BLUESTARCO — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
Moderator · Conference Operator
Ladies and gentlemen, good day and welcome to Blue Star Limited's Q3 & Nine Months FY'22
Questions and answers
Moderator · Conference Operator
The first question is from the line of Nitin Arora from Axis Mutual Fund.
Nitin Arora
Just dwelling more on the room AC side, you said that Blue Star grew by 28%.
Is it possible to help us how much the market grew by because your opening remarks said that the festival demand was not that great as per the anticipation?
We were listening to Vir as well on TV and he also said a 25% growth in the quarter for the industry, whereas other companies are reporting a decline by the same amount in volumes.
So if you can help us understand what really happened in the quarter with respect to the market and yours?
Second, if the demand is so strong and you are increasing market share, why not Blue Star has gone ahead and took a price hike and get the margins up?
Neeraj Basur
Market growth in this quarter, as we understand is around 25%.
By and large the market has performed reasonably well and in that context, our growth of been 28% enabled us to consolidate the market share.
While the festival demand wasn't as expected, sales during November and December was encouraging leading to a good performance for the quarter on an overall basis.
To your question on price hikes, you would recall that we were amongst the few players who implemented three price hikes in 2021 and the last price increase was implemented by us in the month of September.
We needed to calibrate our overall operating prices for us not to become an outlier and in addition there are competitive pressures all the time.
So we didn't consider it appropriate to implement any further price increase.
There are continuing commodity price pressures which have not abated even in Q3, therefore, impacting margins and the impact of price increase has not fully mitigated the margin pressures.
With the third wave not as severe as the earlier two waves, we are quite hopeful that the competitive pressures could start easing in Q4 and the margin profile starting Q4 should be better.
At this stage, we have not considered any further price increase in Q4.
Nitin Arora
Second question was the products which you launched in the mass segment.
There was almost two times the COVID wave and we were trying to test the product in the market, but I think both impacted both the ways.
Now, when you have launched this time, is it more of primary growth which has come in the number?
Can you throw some light, how are the secondary sales has responded to this particular category which we are not across the market?
Neeraj Basur
We consistently consider the growth in value terms and for the primary market.
Our experience with the new mass premium portfolio in the room AC segment has been quite encouraging.
This product range is helping us to expand our outreach in terms of target customer segments and the distribution footprint as well.
This portfolio is resonating well with the end customers and also the dealers and distributors.
However, so far we've not had a full financial year run with the new portfolio since its launch.
We are hopeful of realizing the full impact of this portfolio in Q4 and Q1 next year.
Moderator · Conference Operator
Next question is from the line of Manoj Gori from Equirus Securities.
Please go ahead.
Blue Star Limited February 3, 2022
Manoj Gori
My question is more on the industry outlook.
When you look at there is bit of sluggishness in the consumer demand.
However, if you look at last two years, industry has lost significant portion of volumes in terms of secondary off-take during peak summer period.
So how do you look at the overall demand environment?
Neeraj Basur
The overall outlook for room ACs continues to be encouraging because unlike other consumer durable categories air conditioning requirements at home have only increased with the hybrid and work from home working environments across a number of Indian cities.
When the pandemic started, the demand driven by the impact of lockdowns was more in larger towns and cities, but over the last two years, demand from tier-II and III towns and cities across the country has also seen good tractions.
Room air conditioner is an important category that every household wants to focus upon as schools have been functioning on an online mode and increasing number of people working from home for an extended period of time,.
In the last two years, the full potential of the demand to get converted into actual sales has been disrupted as we had situations where modern trade got impacted or the shops and markets were not permitted to sell.
It has happened twice in the first quarter of a financial year in succession though the extent of disruption was lower in FY'22 as compared to FY'21.
This had caused uncertainty in the minds of people about stepping out to go and buy.
That is the reason the share of e-Commerce has increased in this category over the last two years.
Our premise is that the demand will continue to remain robust.
It is the disruptiveness in the environment, which impacted the full potential to be realized.
The only factor that remains to be seen now is the summer intensity.
With the expectation that the summer this year should start setting in somewhere towards the beginning of March, we are optimistic about a normal summer selling season in Q4FY22 and Q1FY23.
We of course assume that there won't be a fourth wave disrupting us in April as we have just been through one wave in January and even if there is a new variant that emerges in the next five or six months we may still have a normal summer selling season.
This gives us this element of optimism in terms of the Q4 prospects as well.
