured by Blue Star. It was sourced and sold in the market. There is a non-tariff barrier called QCO and that import and selling has been banned. Anticipating this, we had gone ahead and set up another line for that in our Wada deep freezer facility.
The trial productions and field trials are going on now. So we will be in a position to deliver locally-manufactured 60 liters to 200 liters deep freezers from April onwards. Now it is not a significant part of our commercial refrigeration business at all. As I told you, it is in the showrooms for some residential customers who may want to pick up for storing meat, et cetera. But a 60 liter freezer capacity, many refrigerators also offer. There are refrigerators with even 100, 150 liters freezer capacity if they want to have. Now our priority obviously will be the OEMs who are buying thousands of numbers. This is the background behind your channel check.
Understood, sir. That's very helpful. And my second and last question is regarding the EMP order book. Sir, since many quarters now, we've been citing that we're moving away from the commercial building segment, because there we've seen maximum delays. So when can we expect this segment to be hived off completely or we'll still have exposure there? And going forward, what are the segments which will drive our order book?
So there is absolutely no plan to hive it off. It is operating as a wholly-owned subsidiary with its own Board and a specific focus. We know it is a niche business, and it is critically important for Blue Star for the simple reason, a, the first thing is, we have built capability in certain specific areas like industrial testing or data security or medical electronics in diagnostic space.
Second, it is a business with no capital employed there. It is a very limited capital employed and it generates a lot of cash. The third part of it is, sentimentally, it is important for us. This business has been with us for more than 6 decades and it has always made money. And the talent that we have built over the years is very remarkable. And many multinationals who are there in the country today came through that business, whether it is Honeywell, Johnson & Johnson, HP, all those people were represented by this business in India. Then when the market was larger, they went ahead. Our own professionals have gone there. So we maintain the relationship with those companies as well.
So this business will continue to grow. And I think the thrust area is connected with the medical diagnostics. That is the area which will drive the growth. Second area is an emerging segment, which is warehousing automation. We have some unique skills there, and that is connected with electronics and digital, and we expect that also to drive. So these are the 2 areas we will look at going forward in a significant way.
Understood, sir. And lastly, just 1 question for Nikhil sir. Sir, can you just explain the proportion of unallocated portion in the segment capital employed, because that seems to be very high for the past 3 quarters. So where exactly is this going into?
Yes. So Natasha, see definitely, with the QIP funds coming in, some amount of investments, both in mutual funds and fixed deposits kind of gone up. So that is definitely going to be there. So that's one area, I think, which you have to keep in mind, which will cause the unallocated capital employed to go up.
Understood, sir.
Next question is from Swati Jhunjhunwala from BOB Capital.
Congratulations on a good result. My first question is, in the UCP segment, is the entire growth volume led? Or is there a price variation as well?
Can you repeat the question, the entire volume?
Entire growth of 35% that you've reported, is it entirely volume led?
That's right. Of all the products there, including refrigeration products.
Got it. Secondly, in anticipation of the strong summer, do we expect capacity to be a constraint? Given that we are already running at 80, 90 sort of capacity utilization, is that a concern?
No, it is not a concern at all. What we want to do next year, we have full capacity, absolutely no problem. It's relatively a simple manufacturing estimate in that product category, right? So all models are known, and what numbers will come, and it is modular in nature. And you know one more thing that the window air conditioners, we do not manufacture, we source. So everything is intact for next financial year. Even the subsequent financial year, we know what capacity is needed, and Sri City, as I mentioned, is modular. It will expand.
The next question is from Anupam Gupta from IIFL Securities.
A couple. Firstly, on the RAC and the Commercial Refrigeration business. For the next, let's say, 2, 3 years, what sort of product gaps do you still see and where you will invest incrementally for the domestic market?
In terms of manufacturing?
Yes. So in terms of the product portfolio, as you have expanded your portfolio, you have covered a lot of gaps already, but incrementally...
Yes. No. In room air conditioners, the energy label change will be due in January 2025. So therefore, the positioning of the products will completely change, right? So there are 2, 3 things which drive a product portfolio. One is the regulatory, which is connected with the energy labeling now. And the second thing is that when you have intense competition, you need to keep on innovating. And you will begin to see, what we had launched 6 years, 7 years ago, which did not have demand, all that will start coming back at this point of time. The time is right. Like a Wi-Fi-enabled air conditioner, that market size will significantly grow.
