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Edited Transcript of BLUESTARCO.NSE earnings conference call or presentation 15-Nov-19 6:30am GMT

Q2 2020 Blue Star Ltd Earnings Call

Mumbai Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Blue Star Ltd earnings conference call or presentation Friday, November 15, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Neeraj Basur

Blue Star Limited - CFO

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Conference Call Participants

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* Abhineet Anand

SBICAP Securities Ltd., Research Division - Analyst

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Amarjeet S. Maurya

Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps

* Amber Singhania

Asian Markets Securities Private Limited, Research Division - Senior Analyst

* Anupam Gupta

IIFL Research - VP

* Kunal Sheth

Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst

* Nitin Arora

Axis Asset Management Company Limited - Equity Research Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Ankur Sharma;HDFC Life Insurance;Financial Advisor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. And a very warm welcome to the Blue Star Limited Q2 and H1 FY '20 Earnings Conference Call. We have with us today from the management Mr. Neeraj Basur, Group CFO. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Neeraj Basur. Thank you, and over to you, sir.

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Neeraj Basur, Blue Star Limited - CFO [2]

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Thank you. Good morning, ladies and gentlemen. This is Neeraj Basur. Firstly, I'm very happy to share with all of you that Blue Star has been awarded yesterday in London the coveted Golden Peacock Award for Excellence in Corporate Governance for 2019. In fact, I'm taking this call from London as of now and that's the reason I was here. We at Blue Star have always been able to adopt and implement best-in-class governance policies and practices and this award recognizes our commitment in this regard.

I will now provide you an overview of the results for Blue Star for the quarter ended September 2019, financial highlights for Q2 FY '20. Following are the financial highlights of the company for the quarter ended September 30, 2019, on a consolidated basis. Revenue from operations for Q2 FY '20 was INR 1,249.47 crores as compared to INR 1,032.20 crores in Q2 FY '19, a growth of 21%.

EBITDA, excluding other income and finance income, for Q2 FY '20 was INR 73.58 crores as compared to INR 58.07 crores in Q2 FY '19, an increase of 26.7%. PBT before exceptional items was INR 55.75 crores in Q2 FY '20 as compared to INR 34.42 crores in Q2 FY '19, an increase of 62%.

Tax expense for Q2 FY '20 was INR 16.88 crores as compared to INR 7.84 crores in Q2 FY '19. The company has decided not to immediately opt for the lower rate of 22% quarterly tax owing to the unavailed MAT credit to the tune of INR 67 crores on a consolidated basis. At the same time, we needed to account for higher tax expense during the quarter on account of increased profitability and unwinding of deferred tax assets created in the earlier years at the higher rate.

Net profit for Q2 FY '20 was INR 37.94 crores as compared to INR 19.55 crores in Q2 FY '19, an increase of 94.1%.

Carry forward order book as at September 30, 2019, was INR 2,934.52 crores as compared to INR 2,216.63 crores as of September 30, 2018, an increase of 32.4%.

Effective working capital management enabled a significant reduction in our capital employed to INR 1,063.49 crores as on September 30, 2019, from INR 1,267.88 crores as on September 30, 2018. Consequently, borrowings reduced to INR 188.9 crores as on September 30, 2019, giving us a debt-equity ratio of 0.22 as compared to a net borrowing of INR 463.4 crores as on September 30, 2018, and we had a debt-equity ratio of 0.59.

I will now cover business highlights for Q2 FY '20. Segment I: Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment I revenue was INR 783.54 crores in Q2 FY '20 as compared to INR 630.97 crores in Q2 FY '19, a growth of 24.2%. Segment's results was INR 44.56 crores, which was 5.7% of revenues in Q2 FY '20 as against INR 44.75 crores, which was 7.1% in Q2 FY '19.

Order inflow during the quarter was higher by 11.2% at INR 794.35 crores as compared to an inflow of INR 714.31 crores in Q2 FY '19.

Electro-Mechanical Projects business. In Q2 FY '20, order inflows from infrastructure sector continue to be impressive with the addition of airport projects at Bangalore and Delhi. However, delays in new project approvals from financial institution led to relatively lower order inflow in the buildings segment. We continue to exercise caution on the pace of project execution in view of the continuing liquidity stress in the real estate and infrastructure sectors. We maintained our leadership in the electromechanical space in India.

Carried forward order book of the Electro-Mechanical Projects business was INR 2,064 crores as of September 30, 2019, as compared to INR 1,512 crores as on September 30, 2018, an increase of 37%.

Commercial Air Conditioning Systems. Our business registered an impressive revenue growth during Q2 FY '20. New product launches and increased operational reach in Tier 3, 4 and 5 cities helped us to gain market share in chillers and VRF category during the quarter.

We continue to grow faster than the market and improved our market share in all the product categories. Our newly launched products such as the next-generation inverter update, water cooled VRF, air cooled VRF-II chiller and configured oil-free chiller gained good traction and market acceptance.

Key segments that contributed to billing during the quarter were industrial, hospitals and educational institutions. Major orders bagged in Q2 FY '20 were from JSW Steel, Bellary; Safdarjung Hospital, Delhi; and ISRO, Sriharikota.