Manoj Gori
We are sitting on a favorable base at the industry level and also there is a lot of pent-up demand plus the outlook continues to remain robust.
So during next year, what is the growth that you estimate for the industry and how Blue Star should pan out given that South markets are relatively weaker as compared to other geographies over the last two years?
So how do you see yourself placed for the upcoming summer and how do you see the industry growing next year?
Neeraj Basur
In the pre-pandemic normal growth period, the growth CAGR used to be in the range of 15% to 18% and in a good year, even going up to 20-25%.
Once we are out of these disruptions, the overall market should get back to 15% to 18% CAGR.
Our stated position remains consistent and we would like this to scale up our current market share of 13.25% to 15% and how much of that we achieve in FY23 will certainly be an area of focus for us.
Our endeavor will be to grow faster than the market in FY23.
Moderator · Conference Operator
The next question is from the line of Ravi Swaminathan from Spark Capital.
Blue Star Limited February 3, 2022
Ravi Swaminathan
My first question is in terms of visibility of growth in the project business.
What kind of growth can we see in the project business?
Where are the large orders come from like metros, rail, data centers, etc. if you can give your view on the same?
Neeraj Basur
In the project business, we had adopted a slightly different approach for the last two years where we focused on select customer segments where the overall credibility and credit profile of the customer is good and the growth prospects are encouraging.
We have been focusing a lot more on industrial, factories, e-Commerce, warehouses, data centers in addition to the infra sector.
The enabling factors such as PLI-driven investments by the private sector and the CAPEX commitment by the government on the infra sector should augur well for this segment.
We see no reason why a growth of 12% to 15% should not be possible at least in FY23 and as some of these projects gain more traction, the growth rate should get sustained for at least the next couple of years.
We indeed seem to be getting into a new CAPEX cycle, the early signals of which started in FY22 and with more normalization of economic and business environment and with less disruption because of pandemic, this should become more visible.
We are quite optimistic on the growth prospects of segment-I.
Ravi Swaminathan
My second question is with respect to margins.
There are two parts in this.
One is your commentary on the steady state margins in both the EMP and the cooling product segments.
In cooling products, keeping in mind the mix, there is mass premium, input costs increase, operating leverage, all, if you can comment on that and also on the unallocable expense, it is now hovering at Rs.20 crores per quarter and last year it was on the lower side.
So what is the steady state unallocable expense that we need to look at over the next one to two years?
Neeraj Basur
The unallocable expenses for us largely comprises of salaries and related expenses of the corporate management teams and we do not keep any other major cost unallocated.
In FY21, we had taken fairly incisive salary cuts, ranging from 35% to 50% which have now been rolled back.
Our steady state quarterly unallocable expenses are in the range of Rs 20 cr – 25cr which translates to around 1.5% to 1.7% of the overall revenues which is in a healthy ballpark range benchmarked with the peers.
That's not an area of concern.
On the segment margins, I will restrict my commentary today to Q4FY22, because we are yet to work out our entire pricing and overall operating plans for FY23. We will cover that in May when we meet again.
We continue to experience healthy traction in the overall sales in both the segments.
There is a little easing of commodity prices the benefit of which may be realized beyond Q4FY22.
The real determinant of effective realization would be the tapering of competitive pressure and once the demand momentum picks up, realizations will be better for all the players.
That should get us to a margin profile of about 7% or so in segment-II in Q4. Segment-I has been pretty stable in the range of 5.5% to 6% the determinants being the size of the jobs that get concluded and closed.
In Segment-III, 18% to 20% has been a consistent view and there are quarters where it has been a little lower, but it should track around 18% to 20% in Q4. These are our expectations of Q4 and that would be a good starting point for us to enter FY23. Blue Star Limited February 3, 2022
Moderator · Conference Operator
The next question is from the line of Sandeep Tulsiyan from JM Financial.
Sandeep Tulsiyan
My first question is pertaining to the summer season demand, harping on that point again.
If we look at the normalized number that Blue Star did two summers back was close to Rs 1,600 cr, went down to as low as Rs 800 cr in the following summer and came back to Rs 1,200 cr last year and if we were to peg this year summer demand also that Rs.1,600 crores number in terms of what will be the pricing increase you'd have taken over that period, what is the kind of volume growth that you can see for this summer season keeping that in mind and how this number would be split between RAC as well as your commercial businesses, if you can give some color on that?
Neeraj Basur
Our FY23 plans are still in the making.
We have consciously delayed our planning exercise as we wanted to be clear on the impact of the third wave.
