Blue Star Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Unseasonal rains hit RAC, B2B compensated: Unitary Products revenue grew only 6.3% with flat margins as unseasonal rains muted room AC demand, while the diversified B2B portfolio (electromechanical projects, commercial AC, commercial refrigeration) delivered well and drove consolidated performance.
• Segment I order inflow paused: Order inflow of Rs. 1,224.65 Cr was flattish YoY after many quarters of growth, with fewer-than-anticipated orders from the commercial buildings sector, though management cites a healthy enquiry pipeline and ongoing construction cycle.
• FY24 growth guidance held at 15%: Management reiterated at least 15% growth for Blue Star in FY24, banking on a festive-season RAC recovery and robust B2B demand from infrastructure and manufacturing capex.
• Fundraise of up to Rs. 1,000 Cr approved: The board approved a QIP primarily to fund a Rs. 750 Cr CAPEX plan over three years, backward integration, and R&D, with management also open to retiring some high-cost debt.
• What to watch next quarter: Whether the festive season delivers the promised RAC recovery, the pace of Segment I order inflow conversion from the enquiry pipeline, and any concrete export strategy details as the six-month timeline matures.

RAC Demand & the Weather Hit

• Unseasonal rains suppressed demand: Unseasonal rains across the country resulted in muted demand for unitary products; June was far better than May, but the overall quarter left RAC demand flat and growth modest.
• Regional variation was stark: Tamil Nadu and Andhra Pradesh did well in April and early May; East and Northeast did extremely well throughout the season; Gujarat was good; Mumbai was good in March, April and the first 10 days of May then did not pick up; the Northern Region did not do well.
• Channel inventory is manageable: Unlike 3–4 years ago, inventory is not high because Blue Star can quickly moderate inventory levels; the channel did not buy as expected and was regulating cash flows, so inventory may only be slightly higher.
• Market share held at 13.5%: Management estimates the industry degrew by 10% in room AC while Blue Star degrew less, gaining share "very, very marginally," with a larger institutional mix providing relative insulation.
• Festive season is the recovery bet: Given low penetration levels, management hopes RAC demand will revive in the festive season; historically when summer fails, the festival season has been good.

B. Thiagarajan: "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 had gone on to project that for the industry and individually for Blue Star for the financial year FY24, the growth will be at least 10% and the 15% respectively."

B2B Portfolio Performance

• Segment I revenue grew 19.1%: Electromechanical projects and commercial AC drove growth, with healthy bookings from factories and data center sectors due to government thrust on manufacturing investments; enquiries from healthcare and hospitality also picked up.
• Commercial AC maintained leadership: The company held its #1 position in Conventional and Inverter Ducted AC Systems and Scroll Chillers, and #2 in VRFs and Screw Chillers; it also secured significant orders for recently launched centrifugal chillers, with demand from tier 3, 4 and 5 cities encouraging.
• Commercial refrigeration saw broad traction: Growth came from hospitality, pharma, processed food, and warehousing/logistics (modular cold rooms); kitchen refrigeration gained from QSRs and hospitality; leadership was maintained in Deep Freezers, Storage Water Coolers and Modular Cold Rooms.
• Segment III surged 48.9%: Professional electronics and industrial systems benefited from a steady rise in corporate capex across segments, with non-destructive testing gaining momentum and healthcare seeing public and private sector investment opportunities.
• International business stayed upbeat: Middle East markets had strong B2B demand, though Qatar enquiries moderated post-FIFA World Cup; the Malaysia JV is slowly bouncing back after a prolonged slowdown.