The third is connected with component ecosystem. When component is locally made and available, you have to redefine the product. Because that manufacturer may be offering of a different type and different specifications, you have to optimize the machine. So there is the product, as Nikhil mentioned, the R&D investments are very important to be there in the market and to be competitive. And in deep freezers, as I mentioned to you, many capacities, and glass too, curved glass top. These were all earlier not a significant market. Today, it will become very significant. Bottle coolers are becoming a very large market in India. So you have enough and more to be done in terms of product portfolio. It's a dynamic thing.
Sir, initially in your opening comments, there was a comment on the exports part of it, the product exports which you are doing right now to Middle East. But let's say, if you look at over the medium term, for 5, 6 years, when you're able to break into the larger markets, how large do you think your exports can be for the commercial air conditioning side of business?
So see, first of all, we are not going to be selling in our brand. We are going to be making for others. That's what we are attempting to do. And for these markets, the products are to be designed for that country's regulation, the efficiency or safety or refrigerants. So we are currently in the process of developing the products, prototyping, and getting the approval and accept it is where it is. Now it has to fall in place with the launch of the customer to whom we are going to be making. Now if you ask me what is our aspiration, aspiration is to do -- in a 3-year time frame, we want to do USD 500 million of business in the international market. But it is only a beginning. We have a long way to go.
I think when we have clarity, let's say, we have secured a significant base where we will be able to tell how the trajectory is going to be. The market is large, opportunities are huge, but we are just beginning.
The next question is from the line of Shrinidhi from HSBC.
A couple of questions from my end. Sir, have you seen room AC industry getting consolidated in top 5 players through calendar year 2023?
I think it already is my view. The significant -- compared with many other categories, if you take the top 6 players, they have close to 70% market share, right? So the question is that whether there will be -- only these players in future could be a question, no. As we have seen in these categories, India specifically may hang around with 4%, 5% market share also.
And we may even see private labels coming up at some point of time. It is the fastest-growing market. It has the potential to become the largest market in the world, 2040, 50 million seems to be possible. In that event, it is going to be many players.
Great. And sir, just on this, I wanted some color on the margin divergence versus traditional generated channel versus the future channel, wherein you include multi-format retailer, regional retailer, and e-commerce. So would it be possible to give some color on the margin divergence at the EBIT level?
I think everything is converging for the simple reason -- see, we used to think e-commerce is the most price conscious market and you have to be highly competitive. It will have, therefore, lower price realization. So e-commerce and modern trade, it is not much different at all.
Now thanks to the e-commerce, what price you are selling is known to every retailer across the country, every customer across the country. So I am not seeing one channel giving you more profit than other channel. What you may have to look at is how efficiently you're servicing that channel, so that your operating margin is higher. That's how you've to see it, not the gross margin per se.
Let us say, a modern retail who is buying 100,000 units from you, which you are able to take care of and service efficiently with a team of 2 people versus that 100,000 comes from 4,000 outlets and you need a battalion of people.
So therefore, in terms of price realization, there is a convergence because everything is known to everybody today. And most importantly, in the retail outlets, the people who are there as in-shop demonstrators are company deployed people. So these brands will come to know what price other seller is selling in some other thing. So there is a complete information network that is available in every market.
Great. Sir, last one, if I may. Sir, according to your assessment, how much percentage of AC demand would be coming from the first-time buyer?
My estimate is it is 90%.
Okay.
See, 50% is consumer finance, which are first-time buyers definitely. Other than that, the thing is there is no authentic data where -- perhaps the industry can come together and do, I do not know. But in a dipstick style study, it is very clear, 9 out of 10 buyers are first-time buyers. And it is reflected in the entry-level products selling more.
The next question is from Aniruddha Joshi from ICICI Securities.
We had indicated a plan to reach 10,000 outlets for UCP segment. Now we are at the end of January 2024. So can you indicate the progress done so far? And also, the plan, if you want to indicate for FY '25? That is 1 question.
And second question is, EMP segment did extremely well, if we look at the history, in FY '06 to FY '09 period. But post that, almost 6 to 7 years, FY '09 to FY '15, we had very muted growth in single digits, low single digits. So do you see similar structure building now that we are nearing the top. And in 1 or 2 segments, you also highlighted proactively that there might be some slowdown in order closures. So need your expert views on what happened in that period and how different we are in the current ongoing cycle?
So the first question of yours. Can you repeat your first question?