That exercise will be carried out slightly later and that's where probably we can give you some more color on how the entire summer season which starts in March and then rolls over to Q1 next year will play out in terms of demand, pricing, etc. Whatever price increases Blue Star had to introduce and absorb have already been done over three rounds in FY22. Once the other players also calibrate their prices to absorb increase in input costs, there will be a much better realization profile across the board.
That along with our optimistic view about a good selling opportunity starting February end-March beginning should definitely get translated into a better margin realization in Q4 which should be around 7% for us in Segment-II.
We will get back to you on FY23 margin expectations later.
We also need to keep in mind there is a table change that's going to happen from July'22.
Though it is not happening in the first quarter, it does change the blended pricing profile and that resets a lot of variables in the market as well.
Therefore we will be able to give you some more clarity later.
Sandeep Tulsiyan
What will be the cumulative pricing piece over last two years if we were to compare?
Neeraj Basur
In the last calendar year 2021, which is one quarter of FY 20 and then this financial year, we have taken around 15% of price increase in three installments.
Sandeep Tulsiyan
If you can elaborate on your comment regarding the expansion of distribution reach.
So, in the previous call, you had highlighted that North as a region has become bigger, of course, because due to muted demand due to monsoons in South also, but they were contributing equally and totally, were about 70% of your sales.
If you can give some more color and expand your comment on this distribution reach expansion, what do you exactly imply by this, and how has been the regional contribution moved in the current quarter?
Neeraj Basur
That strategy continues to play well.
The number of stores that we are now serving touched 7,500-plus in Q3. This has gone up by 15%- 20% over the comparable period last year and the activity level in these stores is healthy.
We expect to touch close to 8,000 stores by the time we exit the current financial year.
The Northern region continues to track well, and is now measuring up quite nicely as far as the overall share of businesses concerned.
Northern and southern regions are almost at an equitable level in terms of overall contribution to sales, followed a notch level Blue Star Limited February 3, 2022 below by western region.
Northern region has indeed caught up for us in the last I would say a couple of years now.
Moderator · Conference Operator
The next question is from the line of Anupam Gupta from IIFL Capital.
Anupam Gupta
First question is on the margin for the products business, where you said that pricing action by competitors will be big determinant.
So what sort of inventory levels do you see in the channel both for you as for competitors which is driving the higher competitive pressure which you see?
Neeraj Basur
Our checks suggest that by the end of December, inventory levels across the top few players are pretty normalized.
The inventory level with the channel is pretty normal in the context of a normal Q4. Our inventory levels started to normalize in Q2 itself, and we were comfortable with our closing inventory levels as of September.
Capital employed in segment-II is higher as we have consciously built-up raw material and component inventory in order to counter or mitigate the impact of the lead times which are still unstable as far as international supply chain is concerned.
We didn't want to run the risk of any production disruption in Q4 or Q1 next year.
That's a conscious choice and will get normalized by Q1 next year.
To summarize, finished goods inventory levels at end of December were not out of range to cause a pricing pressure.
Anupam Gupta
Would it be right to assume that given that everyone has this raw material pricing pressures and now that inventory are normal, the price hike should be pretty quick or will the weak demand impact that?
Neeraj Basur
Transmission of price hikes is where all these variables play out there are pressures on account of inventory levels and some players wanting to be more aggressive on pricing.
In the quarters where demand starts to grow rapidly due to a good summer season combined with the pent-up demand, most players will tend to normalize the pricing transmission quite rapidly.
Therefore even without taking any further price increases at least in the next three months, there's no reason why the effectively realizations should not see normalization in Q4 with good traction on the demand side.
Anupam Gupta
On the projects side, you have for the last two quarters given a very healthy margin and going by your commentary that both pace of execution as well as order finalization are very healthy, should we not see these margins continue and why is your guidance lower than 6%, if execution is strong and order intake is strong, ideally, you should be able to give a slightly better margin trajectory there going ahead?
Neeraj Basur
Projects segment is a very tightly costed category.
In this category we need to follow a balanced approach between the type of projects, quality of orders, pricing, management of exposures, potential delays, customers’ ability to honor their obligations and the cash flows.
It is not going to be an easy situation to balance all of these and a steady increase in margins over a period of time.
The reason for the steadiness in our margin profile is the balance that we endeavor to maintain between these variables or some of them.
Our experience is that this approach of a Blue Star Limited February 3, 2022 balance between these variables will be a healthy ROCE as well, because when you see the ROCE profile of the segment, it looks quite encouraging in addition to the segment margin.