International business. Our continuous efforts to increase demand for unitary and applied products helped us bag good orders from the market in the Middle East, Africa and SAARC countries. With steady growth, we are also focusing on enhancing and improving our ecofriendly product standards and certifications. Our showroom in Dubai is playing a significant role in demonstrating our product lines and capabilities and helped build confidence in potential customers.

Our international projects executed through the joint ventures at Qatar and Malaysia continue to do well. We continue to invest in strengthening our brand in select international markets.

I will now move on to Segment II: Unitary Products. Segment II revenue was INR 377.21 crores in Q2 FY '20 as compared to INR 343.06 crores in Q2 FY '19, a growth of 10%. Segment result was INR 11.96 crores, which was 3.2% of revenues in Q2 FY '20 as compared to INR 8.2 crores, which was 2.4% in Q2 FY '19.

Room Air Conditioner business. After a very good Q1 FY '20 and late but strong summer, Q2 FY '20 demand for Room Air Conditioners was good and the market grew by around 10%. We grew in line with the market and maintained a market share of 12.5%. The demand for -- the demand was for the low-end products with more than 60% emanating from Tier 3, 4 and 5 markets. Further, 40% of the sales was through the consumer finance route.

FY '20 should be a normal year of growth for the industry on the back of lower penetration. Our new brand initiatives have been well received by the trade and should support our growth plan for FY '20 and the next summer season.

Commercial Refrigeration business. Revenue growth in Q2 FY '20 was contributed by increased billing across all categories. We continue to perform well in the processed food, ice cream, hospitality and dairy segments and maintained leadership position across the product categories. Our new lines of businesses also started gaining good traction in the market with orders from several reputed brands. Major orders bagged in Q2 FY '20 was from [Shell], [Sydney], [Hatsun] and [Havmor].

Water Purifier business. We continue to grow in line with the market growth and maintained our market share. The total installed base of our water purifiers have now crossed 1 lakh units during the quarter. We will continue to make investments in branding and marketing initiatives, both in the digital and print medias to achieve the targeted growth and market share.

Segment III: Professional Electronics and Industrial Systems. Segment III revenue was INR 88.72 crores in Q2 FY '20 as compared to INR 58.17 crores in Q2 FY '19, a growth of 52.5%. Segment result was INR 24.43 crores, which was 27.5% of revenue in Q2 FY '20 as compared to INR 12.56 crores, which was 21.6% of revenue in Q2 FY '19.

Revenue and profit growth in this segment was majorly contributed by receipt of multiple high-value order of Data Security Solutions and Nondestructive Testing businesses. The growth potential in the Indian digital payment sector continues to offer some interesting growth opportunities for our Data Security Solution business. On the other hand, automated CapEx continue to be muted. During the quarter, large orders were received from Honda Motorcycles and Scooter and Welspun Corporation Limited.

Business outlook. Though the order book is healthy, project execution pace has not picked up and credit flow in the real estate and infrastructure sector remains the constraint. Low penetration coupled with increasing demands from Tier 3, 4 and 5 towns will continue to support growth in the products business. We will stay focused on driving revenue growth and profitability with a close watch on margins, cash flow and capital employed.

With that, ladies and gentlemen, I am done with the opening remarks. I would like to now pass it back to the moderator who will open up the floor to questions. I will try and answer as many questions as I can. To the extent I am unable to, we will get back to you via e-mail.

With that, we are now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Aditya Bhartia from Investec.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [2]

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Sir, growth in Unitary Products segment for us appears to be weaker than what some of the peers have reported as well as growth that we understand the industry has delivered in first half of this fiscal. What has that been on account of? And have you seen competitive intensity increasing from private label brands and from some of the other players, especially into that market?

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Neeraj Basur, Blue Star Limited - CFO [3]

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Yes. So like I mentioned, the industry growth and our growth in the Room AC category has been same -- similar, around 10%. It has been a mixed quarter for different players as far as this quarter is concerned. There are players who have done more than that, and there also players who have probably been a bit lower, accelerating the final industry data. Now our assessment is, a bulk of the growth has come from lower-end products, the entry-level products in Tier 3, 4, 5 markets and also online range, which is having, again, more inclusion of the lower-end and the entry-level products. There is -- you're aware that Blue Star has consistently maintained a big senior level market positioning. And in that context, our growth of 10% is pretty much in line with what we were expecting for Q2.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [4]

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Sure, sir. But if we look at the first half as well, our growth in the Unitary Products segment had been somewhat lower, somewhere around 10% vis-à-vis 30-odd percent that industry appears to have grown. So even first quarter, to that extent, growth was a bit slower and what is really attributed to that?

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Neeraj Basur, Blue Star Limited - CFO [5]

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Yes. I need to remind you and others who are on the call, which we explained during our quarter 1 call that in quarter 1, our Room AC growth rate was around 25%, just to remind you. We had a situation where our commercial refrigeration products in quarter 1, because we transitioned out from the old range of our products into a new range, so we were liquidating our inventory, so we had consciously decided to a little bit descale our commercial refrigeration products. So overall growth in quarter 1, therefore, was impacted by the commercial products, whereas the Room AC sales was pretty much in line, in fact, slightly ahead of the market as far as the market was around 22%, and we were at 25%. And as a consequence, when I look at H1, which is Q1 for Room ACs and 10% growth in this quarter, we are maintaining close to 22% year-on-year growth as far as our Room AC business is concerned. So that will -- that should give you the context.