Sir, the outlet reach we had indicated...
Second question is connected with the slowdown?
Second question is on EMP segment, yes.
Yes. So the first part. I think it is irrelevant in how many channels you are there. I've explained in a number of calls or in one-on-one meetings I've explained. It was an old terminology, how many outlets we are present, how many outlets we are going to expand. And the brands also, the companies also keep telling the figure. Our own sales guys also keep telling the figure. According to me, it is completely irrelevant.
You have to look at what is the potential of a counter. In that count, what is your market share and how you will maximize. And number of counters are becoming increasingly irrelevant. So that's the first part. Second part is that the consolidation of modern and regional retail, it is a big phenomenon. You will watch, as India grows, more than 70% of the market will be controlled by these players like a Vasanth & Company in South or Satya or Chroma, Jio, like that. These are the -- retail chains is a very big player.
So this consolidation, when you do, the number of outlets, you need not worry at all, because they know how many outlets they are going to expand and how they will reach. Okay? That is the second reason why I'm saying number of outlets are irrelevant. Now the distributors. So a distributor is a sales point to you. Your distributor will have 300, 400 kind of places to sell. Now this counting around to be saying that -- in our own internal review, if somebody is telling me 15,000 outlets and all, I do not pay attention at all. This is my philosophy.
Now if you earn 10,000, 10,000 would have been already achieved. It depends on how many subdealers we have and how many counters we had. So please, my request is, you should not pay attention to this at all about number of outlets in future. Now one more thing that is going to happen is the ONDC, which is going to come. You watch, in about 18 months' time, everybody can sell through ONDC, and it will be served. That is going to change the face of distribution itself.
Now you may be aware of another model. Another model is that subdealer outlets, which the distributors were managing, big players are trying to serve them. Like for example, Jio will be able to serve a subdealer in Varanasi, for example. He has to punch an order. No distributor needs to stock and deliver to you. So this part I'm not worried at all. We will be already in 10,000. It may become 12,000. These are all not relevant. Within that particular one, what is my say. That is how we have to measure and move forward. That's what we do.
EMP segment, yes, the slowdown signals are there in some segments other than factories and data centers. And we feel it is good, basically because we can focus on execution and we can push up whatever we can do. Because carried forward order book record has no meaning. It has to convert into revenue and receivables have to be received. There is no point in sitting on an advance or no point in sitting on inventory or work in progress.
You can extend the call by 15 minutes, no problem. Unless -- Nikhil, you are free for another 15 minutes?
Yes. It's fine.
Yes.
We'll have to take that as the last question.
No, no. We can take the question. As Mr. Thiagarajan said, we can extend the call by another 15 minutes. So we can take the next question.
All right. We have a few more questions in queue. We take the next question from the line of Dhananjai Bagrodia from ASK.
Congratulations on fantastic of set numbers. Just wanted to ask, now with this new policy coming around for solar generation, which would require households, let's say, solar rooftop. That would impact the -- greatest impact on that would be actually coming from consumer durable players like ACs, which would be especially players like Blue Star.
Just wanted to understand, we've always positioned ourselves as a mass premium brand. Would we ever look at, maybe in certain select pockets, trying to get the volume game and maybe reduce our prices and go completely masked, because in those places, they'll always look at operation cost and earning costs vis-a-vis brand as such. Is that something we would look at?
Very clearly, we want to grow. We had stated our first step is to get to market share of 15% by FY '25. And we are at 13.75%. We have a huge hill to climb. And we also have intense competition happening. Now every opportunity is welcome. And we keep looking at how to make the air conditioner more and more affordable. So the answer is yes, we will look at every opportunity.
Okay. Fantastic. Because see, the growth in numbers could be even higher than what we estimate. So as long as we're willing to reduce prices, then we'll definitely get our market share objectives, which what we think of. Yes, that's about it.
Can you take the next question?
Hello? You can take the next question.
We're just trying to see, I think -- I don't know.
Yes, sir. The next question is from the line of Lokesh Manik from Vallum Capital.
Thank you for the elaborated answers in the beginning. Cleared a lot of my queries. Just a couple of ones on the bookkeeping side. In the EMP segment, if you can just share the breakup between exports and domestic in your order book? And in the UCP side, the breakup between RAC and non-RAC for this quarter and Y-o-Y, that would be great.