We feel that this consistent performance of 5.5% to 6% should continue.
You will see quarters where it will be more than 6% also.
But that will be sort of contingent upon certain large projects or projects with slightly healthier margins getting closed out and so on.
We feel it's a more realistic view of where this segment can go.
We are happy with the healthy growth rate and a steady margin of 6% and equally encouraging ROCE earned by this segment following this approach.
Moderator · Conference Operator
Next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Bhavin Vithlani
Could you help us with an update on our expansion projects, what is the kind of timeline and the capacities that we're looking at?
Neeraj Basur
There are two projects in progress.
In the next three months, we will commission our second deep freezer manufacturing plant in Wada.
This CAPEX was underway for the last year and a half, in between we had little bit slowed down because of the pandemic, but now it's on track to be commissioned very soon.
The objective of setting this plant up in Wada was to substitute import of a few SKUs.
This would help us indigenize and reduce import dependence and will have its own rub off effect on the other downstream elements as well.
The second project that's under construction is the plant at Sri City which should get commissioned by Q3 of this financial year in the quarter October to December.
To begin with, we are going to set up the third room air conditioner manufacturing facility there.
It is for this plant that we had applied for and got the PLI benefit.
The rollout will happen in phases and we will keep augmenting the capacity of this plant to align and calibrate with the capacities in our two Himachal plants so that all the three plants put together help us significantly increase the own manufactured base.
There were certain imports of finished products which got reduced because of changes in the BCD structure over the last two years and we've been also buying from certain outsourced contract manufacturers.
While we will continue with that arrangement for a select SKUs to be bought locally, it's a fulfillment mix change from a combination of imports and ODM manufacturer to our own manufacture.
Traditionally, we had maintained a 50% to 60% own manufactured proportion.
After the Sri City plant is commissioned, a combination of these three plants should take us to around 70% or even 75% over the next couple of years.
We are well on our way to execute that plan as envisaged.
Bhavin Vithlani
Just a follow up on the freezers.
What is the total CAPEX incurred so far and what is the volumetric expansion on the capacity that will be from the current levels?
Neeraj Basur
The overall CAPEX we've spent in this plant over the last two years is around Rs.100 cr. No further CAPEX in this deep freezer plant is expected in in FY23. Whatever needed to happen will conclude by FY'22.
The commercial refrigeration product is a subset of our segment-II and contributes well as far as the overall segment growth is concerned.
To fulfill our aspiration to Blue Star Limited February 3, 2022 grow higher than the market, growth of commercial refrigeration products would also be important.
The immediate objective is import substitution and in addition this capacity will help us scale up faster once this plant is fully operationalized by FY23.
Bhavin Vithlani
Just a housekeeping question on the unitary product segment, if you could just help us with the mix with RAC and non-RAC for the current nine months and the previous nine months.
Neeraj Basur
Traditionally, around 60% was RAC and 40% was the basket of non-RAC products.
As the RAC growth has been a bit subdued over the last two years, the mid would now be around 65%-35% between the RAC and the non-RAC products.
Moderator · Conference Operator
The next question is from the line of Nirav Vasa from Anand Rathi.
Nirav Vasa
This is pertaining to the price hikes.
What am I able to understand is that price hike is going to be a function of volume offtake?
So, just wanted to understand if the season goes well, what is the kind of price hikes that can happen across Q4 and Q1 to pass on the cost?
Neeraj Basur
We are not expecting any further price hike in Q4. As far is Q1 is concerned, we have not yet finalized the plan.
We will have clarity by March as we need to factor not just summer season offtake but also the impact of the table changes which will take effect from July.
In Q4, we are not anticipating any further price increases from our perspective.
We however expect other players who were not able to take sufficient price increases in the last three quarters to catch up on the price increases at some stage once the demand increases.
It will be a good opportunity for the entire market to become calibrated on the level of pricing and it will have a favorable impact on at least the mitigating effect on the commodity prices impacting everyone.
Nirav Vasa
My second question pertains to the ad spends that we will be looking for the peak summer season.
Is the number for that finalized?
Neeraj Basur
No, not yet.
It's a bit too early.
We haven't made our plans yet for FY'3.
As in the past, we usually calibrate that fairly quickly with the ongoing market conditions and market opportunity.
We will have better clarity in the month of March and April.
Moderator · Conference Operator
The next question is from the line of Sujit Jain from ASK Investment Managers.