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Operator [6]

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The next question is from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [7]

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Congrats on your new award.

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Neeraj Basur, Blue Star Limited - CFO [8]

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Thanks, Renjith.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [9]

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Yes. Sir, just -- you see the margins have been a bit of a worry for us. So why has it been lower? Because last year we can understand there were a lot of inventories. So this quarter also, it was low. So is it kind of -- we are unable to take any price increase? Or is it something to do with the investments into the Water Purifiers?

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Neeraj Basur, Blue Star Limited - CFO [10]

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Well, let me clarify that as well. So if you look at the overall Segment II margin profile this year versus last year, this year we're at around 3.2% as compared to 2.4% of last year. And last year, quarter 1 was impacted more because of the inventory problems and tax spilled over to quarter 2 also. So there was an overhang of inventory and related inventory-holding costs in quarter 2 last year, which is not there this year, which is getting reflected in the margin improvement. Now having said that, the pressure on price continues, and obviously, that has an impact on the overall margin profile as well. So we -- if you remember, we took a price increase in end of Q3 and beginning Q4 last year. After that, we have not recalibrated our prices significantly across some SKUs we might have done something, but not on a generic basis because we've been mindful of the pricing gap between our SKU-level pricing and the competition. We've been trying to narrow that down as much as possible in order to catch up on the growth momentum, which has really helped us in H1 this year. So to that extent, of course, there will be further pressure on prices.

And lastly, we have consciously stepped up our branding and advertising expenses in this current year in H1. You might have observed -- you might have noticed, we have recently signed on Virat Kohli as the new brand ambassador for Blue Star entire range of air conditioner and the products. So that is just one example of how we are stepping up the entire marketing and advertising spend because we do believe, like I mentioned, that full financial year growth for the market should be good. And in that context, we want to use Q3 and then begin Q4 when the summer starts to get -- step in. So we want to make sure that our market growth rate again catches back in terms of our aspiration of the market share that we've been talking about. So it is a mix of -- so, while, yes, there's been saving as compared to last year in some of the inventory management, inventory holding costs. But equally, we have stepped up advertising and yes, pricing, we have not taken consciously any price increases. We are -- so this is quarter 2. And you're aware that quarter 2, because of the overall volume and scale, the margin tends to be lower. Same situation will be there in quarter 3 as well. But by quarter 4, we are expecting to come back on our expectations of where we said, 9% to 9.5% margin profile for this particular segment.

Just to conclude this answer on your water purifier question, so again, we are -- in the current year, we are on a reducing investment scale on an overall. So the margin impact last year, if you remember, was 160 basis points on Segment II margin. This year, we are expecting it to be anywhere between 90 to 100 basis points so that it will be lower. It is on a lower scale. But overall, we think we are moving in the right direction as we have planned.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [11]

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Okay. And sir, when we look at the order intake and your peers, there is a stark difference. So have we lost out on any of the metro jobs due to...

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Neeraj Basur, Blue Star Limited - CFO [12]

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Are you talking about Segment I?

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [13]

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Yes.

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Neeraj Basur, Blue Star Limited - CFO [14]

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Yes. Well, so when we -- in fact, you might have heard, in fact, we have -- we bagged in quarter 1, one of the largest order of INR 250 crores, that was from a metro job, which is Mumbai Metro. After that, we have been bidding for some more metro and airport job. In fact, we bagged a couple of good airport projects and we've been bidding for metro jobs as well. So overall, our order book, in fact, has grown quite impressively this year, if you see the numbers, from 32% plus.

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Operator [15]

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The next question is from the line of Nitin Arora from Axis Mutual Fund.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [16]

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First question on the UCP. Can you talk about -- so we faced a decline because of -- in the chillers part, because we were going for a transition in lot of products. Can you quantify how the growth was within this quarter and other products back in the system because you were doing some high-rated inverter products there as well? So if you can talk about (inaudible)?

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Neeraj Basur, Blue Star Limited - CFO [17]

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Yes, yes, yes. You are talking about the commercial refrigeration products?

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [18]

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Yes, yes, sir.

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Neeraj Basur, Blue Star Limited - CFO [19]

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So, yes. So in quarter 1, we had a degrowth situation in that particular category. We are back on a growth track in this quarter. So like I mentioned, we were liquidating our inventory of older SKUs. In the current quarter, we are -- we've grown around 6% as far as that particular category is concerned. And then the other -- rest of the other products have given us rest of the growth and then Room AC is about 10%. So that is the overall, I mean, aggregate we are at 10% growth.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [20]

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So for the full year, you are expecting a 10% growth? Sorry.

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Neeraj Basur, Blue Star Limited - CFO [21]

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No, no, no. For this -- for quarter 2, quarter 2 overall is 10% and within this 10% is around 6% that we have that is contributed by the commercial products, 6% growth.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [22]

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Got it, got it. And how do you look at this commercial refrigeration for this year and next year because that's almost like about 30% of...

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Neeraj Basur, Blue Star Limited - CFO [23]

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Yes. So -- I had clarified last quarter as well. So we are expecting to be able to neutralize the impact of the growth in commercial refrigeration for quarter 1 through the year -- through rest of the year. And by the time we finish FY '20, our expectation is we will be just about neutral for the full year or some single-digit growths. In the commercial products and rest of the growth in Segment II will be driven by Room AC brand and the other products that we have in this category.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [24]

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And just last 2 questions. One, sir, we saw during this quarter when the wholesale was getting enforced in the channel, there was a brand, I mean, which was trying to find PMI, which, I mean, AC has lost out a lot during this wholesale because you still have a lot of inventory.

