Blue Star: Govt Initiatives Drive Bookings In Commercial ACs
Transcript
00:00The earning season may have been a bit muted, but for unexpected lines, but select companies
00:07have actually delivered very, very strongly on a number of counts.
00:11So Blue Star would probably feature amongst those lists because with a 28 odd percent
00:16uptick in revenue, though you could argue that maybe that number may have been marginally
00:19below what the street was estimating, but on the EBITDA front and the margins front
00:22outperformed.
00:23It's not just about the quarter that we want to talk to Mr. B. Thyagarajan about.
00:28We want to really talk about what is in store for the rest of the year and arguably for
00:32the rest of the decade as well.
00:34As I was saying, it kind of enters a golden summer for the year and maybe we'll see many
00:39more golden summers out there.
00:40Mr. Thyagarajan, thank you so much for joining in our studios.
00:43Pleasure talking to you today.
00:45It is wonderful to be here.
00:47You know, your studio is really impressive.
00:49Thank you so much.
00:50As impressive as your numbers have been, sir.
00:52One of the finest studios I have ever been.
00:56It's a pleasure to be here and interacting with you and Sameera.
00:59Thank you so much.
01:00So let's start this off by talking about how much of a pleasure was quarter one for you.
01:04The start of the year, people want it to be good.
01:07In a quarter marred by lack of activity due to elections, you've delivered reasonably
01:12well and very well on the margin front.
01:14How did you feel about it?
01:16I think we delivered exceedingly well.
01:18As you may recall, before the season, we interacted.
01:23I had predicted it may be 25 to 30 percent growth and we were surprised to see growth
01:31of over 40 percent in the last week of March, 70 percent in April, another 70 percent in
01:38May.
01:39It tapered off in June.
01:40Overall, it is more than 55 percent growth.
01:46The industry did extremely well and I think it is driven by very harsh summer season and
01:55it is a happening industry.
01:57From now on, I think the growth will be significant and we anticipate that the market size from
02:06around 14 million, it may be this year 14 million to around 30 million by 2030 and it
02:17is a significant growth that is happening across.
02:19Wow.
02:20Sorry, did I hear you say that the industry size could more than double over the course
02:26of the decade?
02:27Yeah, yeah.
02:28By 2030, I think definitely it will be 30 million.
02:34You know, sir, you have historically grown more than the industry and we have seen that
02:40every time we have spoken to you, you have created that alpha over industry growth.
02:44From what I read and I understand from a little bit of stuff on your earnings, some of the
02:51players were unprepared for this massive surge in demand.
02:54Were you managed to fulfill the demand that came in in this quarter because capacity utilization
02:59must have been at over 100 percent, I would have imagined and hence there could be a little
03:03bit of FOMO feeling given that this golden summer was behind us.
03:06A very intelligent question.
03:08I don't think this quarter we would have grown faster than the market, this particular quarter.
03:14We were very clear that it will be a 25 to 30 percent growth.
03:20You could have managed another 5 percent.
03:22At best.
03:23At best.
03:24But you know, March itself, we had to exhaust what was planned for April.
03:29Then April, we thought the summer has advanced.
03:33See over the years I am watching, the peak of the season, what used to happen in the
03:38May last week, moved to May middle, moved to May first week and April, I thought now
03:43the season has advanced.
03:47See it was a golden summer for different reasons.
03:50There was IPL that was happening, there was election season and summer was really very
03:59hot and we were excited to fulfill the demand.
04:04But then somewhere in May middle, we couldn't.
04:09Couldn't catch up.
04:10So there could be players, there could be other brands who would have filled in that
04:14gap.
04:15So therefore our growth was not more than the industry.
04:20So that brings me to my next question.
04:22A golden summer and a rather golden monsoon.
04:24We have actually had a really solid monsoon and rural India is now picking up.
04:28I know that your demand for rural India usually perks up in the festive season, which is very
04:33closely related to how well the monsoons have done.
04:36How ready are you in terms of fulfilling the demand that may come potentially from rural
04:41India in this quarter?
04:42We are very well prepared, but I keep telling myself and our team that it is better to look
04:50at the long term rather than the quarter for the simple reason.
04:54Because this is not organic then, right?
04:56It is sporadic.
04:58But then you will miss it if you are looking at the quarter.
05:02You have to look at what is coming in the future, how you have to prepare for.
05:09That has been the DNA of Blue Star.
05:10Get the fundamentals right, you will perform definitely well.
05:15So you look at this.
05:17That more than 95% of the buyers are first time buyers.
05:22And the penetration levels today are around 7%.
05:27It is expected to more than double going forward.
05:30Air conditioners are category is not one per home, it can be multiple in a home.
05:37More than 55% this summer season bought air conditioners through consumer finance.
05:4365% of the sale is coming from tier 3, 4, 5 down.
05:49More than 80% are entry level products and the 3 star, 2 star air conditioners account
05:55for close to 70% of the consumption.
05:59So in India, if you have to succeed, you have to have affordable products.
06:05And therefore, we repositioned ourselves to offer that affordable.
06:09At the same time, India is a market where many things coexist.
06:15So you cannot ignore affordable premium or premium segments as well.
06:21And the next part is concerned with the channels itself.
06:24You have different types of channels coexisting.
06:28It will not happen in Europe or United States.
06:30You have single outlet stores, you have modern retail, you have got e-commerce, you have
06:36got distributors, all of this coexists today.
06:41And the consumers whom you are dealing with from different markets demand different things
06:48actually.
06:49So if the growth is going to be so much in the coming years, how are we going to innovate
06:57in order to keep the product differentiated in terms of energy efficiency, reliability?