Order Inflow & the Segment I Pause

• Order inflow was flattish YoY at Rs. 1,224.65 Cr: This broke a multi-quarter growth streak, with fewer-than-anticipated orders from the commercial buildings sector; management says the construction cycle is on, the enquiry pipeline is healthy, and quite a few orders are under finalization.
• Profitability focus over market share: Management is not building market share in the electromechanical projects business, focusing instead on profitable growth and free cash flows; the earlier surge in order inflow beyond expectations required beefing up design and execution teams.
• Major orders were still won: Key wins included IndusInd Bank (Chennai) and Maruti Suzuki for electromechanical projects; Foxconn Technology (Bangalore), IOCL (Baroda), and Mindspace Business Parks (Thane) for commercial AC; and the New Parliament House (New Delhi), DHL (Chennai), and Nestle India for commercial refrigeration.
• Railway and metro enquiries remained buoyant: Infrastructure-linked demand from railway electrification and metro railway projects continued to provide a healthy pipeline for Segment I.

Fundraise, CAPEX & Capital Allocation

• QIP of up to Rs. 1,000 Cr approved: The board approved raising funds via QIP to ensure a balanced and optimum capital structure; usage will be a combination of working capital, CAPEX, and general corporate purposes, and may include retiring some high-cost debt.
• Rs. 750 Cr CAPEX over three years: A large part will be spent in FY24 and FY25, covering Sri City phase expansions, backward integration, increased product portfolio, and R&D investments; internal accruals will continue to fund CAPEX going forward.
• Sri City Phase 1 is under commercial production: Capacity stands at 300,000 units, with total planned capacity of 0.12 crore units across three phases; land for Sri City 2 has been acquired for expanding commercial air conditioning after a year or two.
• Deep freezer and Wada investments: The company is investing to manufacture smaller-capacity deep freezers (250L, 200L, 150L) at Chinese cost, and is also investing in sub-300-litre capacity at Wada in addition to Sri City.
• Net debt comfort is clearly defined: Management is uncomfortable with a net debt position above 0.2–0.25–0.3x, emphasizing that this is a seasonal business and the debt position must be right through the seasons.

Nikhil Sohoni: "I would say that a net debt position anywhere above 0.2, 0.25 to 0.3 makes us very uncomfortable... this is a seasonal business. So, you need to ensure that your debt position is right through the seasons also."

Margins & Competitive Landscape

• Segment II margin compressed to 7.5% from 8.1%: Subdued demand from unseasonal rains was the primary driver; margins in the unitary products segment remained flat overall.
• The new margin reality is 8%–8.5%: Management stated that three years ago, prior to COVID and PLI, margin expectations were 9.5%–10% or at least 9%–9.5%; with capacity expansion and the new competitive landscape, one should be happy with 8% to 8.5% on a steady basis.
• Inventory management prevents price dilution: Unlike earlier years, there is no inventory pressure from the import route because the component ecosystem has evolved and finished goods manufacturing happens locally in a much bigger way, preventing price dilution.

B. Thiagarajan: "I think with the capacity expansion that is happening and the new competitive landscape, one should be happy if it is 8% to 8.5%."

Exports, Compressors & Strategic Bets

• Export strategy is nascent: Wholly owned subsidiaries have been set up in Europe and North America; the company is developing advanced products and solutions for these markets and is in talks with some anchor customers, but a formal strategy will be communicated only in six months' time.
• US/Europe build-out will take years: Product specifications differ on frequency (60 Hz), energy norms, refrigerant norms, and brand approvals; R&D testing will take 12–18 months, and building the business in the right way may take 5–10 years.
• Compressor manufacturing is not imminent: Commercial AC uses 60–70 compressor types and the India market is too small for captive manufacturing; for room AC, management will evaluate captive compressor manufacturing only when Blue Star reaches 0.2 crore units, versus an expected 0.1 crore this year.
• Industry AC market trajectory: The market is expected to move from 0.8 crore units to 1 crore in FY24, and to 1.3 crore by FY25; Blue Star is targeting at least 10 lakh units this year versus 8 lakh last year.

B. Thiagarajan: "My view is that if Blue Star wants to look at it it should when it reaches 0.2 crore units in room air conditioners, this year, hopefully, we will be doing 0.1 crore. So, when we reach 0.2 crore, you can evaluate whether at that cost it is viable for you."

Guidance & Commitments

Key Metrics