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Neeraj Basur, Blue Star Limited - CFO [25]

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Sorry, Nitin. I was not able to hear the first part of your question. Can you please repeat?

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [26]

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Yes. So there was a brand who was pushing the prices a little bit higher compared to what is available in the market by all the other brands. When we look at the wholesale numbers of each brand in this quarter, I'm talking about the volume part, we saw that he's relatively not able to push that wholesale because he still has a lot of inventory in the system. Has that really helped Blue Star also to gain some market share from him? Or do you think this is a transition thing, so not really impacted, the other players are not able to gain by the other players?

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Neeraj Basur, Blue Star Limited - CFO [27]

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Well, we're not getting into specifics because like I said, we're still awaiting the market share data for quarter 2. Whatever early numbers or whatever early data we have got, indeed, there are kind of 2 or 3 players who have grown quarter-on-quarter. And equally, there are players who may not have grown, in fact, who might have degrown. And that's what is happening overall. That's why market -- overall market growth is about 10%.

Now quarter 2 is a relatively low quarter to have any view on structural shifting market positioning and so will be the case in quarter 3. Our sense is, make it priority we get established on the market lines, so to speak, by quarter 4. The good news is, again, our understanding is that the inventory level across most players in the market is fairly comfortable -- normal relative to last year what the situation was. So to that extent, since the excess inventory situation has completely got handled, managed and resolved, pricing pressure because of that should not be there, at least going forward. So like I said, so we are also quite hopeful that by the time we step into Q4, the normal stocking levels for the trade would have happened and that would again kickstart Q4 growth on the normal trade. So we are not expecting supernormal growth, but in the context of last year, what had happened, we are expecting overall growth to be into normal levels and normal rate.

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Operator [28]

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The next question is from the line of Aditya Bhartia from Investec.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [29]

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Sir, my question is on Water Purifiers wherein you indicated that we have grown at the pace of the market. Given that we are a new entrant, one would have imagined that Blue Star would be growing at a pace meaningfully faster than the markets. So what's your take on that? And how you will be progressing vis-à-vis the initial expectations that we are expecting?

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Neeraj Basur, Blue Star Limited - CFO [30]

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So, well, Aditya, one clarification. The rate of growth in effect we are normal as compared to market was in the context of Room AC. So Room AC market share -- or market growth rate and our market growth rate is in line in that context. Now coming to Water Purifier, we are -- we would be at around 2% or 2.5% market share overall -- as far as the overall Water Purifier market is concerned. We are doing quite well as far as the entire product portfolio and the set of product expectations that market has and what we are offering, and the products are very [well to see]. Our distribution in Water Purifier was -- so we underwent a change where we realigned the entire Water Purifier distribution with our Room AC [17], so that gave us access to a larger distributor base. So that part has also settled out and so is the aftersales servicing in this space. Now you will appreciate that this market is a highly concentrated one where the top 3 players, the existing incumbents have amongst them, between the 3 of them close to 70%, 75% market share. So it does take time to penetrate deeper. So we are reasonably comfortable with our 2% market share as of now. Of course, we could have done better and we can still do better is our overall view. But we will steadily keep building on, on to the building blocks, which are nicely in place, and we are, like I said, the overall burn or overall investments are reducing. And we should -- by next year, we should be relatively on better state as far as this particular category. So basically, it's taking us longer than what we had anticipated for sure, but we are pretty okay with the progress made so far.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [31]

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And to break even, sir, what's the kind of rough market share that we require?

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Neeraj Basur, Blue Star Limited - CFO [32]

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Well, we -- that number keeps changing. But overall, it won't be significantly higher than 2-point -- I mean we are at currently 2%. So we need to do somewhat more. We will quantify that probably for next year when we convey our FY '21 overall position, we will convey that as well. We will not be very far off from that level by the end of this year.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [33]

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Understood. And sir, my last question is on Segment III margins wherein we are seeing very strong margins in this particular quarter. What has that been on account of and how should we see margins in this segment going forward?

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Neeraj Basur, Blue Star Limited - CFO [34]

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Well, Segment III is a bit different segment as far as our overall product and solution portfolio is concerned. Now you're aware that we have some very good solutions on the data security space. And at the same time, there is an overall increase in digitization. And there is also an increase in digital payment transaction volumes across the country. So that opens up some investing spaces for us and that's exactly what has happened in the current quarter. So we've got multiple orders, which contributed nicely to the revenue as well as profit growth. And in addition to that, we also had some good orders from our Nondestructive Testing business. So overall, this gave us some nice push in terms of revenue as well as profit growth and also margin profile. But this is kind of -- so this business is subject to such quarters where it will have a bump up, and you will see these kind of margins. And any kind of -- when these orders get fulfilled and then we get back to the normal booking and order fulfillment cycle, then it tends to peter out. So overall, we have been -- this segment is capable of generating 15% to 18% margin. So far, so good. This year has been good like last year again. In this business segment, we got a big order for supplying CT machines in the state of Uttar Pradesh. That had given us a good boost to the overall segment profits and revenue. So likewise, because there are multiple lines of businesses, so something or the other will keep contributing and then there'll be quarters when it kind of tapers down as well. So on an overall basis, 15% to 18% is what we are quite comfortable with as far as the segment is concerned.