07:06And retain market share in that same way.
07:08That's right.
07:09Our goal is to get to 15% market share, which should have happened by…
07:13You are at about 13.5, 14 right now?
07:1613.9?
07:1713.75.
07:18So we should have reached 15 by FY25.
07:20We are now saying FY26.
07:24Mr. Thyagarajan, let's assume the units that we spoke about, the doubling of the market
07:32size itself, etc.
07:34Would companies like you need to innovate as a necessity in order to reach that 15%
07:42market share?
07:43Or would that happen naturally?
07:44Because you do have a good brand.
07:45My limited point is, based on demand supply, you reckon growth is easy to get relatively?
07:52Or would you need to strive hard on multiple fronts in order to be able to get growth and
07:57growth in market share both?
07:58If it is a happening industry and so much of revenue to be earned, profit to be made,
08:06it's going to be fiercely competitive.
08:10So it's not the question of getting into playing 11.
08:15If you are a batsman, whether you are in that 5, and we are part of that 5, and how to get
08:25to 3, and therefore, you have to be very clear in terms of building your competitiveness.
08:34For that, product innovation is the first step.
08:38The reason why I actually ask this more is because multiple notes say that they draw
08:44comfort from your strategy, and I don't know if it's a pivot, but your strategy of pursuing
08:50profitability and cash flows at the current point of time.
08:55So my question therefore is, would it need to be fiercely innovative in order to gain
09:00market share?
09:01Because usually, companies which are working on profitability and free cash flow don't
09:05keep as strong an eye on the top line as on these factors.
09:09I know you will say you have an eye on all, but where is the first port of call?
09:14Profitability and free cash flow or market share?
09:15So as I age and mature, I will wake up and go to sleep with this question.
09:24If you are serving the investors, it is profitability and cash flow leadership.
09:31As far as the consumer is concerned, whether your product is superior, it is reliable,
09:39you are providing extraordinary customer service, and it is coming at a price and value for
09:47money.
09:48That's how the consumer looks at it.
09:49So you need to first build that.
09:55That pillar is very much important.
09:57The second pillar is about that if I have to ensure that I am part of an industry which
10:04has to grow responsibly, look, this growth, whether India will be able to provide power
10:11when especially 50% of the energy will have to come from renewables, we don't want a situation.
10:19You know, I had grown up in this industry for more than four decades, that summer will
10:25come, there will be power cut and the sale will be impacted.
10:28It's not uncommon for us to explain to the management there was power cut, we couldn't
10:31sell.
10:32We don't want that.
10:33If that is so, the industry will have to work harder.
10:36The third part is connected with what is the return that I will provide.
10:40It's a capacity utilization.
10:42It is the improved profits.
10:44Again, to provide great returns, you need to invest in R&D.
10:52The materials are not going to be easily available, copper for example and steel, microprocessor.
11:00These are emerging industries.
11:02The component ecosystem is not yet complete.
11:04Sir, you know, one thing that stood out for us was while you might have not gained more
11:09than the market in the last quarter, your margins have improved significantly.
11:13And I know you've talked about this for the last year or two where you're working on operational
11:16efficiency.
11:17Now, MEP and central air conditioning margins have improved and so has it been for room
11:22AC and commercial refrigeration.
11:24For the rest of the financial year, do you think you could maintain the nine, nine and
11:27a half percent margins or am I being too ambitious?
11:30Because we've seen a big uptick from six and a half to eight and a half.
11:33So the first thing is connected with scale.
11:36The second one is the value engineering research and development related innovations with what
11:43had gone into.
11:45The backward integration initiative, these are all resulting in this.
11:49The margin guideline for segment one is between seven and seven and a half percent.
11:55For F5, for the rest of the year?
11:56For the rest of the year and we have said that it could be around 8.5 percent for segment
12:02two.
12:03Okay.
12:04So the average would be close to about 8 percent for the rest of the financial year.
12:07That's right.
12:08Having said all this, we are also really concerned about, that's why I said that there is no
12:12point in worrying over a particular quarter.
12:16The geopolitical issues that are developing, it's a matter of concern actually.
12:22You've invested extensively in Capex and like you indicated to us as well, you can't get
12:26your eyes off R&D, technology, digitization.
12:28That is the big theme to work with.
12:31How much have you earmarked for expansion this year and how would you look to fund it?
12:36Because you've significantly reduced your debt as well recently.
12:40When the quarter ended 30th June, we had surplus cash in hand.
12:45It's because of the QIP.
12:46Okay.
12:47So that's going to go into…
12:48So the last year we raised the QIP, keeping in mind that there is need to invest in manufacturing.
12:56There are investments that are required in research and development.
12:59There are investments that are required in digitalization, including machine learning,
13:04AI, etc.
13:05So by F5-26, where do you see capacity at?
13:07Because demand is not a problem in your industry.
13:09Now it's all about just playing catch up on supply side.
13:12F5-26, we would have reached more than 15 million.
13:17Wow.
13:18I'm clearly very fascinated by your company, but thank you very much.
13:22So it's indeed a pleasure to have you in the studio to talk to us about Blue Star, the
13:26landscape, and like Sir said, it's a hot industry.
13:29You can't get your eyes off it.
13:31Happening.
13:32Happening and hot as well.
13:33We just had a heat wave behind us, but yes, very happening.
13:35The stocks have also been on the move.
13:37The earnings have been fantastic.
13:39The outlook also looks rather promising.
13:41And of course, Blue Star aspires to hit that 15% market share by next financial year.