So the second part is a selective disclosure. It becomes difficult for us to say how much is refrigeration and how much is room air conditioners. Now on the first part, the export is negligible. We don't focus on Electro-Mechanical Projects, the export markets at all, and for the projects part of it.
In terms of projects, as I told you, these are all some trial orders and small orders and whatever we export to the Middle East region. So therefore, you can imagine the pending order book is largely domestic.
Okay. And just last question on the trend that you mentioned where you will see consolidation in the retail segment more towards the modern retail front. Would you then say that -- would this reduce your bargaining power and would it have an impact on your margins given you would have a higher bargaining power with stand-alone outlets versus, let's say, modern retail?
No. The question is, you have to compete. The options are plenty, the market is growing, and every player would like to. And the thing is that if you're in the business, you have to do all that. All that I can tell you is that we are very happy that it is a golden period for this particular category, both B2C as well as B2B at both air conditioning as well as refrigeration. The second is we are also happy that there are healthy competitors, capable competitors, multinationals. So therefore, they are going to be producing products which are superior. And then it is better to compete with them rather than those old days of assembly, cheap products, et cetera. Then you will not be able to compete with them at all. It is possible for us to compete with the multinationals.
The third is that there is a country-specific regulation, let's say, energy efficiency for our ambient conditions, the seasonal energy efficiency ratio. It is not somebody can suddenly bring a product from abroad and launch it. They have to redesign the product that makes it a level playing field. And imports are -- now you can say it is highly regulated. Therefore, the supply chain related competition is healthy. Consumer finance, it is a level playing field. So you have to compete, but you are competing in a very healthy environment. Therefore, we are happy about that.
I'm sorry to interrupt. My question is actually between general trade and modern retail. So how would your bargaining power vary between...
So what I'm saying is that we all are having equal bargaining power. The question is that in the modern trade, all the big brands are going to maximize their share. So if he has got the power to be ordering 10,000 units, 20,000 units, he is going to be asking you for a particular deal, which you have to compete and offer. In a small retail, which he has got a share -- I told you, counter wise, you have to look at how many share will be maximum. He has got his own bargaining power. But if your question is intended to about which is more profitable, I'm telling you, all are same price realization today because everybody knows at what price you are delivering to somebody else.
The difference could be, what is your operating margin, because your cost of servicing a particular channel may be lower per unit when it is modern retail. The simple answer is, if I have to compete with player A, it is one and the same, whether it is here or there. Bargaining power is one and the same.
The next question is from the line of [ I.S. Rana ] from Sundaram.
My question is around Blue Star's position in the cold room market segment. And what are the strategies deployed to enhance the presence in the market? And also, what is the approach to dealing with unorganized sectors in the cold room, unitary and commercial segment, particularly in terms of maintaining competitive margins? So if you could elaborate on this, sir?
So we are perhaps the only player who has got the end-to-end solution, in the sense, there is a cooling unit outdoor, there is a cooling unit inside the cold room, and there are panels that are required for constructing a cold room. So we call that business within Blue Star as modular cold room business. We are the player who supply everything together. So in unorganized case what happens is, you buy panel from somebody, outdoor unit from somebody, indoor unit from somebody, controls from somebody. So Blue Star's value proposition is, I give you everything together on a turnkey basis. Our dealers are trained to install it.
Okay. And what is the focus going forward, sir? Are you going to increase your investments in this cold room segment given the demand and the requirement in the country is going up?
Yes. It will be a very huge market in the coming years, driven by basically the retail, driven by food processing, driven by consumption of processed foods, driven by pharma and health care. Now our next step there is highly energy-efficient inverter-based systems. And that is going to be there. Because they all work 24/7, and the energy got less. So we will be one of the players having highest energy efficiency. That is the way we are moving forward.
Okay. And what about, sir, with regards to your demand for deep freezers and modular cold rooms, how is it going and what is your focus going forward?
It is at least 25% CAGR.
25%. Okay. For both, right, I mean deep freezers and modular cold rooms?
Yes. There again, when the market grows, competition will come. Today, you see the number of players being lower. When India grows and the market grows, there will be many more people coming in there also.
Ladies and gentlemen, we will take that as our last question. I now hand the conference over to Mr. Nikhil Sohoni for closing comments.
Yes. So thank you very much, ladies and gentlemen. With this, we'll conclude the quarter earnings call. Do feel free to revert to us in case any of your questions were not fully answered, or if we were not able to take your questions. 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. You may now disconnect your lines. Thank you.