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Operator [35]

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The next question is from the line of [Manaj Koori] from [Acreta] Securities.

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Unidentified Analyst, [36]

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So sir, if you look at the related markets that you have been targeting in 2020, North markets in the rest of the year, and it's I think correct. The extra margin (inaudible) is different of products in other markets. So how would you...

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Neeraj Basur, Blue Star Limited - CFO [37]

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[Manaj], sorry. Can you please repeat a little slowly. I cannot catch what you were saying.

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Unidentified Analyst, [38]

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Sure. Sir, if you look at where we've been targeting North markets and we came out with different range of products at different prices as compared to other geographies. So can you throw some more light like how we are targeting North markets and what could be the status maybe for the next season and how we are looking good and that.

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Neeraj Basur, Blue Star Limited - CFO [39]

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Yes. So first clarification, we have not come up with any different product range for North market. What we have said that our sales and distribution efforts in the North is a large market and we were lagging in that market. We remain traditionally lagging and that for us has been traditionally -- sorry. South has been traditionally stronger. So the last, I would say, 1.5, 2 years, we've been consciously focusing on improving our distribution capabilities and outreach in North. And that is helping. So as we speak, we now have South and North. South is still higher but then South is now followed by North, so it is picking up. And we do expect that over the next few years, we have a pretty much equitable contribution coming to us from South and North, probably followed by West and then East, in that order. So it was more -- it has been more around distribution-led initiatives than anything else, which is helping us.

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Unidentified Analyst, [40]

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Great. Sir, on the E&P side. So if we look at currently, there has been a slowdown like we were already mentioned in the opening commentary. So can you throw some more light how we look at like in the near future, near to medium term like in terms of order inflows and acquisition?

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Neeraj Basur, Blue Star Limited - CFO [41]

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Yes. On the projects concerned, we have already healthy order book. In fact, our order book will be all-time healthy. So there's no problem or there's no issue, no challenges how the order was confirmed and the carryforward order book of around INR 2,900 crores. We are in a good space. And equally, the sales funnel also is there really across, let's say the midsize and smaller projects, which we service to our own commercial air conditioning products. With order bookings looking reasonably okay as far as that segment is concerned. Now the challenge in the projects business, which has been now very rough for 1.5 years and continues to be there for the real estate and infrastructure customers is around the flow of liquidity and credit. So we are being watchful. And I mentioned this in our last earnings call as well, our focus is to balance our overall billing growth with our operating cash flow and working capital. The sector that is visible in our working capital position, it was there end of quarter 1, it was there end of quarter 2 as well, and that's how we have been able to achieve a substantial reduction in our borrowing quarter-on-quarter. So we are being watchful, and that does give a little pressure on the margin because we continue to incur overheads while we are still executing these orders. But whenever we get a sense that from our view the infrastructure customers are having a little bit of a stretch on their payment capability, all the payments are coming to us slower than what their terms agreed with them should have, we are moderating the pace of our execution for this reason and no other reason. Normally, we would have executed much faster than this kind of order book. We would have accelerated the pace of execution but because of the external market situation, we continue to exercise caution. Our sense is we will continue to do that, at least for the next couple of quarters more and then take some [judicious] cost on. So hopefully, once delivered, the situation stabilizes on the banking and in the office space, the other [division] space for those kinds of customers will come back on track. As far as the government customers are concerned particularly from [PSU] customers and government customers, the execution is going on fine though payments are tending to be delayed even from the government customers. At least we have an assurance, a reasonable assurance of the payments will get realized, even though with the dealer. So it's a -- that's the reason in this segment we want to continue to exercise caution and watchfulness and that's what exactly what we are doing.

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Unidentified Analyst, [42]

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So it's more of an execution timing-related concern rather than [anything else]?

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Neeraj Basur, Blue Star Limited - CFO [43]

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Yes, that's right. And that's linked with -- largely with liquidity and the availability situation, which once it starts, just know it will stabilize at some stage. Once it stabilizes that, and the company that will be attributed around execution and growth.

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Operator [44]

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The next question is from the line of Anupam Gupta from IIFL.

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Anupam Gupta, IIFL Research - VP [45]

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So on the product segment, where you guided for the 9%, 9.5% margin, but at the same time you haven't seen any prices like you also said. And instead you're stepping up your [engagement] and marketing expenses as well. And given that last summer obviously was pent-up demand after the very strong summer than the previous year. But going forward, you've seen some consumers slow down. So combining all this, is there a downside to this 9%, 9.5% margin in the balance half for this year?

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Neeraj Basur, Blue Star Limited - CFO [46]

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Well, the downside risk could be only to the extent if summers in Q4 did not set in early enough. So normally, you're aware that our summer start to set in somewhere in the middle of February, beginning March actually. Then March tends to be a good enough month. And so it boils down to the scale and the overall pace of growth, which is reasonably possible in Q4. So far, we are tracking fine in terms of our overall margin for H1 in this segment. Q3 will be, again, a lower growth [delegated] margin kind of a quarter. And Q4 is where actually we'll be able to catch up and come to closer to this 9%, 9.5% overall for the year. So the only downside risk, and since you're asking will be the vendor pattern and when and how strongly the summer set in, in Q4. If the summer sets in strong, then we've seen it many times in the past, quarter 4 can be a [damper] quarter.