Sujit Jain
Since you said your price hike probably was not matched by some of the other players.
Does that mean that your value growth is definitely higher, but volume growth could be similar to what industry would have done in Q3?
Neeraj Basur
Our own sense is industry has grown by around 25% and we have grown 28%, and a part of will be the impact of price increase.
Sujit Jain
I checked your commentary for Q3 last year as well where you talked about 13% market share and 13.2% market share for Q3 FY'22 as well in volume terms probably.
If you can also tell about nine months volume for the industry and for you in terms of growth rates?
Blue Star Limited February 3, 2022
Neeraj Basur
We always talk about the growth and market share in value terms on primary sales because volumes are a bit inconsistent to track and explain.
Our market share has grown from 13% to 13.25% over the last one year.
We have been conscious not to grow our market share just for the purpose of market share expansion.
If one wants to be aggressive on the market share that would impact margins as well.
Since this beginning of the pandemic, we've tried to be realistic as well as reasonably aggressive on holding on to the market levels, such that once the market normalizes, that gives us much better clarity on the overall strategy to further augmenting this market share.
It is again partly by design and choice that we are just holding on to the market share at this level for now.
Sujit Jain
If you can just share the nine months value growth for you versus the industry like you said for Q3?
Next question is on capital employed, the entire increase is because of the higher inventory you've chosen, right, and no CAPEX has come into this so far?
Neeraj Basur
It's a combination of both these.
A short while ago I mentioned about CAPEX that we have mostly finished in our Wada plant for deep freezers.
That also sits under Segment-II.
It's thus a combination of inventory for the room AC and the capital expenditure for the deep freezer expansion.
Sujit Jain
Wada would have added Rs.130 cr right?
Neeraj Basur
Wada would have added about Rs.100 cr, there's also the routine CAPEX in the other plants.
To answer your question on year-to-date nine months market versus us, we have grown by around 36% for the first nine months and market growth rate was around 33% - 34%.
Moderator · Conference Operator
The next question is a follow up from the line of Sandeep Tulsiyan from JM Financial.
Sandeep Tulsiyan
I had a couple of follow up questions.
One was on the eCommerce share of sales, which you had mentioned that Blue Star was tracking a bit lower than the industry, about 13%- 14% of your sales came through eCommerce.
So if you can just give an update, and what is the outlook going forward on this side?
What is the current share of sales from us?
Neeraj Basur
For Q3, overall market was around 10% and we were around 8%.
For Q2, the overall share was higher for market as well as for us.
On a year-to-date basis, the market is tracking at around 18%, and we'll are 14% to 15%.
Sandeep Tulsiyan
On an annual basis it is 14 % to 15%?
Neeraj Basur
Yes as I mentioned about nine months.
We don't expect the proportion to significantly change in Q4.
Sandeep Tulsiyan
Second question was regarding these tax breaks that is given under Section 115BAB, that is at 15% for new manufacturing unit that can commence production till March 2024 now.
So for the new investment that we'll be doing under PLI, will that unit have this lower tax rate?
Blue Star Limited February 3, 2022
Neeraj Basur
Correct, it will have a lower tax rate.
The extension of one year was announced only day before yesterday.
We are on track to go live with the commercial production in FY23 itself much before March '23, which was the original date for the lower tax rate.
Sandeep Tulsiyan
So how should we look at your tax rates going forward because it's still tracking higher tax rate in the current quarter significantly higher at 33%?
Neeraj Basur
That's the normal tax rate, because till last year, we had 80IC benefits in our Himachal plants, and the 10-year holiday got expired and then the profitability was lower till Q3 and you will see a full annualized tax rate of around 31% last year as well because Q3 profitability has improved, and we are at 32%- 33% right now.
We will be sharing the likely blended tax rate for FY23 once we finalise the plan for that year.
That should reduce because of a combination of Blue Star’s shift to the 25% tax regime from FY23. The full impact of the lower tax rate 115BAB will not be available in FY23 for the new plant because it will be FY'4 when IT will be fully operational.
We'll give you an outlook probably in May.
Moderator · Conference Operator
As there are no further questions, I now hand the conference over to Mr. Neeraj Basur for closing comments.
Over to you, sir.
Neeraj Basur
Thank you very much, ladies and gentlemen.
With this we conclude this quarter's earnings call.
Do feel free to revert to us in case any of your questions were not fully addressed and we will be happy to provide you additional details by e-mail or in person.
So with that, wish you all the best and stay safe.