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Anupam Gupta, IIFL Research - VP [47]

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Okay. And have you -- let's say end user segment, have you seen any sort of shortages that's impacting orders? It looks like AC has been immune as I understand. What...

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Neeraj Basur, Blue Star Limited - CFO [48]

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Sorry again, I can't hear you properly, Anupam.

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Anupam Gupta, IIFL Research - VP [49]

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I'm saying the slowdown, which is impacting a lot of other segments and the challenge it has given you so far. Have you seen any signs of slowdown at all in any geography or season for AC?

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Neeraj Basur, Blue Star Limited - CFO [50]

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Well, not in that sense because the main impact is again, this the [best] of the theory happens if summer was strong and yet increased sales do not happen. That is a little bit too exactly to know whether there is a structural issue and the slowdown issue at all. Now our availability of financing for the consumer at a slow level, is continuing to be normal in this quarter as well, quarter 2 included. And we do not see any challenge so far. And I think those kind of NBFCs who are financing consumer appliances, electrical appliances and so on. That continues. A big part of online sales, any way people are funding using their credit cards. That is not strictly speaking financing in that sense. But it's an alternate way of paying for the equipment. That continues. So as a consequence, so far, we have not really seen -- not just in the room AC segment, even our commercial range of refrigeration products. We have not really seen this kind of rub-off effect or this perception or this experience of slowdown as of now. But again, we will, I guess, wait till end of quarter 3 and quarter 4 to see whether it is all normal in terms of our overall expectations.

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Operator [51]

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The next question is from the line Abhineet Anand from SBICAP Securities.

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [52]

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Yes. First thing is the other income. Is there any one-off in this quarter?

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Neeraj Basur, Blue Star Limited - CFO [53]

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Other income, we had an income tax refund in this current quarter and that was included so I'll give you the quantum of that. So the INR 10.6 crores that you see, about INR 4.5 crores, around that is on account of the interest regarding the income tax refund. And that you can, in a manner of speaking, take one time because we may not necessarily have income tax returns every quarter. And just off the other income of 5-odd crores will be the nominal other income from [fees] also.

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [54]

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Okay. Secondly, the share of JVs that surpassed '19 year, the last [INR 118, 120] crores, right? Would last year have to be good at around 2-odd crores of dividends? Throw some light what will happen exactly and how this year will pan out.

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Neeraj Basur, Blue Star Limited - CFO [55]

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Well, again to the length of the last year, we were, last year by quarter 3 actually we had done that. Our joint venture in Oman, which was, at that point in time, incurring losses. We had taken losses in quarter 2 last year, and in quarter 3 we had taken a complete write down in net-incurred exposures. So quarter 3 will again see as last year but as you see those numbers, we will see that charge weaker. Now since we already provided for that entire exposure last year. At some time, we initiated measures to exit the joint venture, and that venture is no longer contributing to other profits allotted. So the contribution is now from the other joint venture that we have, which are there and they are performing quite well. But this is a small number, which will not impact significantly either way.

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Abhineet Anand, SBICAP Securities Ltd., Research Division - Analyst [56]

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And just lastly, this margin for the first segment. Year-over-year, I think we have seen than we'd be around that 5.5%. Those numbers remain or is there any change to that?

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Neeraj Basur, Blue Star Limited - CFO [57]

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Well, I know I've always been saying 4.5 to 5.5. So that remains. It's a range. So yes, we should be okay in that range.

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Operator [58]

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The next question is from the line of Ankur Sharma from HDFC Life Insurance.

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Ankur Sharma;HDFC Life Insurance;Financial Advisor, [59]

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Just a question on the UCP segment margins. Now given the fact that there has been no price hikes on the file, plus we have seen this doubling of custom duties and IDs over the years. So I'm just wondering, especially as we go into the next year. Of course, this year we had a rise in inventory, how do you manage that transition and what's the plan in terms of in-sourcing production like this?

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Neeraj Basur, Blue Star Limited - CFO [60]

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Yes. So customs duty has happened last year in September. And again, after this year's budget of course it happened on a certain set of components, including compressors. And now after the budget this year where even the units are included. So that's happened. And of course, a part of that does have an impact on margins because so far, we have not really absorbed the effect and we now pass it on.

Now as far as our strategy going forward is concerned, we intend to in-source in a big way the manufacturing work in the units. It's already starting. It started last year, in fact. In the current year, we are intending to manufacture at least 20% of our overall indoor unit consumption that will be needed in our own factory in margin. Progressively by next year, we expect this 20% to increase consumption 70% or 80%. And then our ideal impact over the next 1.5 years or 2 years, we should try and completely or substantially reduce the dependence on imports of the indoor units. So that will help because the indoor units definitely impact the margin profile of other units, of the custom duty. The increases happen, then that does impact us. And I as far as some of the other components are concerned, we are also exploring alternative sources of procurement other than China, including some FPA countries. If we can procure some of these components from those locations, those countries, which will, to some extent, have a mitigating effect on the custom duty profile. And lastly, we will have to take our pricing view at some stage. We're just holding on for the -- by longer and probably by end of Q3, beginning Q4. At the beginning of Q4 is when we launch our new product range for the next year and within the time of pricing divisioning. So what we thought that we needed 3 months left for the year, the calendar you're doing, that would make sense to tinker around with prices too much in Q2 and Q3. I guess we will go with the flow and then by the time we are ready to launch the new range of products for the new summer season, that is the time we will take a couple of review on prices again. So that's how we are planning to respond to the customs duty increase scenario.

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Ankur Sharma;HDFC Life Insurance;Financial Advisor, [61]

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Sure. Very helpful. And just the second question was on the overall demand of Room AC. Typically, we've seen the September to November start the so-called the second summer season, which really hasn't happened this year, right? Given the extended monsoons. Despite that, we do not hear of another kind of inventory buildup. But maybe I'm wrong, and you can correct me here. So I'm just trying to understand why despite such a high and extended monsoon you are not seeing any sign of inventory buildup, especially in the second [level]?

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Neeraj Basur, Blue Star Limited - CFO [62]

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Yes, so obviously the secondary sales was really good during quarter 1. In fact, quarter 1 secondary sales and primary sales was quite good. So that led to liquidation, reasonable and substantial liquidation of stock. Our normalized level of liquidation, I would say, at the distributor level. Now this -- the monsoon in -- there are pockets in where monsoon have extended and it's extending into October as well. Mainly West because west is the market where secondary summer, or the second summer happened, the impact is kind of localized to West. And on an aggregate basis, we don't see too much of an inventory problem regardless of how the summer is affecting summer-extended monsoon played out in some profits of the country. Now of course, things are normalized and, I guess, by the time we said December, the stocking of each part for -- in preparation for Q4. So I think that's what we're going to see.

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Operator [63]

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The next question is from the line of Amber Singhania from Asian Market Securities.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [64]

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Just a couple of things. One, if you can just give some color about how the other products are doing like water cooler, air purifier and all. Those small but we had the significant impact on the margins because of these products also. So how is this work you're doing and what are the outlook in this?

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Neeraj Basur, Blue Star Limited - CFO [65]

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Yes. As far as water coolers are concerned, the biggest input actually happened in quarter 1, and it was good, in line with the overall summer. And then again it starts in Q4. But Q4 and Q1 are the 2 big quarters of water coolers and so far we are quite good. As far as air purifiers are concerned, it's a small market, and unfortunately, the situation [in PR] northern parts of the country. There's been a bump up to the demand, which shall happen in Q3. But since the overall market size is small, it will not make a very big impact on the numbers. So we are continuing to push out the distribution of our air purifiers, sorry I meant, in the regional markets. We are going to launch another SKU in the range of air conditioners, which will have an in-build air purifier just to converge from there the 2 products. That's been our overall thinking for the profits where we believe that air purification and air conditioning will be quite convergent with each other. So the we wanted to step out and see how that goes. And then those range of products, when we launch in 3 months, we will be including them as well.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [66]

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Okay. Secondly, as we have hired Virat Kohli and also we are doing some with higher advertising compared to last year. What kind of advertising budget we are keeping for this year versus last year and whether it will be reflecting in our annual expenditure or whether it can be part of UCP?

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Neeraj Basur, Blue Star Limited - CFO [67]

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Well, first line, you can see we are not higher than the last quarter. We're just -- it has been another (inaudible)

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [68]

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Yes, there's no difference. Sorry.

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Neeraj Basur, Blue Star Limited - CFO [69]

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Okay. Yes. So in the first line, this is the line and whatever is on the -- and last year the spend was really muted because the weather and the seasonality in the market was not great. We had, in a way, underspent, so we wanted to catch up, we had to catch up with the brand spending. And this worked quite well and kind of reputation that Virat Kohli has in that space, plus the fan following that he has [Italy], the customer segment has a good amount of alignment in people who follow him and people who followed [Mustaf]. And the common trait between him and us means trust. So the kind of trust we're going to see demonstrates across all key categories of the game, we also are in the same league as we believe trust is one of ours because USP, as well as all of our brands are concerned, I mean, across all 3 segments, whether it is retention, whether it is commercial or other large projects. So to that extent, there is a good amount of calibration in having him as a brand ambassador. But the overall -- so the results plan and this was part of our overall client spend or nothing more than we have already allotted it for.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [70]

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So around 2% of the sales or...

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Neeraj Basur, Blue Star Limited - CFO [71]

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Well, we are yet to work out all of that spending structure of quarter 4 because of [Welspun] customers, the next round of spending happened there. So I guess we'll talk more about it in Q4.

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Amber Singhania, Asian Markets Securities Private Limited, Research Division - Senior Analyst [72]

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And will it be part of an [amicable] expenditure, not a part of [India]?

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Neeraj Basur, Blue Star Limited - CFO [73]

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No. No. No. It is all allocated. So unallocated expenses, as you see here is a -- it doesn't have at all any the brand marketing, advertising expenses.

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Operator [74]

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The next question is from the line of Kunal Sheth from B&K securities.

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Kunal Sheth, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [75]

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Sir, my question is pertaining to the unit recooling segment. So, you mentioned in your comment about the margins for the quarter and that part of the reason why margins were lower because there is still pressure on pricing in the market. So could you share your thoughts in spite of such a strong growth in the room AC market this year what is causing the pricing pressure in the market?

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Neeraj Basur, Blue Star Limited - CFO [76]

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So Kunal, the inventory in the market across different players and there in quarter 1 included, are not all players are ready to liquidate the hangover of inventory from FY '19 in either Q4 or Q1 of this year, Q4 of last year, Q1 of this year. While we have the substantially liquidated our inventory starting Q3 and Q4 itself and we didn't have much of a challenge in Q1. Last year, we did have residual problems like -- so quarter 1 and then quarter 2, now those pricing pressure even in quarter 2, there are possibly some players who had to take some shrinkages from some of this aggressive repositioning because of the inventory issue. Now the good news is our market assessment, it was like, by September of this year, most of the players do not have any excess inventory left whatsoever. So hopefully, by the time we get into Q4, pricing pressure arising from the impact of excess inventory should not normally be there. Of course, we don't know how others on any external factor will play out. And the inventory should not be contributing to the pricing pressure in Q4. And that's our stand.

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Kunal Sheth, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [77]

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So it is purely led by [remain], you don't see too much of a competitive positioning in terms of new challenges that are causing pricing challenges. It's purely inventory-driven.

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Neeraj Basur, Blue Star Limited - CFO [78]

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Sorry, in what sense?

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Kunal Sheth, Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst [79]

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Sir, what I'm trying to figure out is that, so this is purely due to excess inventory in the system and not necessarily some of the new players of private label that are causing pricing pressure in the market.

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Neeraj Basur, Blue Star Limited - CFO [80]

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Yes. I mean that's all likely there in quarter 1, not as much in quarter 2. Yes.

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Operator [81]

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The next question is from the line Amarjeet Maurya of Angel Broking.

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Amarjeet S. Maurya, Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps [82]

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Sir, according to one of the domestic manufacturer, outsource manufacturer, gift card and Amazon are coming aggressively in their interlude segments. So what's your thought on that and are you facing something in that segment?

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Neeraj Basur, Blue Star Limited - CFO [83]

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Well, there are 2 sides to it. So firstly, using gift cards, Amazon and the entire e-commerce, e-marketplace platform tools sell, is 1 reality. And we are very well aware and we are gearing up too to be able to compete well in that entire category, so that's 1 part. The other part what you were asking is whether some of these brands will launch their own -- some of these peers will launch their own branded machines and whether that will become a trend. So they can -- they do need a launch, other than that, their own branded products. But then, what we have also seen in this market and will see is there is a feel of potential buy. But at the same logic, there are some [knowledge trees] or participants as well who are having their own who launch as well its own branded machines. And so it's a leverage and their positioning is more of a leveraging their existing distribution infrastructure and platform more than any real sense, in a real sense to become a serious player, at least at this point in time. And that -- those kind of competition will remain, and we'll have to just respond to that. But from a serious positioning, as of now, we do not really see that becoming a megatrend.

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Amarjeet S. Maurya, Angel Broking Private Limited, Research Division - Senior Research Analyst of Mid-Caps [84]

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So your Q3 revenue of [room] '18 , out of that, how much is contribution from intersegment, middle segment and can you give us some split?

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Neeraj Basur, Blue Star Limited - CFO [85]

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Well, we have never compiled a breakup of sales in that manner, but a general view that we already [held] our income and we view -- and more or less we are a mid premium segment. And that's what we expect.

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Operator [86]

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(Operator Instructions) We'll take the next question from the line of Ravi Sinha from Sunidhi Securities.

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Unidentified Analyst, [87]

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Sir, the first one is you specifically mentioned that you will not grow well into the low end market growth in the first half of this year. So if at all, the market will behave like that in the next coming year, in the second half of this year or in this season, what would be the strategy, given that you have not taken a price increase? And also there is a cost pressure results there. So what is your expectation of the UCP sales and the pricing front? And secondly, you mentioned that in years your initial demand that your margin has come down to 2, your fixed income and expenditure. So why the other expenditure has come down by around y-o-y, but a 3% decline almost in our expenditure. How we can confirm this game change? The overall significant decline announced, the market decline plan in the segment and the price impact?

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Neeraj Basur, Blue Star Limited - CFO [88]

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Oh well, there are many questions you asked. But firstly, let me clarify. We are expecting the overall market growth for FY '20 to be normal, that is what I had said in the opening remarks. Normally, it will be anywhere between probably 10% to 12%, and we would -- in that situation, we are, of course, going anywhere between 15% to 20%. So that's the overall transfer for full year as far as full year is concerned. To your second question on other expenses, I am not able to relate because the other expenses are INR 120 crores in this current quarter as compared to INR 97 crores last year. So if there is anything specific you might just want to e-mail the same to us, we will see how to respond to that.

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Operator [89]

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That was the last question. I now hand the conference over to Mr. Neeraj Basur for closing comments.

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Neeraj Basur, Blue Star Limited - CFO [90]

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Thank you very much, ladies and gentlemen. With this, we conclude this quarter's earnings call. Do feel free to refer to us in case any of your questions were not fully answered, and we will be happy to provide you additional details by e-mail or in person. Thank you very much, and have a good day.

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Operator [91]

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Thank you. Ladies and gentlemen, that concludes this conference call for today. On behalf of Blue Star Limited. Thank you for joining us, and you may now disconnect your lines.