Ladies and gentlemen, good morning and welcome to Blue Star Limited Q2 and H1 FY25 earnings conference call. We have with us today from the management, Mr. B. Thiagarajan, Managing Director of Blue Star Limited, and Mr. Nikhil Sohoni, Group Chief Financial Officer of Blue Star Limited. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. B. Thiagarajan and over to you, sir.
Thank you. Good morning, ladies and gentlemen. It's my pleasure to join this call along with Mr. Nikhil Sohoni. You have seen the results which were declared yesterday, and with a revenue growth of over 20% and operating profit growth of around 22% and net profit increase of over 36%, it was an excellent quarter. Mr. Nikhil Sohoni will provide the highlights of the results, post which we will answer your questions. There will be also questions related to how the festival season, or specifically the month of October, all throughout post-summer season, the room air conditioner business has done exceptionally well. Some of you might have seen even the GfK report that came out a couple of days ago. And to disclose the specific figure, the October being the Diwali month, the volume growth of room air conditioners was around 30% and the revenue growth of around 28%.
And this is happening after a volume growth of over 53% in H1 for room air conditioners and the revenue growth of around 45%. And in Q2 alone, the room air conditioners grew 27% and the revenue growth of around 25%. Now, the questions will come on segment two why that growth is not reflecting. They will explain to you what are the reasons for, despite room air conditioners growing by 27% in Q2 and revenue growing for room air conditioners by 25%, still why the segment two revenue growth was lower. The GfK report, if you notice, in Q2, the industry growth is reflected as the tertiary growth of 17%. Blue Star growth is reflected as 30%. And in H1, the industry growth is reflected as 31% tertiary volume growth and 55% as the Blue Star's growth. Those are the GfK figures.
The market continues to do well in the consumption. One major concern, in my media interviews as well over the past two, three weeks, while there is a slowdown that is being reported in FMCG or automobile sector, fortunately, the room air conditioner industry is doing well, and we are doing well, therefore. The question is, when automobile has slowed down, FMCG has slowed down, why air conditioner alone should be, even some other durables might have slowed down, why air conditioners alone is growing is a question which I am not able to answer.
Perhaps a, the temperature conditions or the way the people are getting used to air conditioning in other ways, whether it is a restaurant, whether it is car, whether it is offices, whether it is markets, everywhere they are exposed to air conditioning. So therefore, at home, they may be needing the comfort of air conditioners. Two, the prices have remained stable. Three, huge consumer finance options are available. We continue to witness that more than 50% of the sale is happening through consumer finance. The prices have remained stable, and most importantly, the power consumption has been coming down thanks to the energy saving scheme, and so we are happy that our industry is doing well, and I hope that it will continue.
Having said that, these are uncertain times. We will keep a close watch on what is happening. Fortunately, it's a lean period. There will be one more spike between Christmas and New Year, then we have to look at what's going to happen for the forthcoming summer season, so the room air conditioning industry continues to do well. The commercial refrigeration part of it, it is again doing well, except for the setback in water coolers, which is a high-margin product. Right from March 27th of 2024, there are related changes in terms of specification that have disrupted the supply chain, and there are difficulties that are being encountered. We will explain to you, but that is ephemeral in nature, and there is nothing to worry about the overall growth prospects for commercial refrigeration.
Manufacturing, data center, and some parts of commercial real estate are doing extremely well. Infrastructure projects, there was a slowdown in execution. It is coming back post-elections, and the commercial air conditioning business continues to do well, which in our case is part of segment one. It is not part of segment two like other players, and it is doing extremely well, both in terms of order inflow and the margins and the consumption across various sectors, including manufacturing, including shop showroom boutiques. The input costs are stable as of now, and the supply chain-related challenges continue. There is nothing new to report during the quarter, and the preparations are on for the forthcoming summer season.
Overall, we are very optimistic about the financial year FY25, and I think it will be another landmark year. We are proceeding with our investment wherever we have committed in terms of R&D or digitalization or manufacturing capacity expansion. One more general point that will come up in the international foray, the testing validation of various products meant for Europe or U.S. is going on very well. And to U.S., we are able to deliver quite a bit of products for their refrigerant migration program , for which the deadline is this calendar year. Now, post the elections, what will be the direction in the U.S.? How the market will pan out, we have to wait and watch.
Europe market continues to be slow, and all of us are waiting, whether it is Blue Star or international players trying to export to Europe or European players. They are keeping their fingers crossed as to when the European market will open up for consuming the decarbonization-related products. But our pursuit of developing products for this market, getting new customers to gain trust in an Indian manufacturer as against China, and how we will be able to improve our own processes in terms of quality and the standards that are to be maintained there post-delivery of the material, those are going on as per the plan. Overall, it has been a good year, and we look forward to closing the year in an exceptional manner. Of course, the same question which you or the financial media keep asking, that won't the slowdown of other industries catch up with us?
It is not. Let us hope that it will not catch up with us. Thank you. Over to you.
Thank you, Mr. Thiagarajan. So good morning, ladies and gentlemen. This is Nikhil Sohoni, and I will be providing you an overview of the results of Blue Star Limited for quarter-ended September 2024. Coming to financial highlights, this quarter, we sustained the momentum established in the first quarter. The strong performance across all key segments, supported by a robust order book, reflects growing demand for our diverse product portfolio. Continued focus on distribution footprint expansion, innovation, and R&D localization and backward integration in manufacturing and supply chain cost optimization has resulted in a growth in revenue and profits. Financial highlights for the quarter-ended September 30, 2024, on a consolidated basis are summarized as follows. Revenue from operations for Q2 FY25 grew 20.4% to INR 2276 crores as compared to INR 1890 crores in Q2 FY24.
EBITDA, excluding other income, for quarter 2 FY25 improved to INR 149.3 crores, a margin of 6.6% of revenue as compared to INR 122.7 crores in EBITDA margin of 6.5% of revenue in the quarter 2 of last year. PBT grew 38.3% to INR 131.4 crores in Q2 FY25 as compared to INR 95 crores in Q2 FY24. Tax expense for Q2 FY25 was INR 35 crores as compared to INR 24.3 crores in Q2 FY24. Net profit grew 35.7% to INR 96 crores in Q2 FY25 as compared to INR 71 crores in Q2 FY24. Carry forward order book as of September 30, 2024, grew by 9.8% to INR 6,598 crores as compared to INR 6,008 crores as of September 30, last year. Carry forward order book as of March 31, 2024, stood at INR 5,697 crores.
The capital employed as of September 30, 2024, increased to INR 2,550 crores as compared to INR 2,070 crores as of September 30, 2023. We continue to invest in manufacturing capacity, R&D, and digitalization initiatives. The net cash position of INR 185.26 crores as of September 30, 2024, as compared to net cash position of INR 285.9 crores as of September 30, 2023. Coming to business highlights, segment one that is electromechanical projects and commercial air conditioning, the segment one revenue grew by 32.6% to INR 1,428.4 crores in quarter 2 of FY25 as compared to INR 1,077.2 crores in quarter 2 of FY24. Segment result was INR 119.2 crores, which is 8.3% of revenue in quarter 2 of FY25 as compared to INR 65.28 crores, which was 6.1% of revenue in quarter 2 of FY24.
Order inflow for the quarter was INR 1,899 crores in quarter 2 of FY25 as compared to INR 1,765 crores in quarter 2 FY24. Coming to individual businesses, the electromechanical projects business, manufacturing and data center segment continued to drive growth. The infrastructure projects execution is picking up momentum, and we are also witnessing order finalizations from commercial real estate sector. The carried forward order book of the electromechanical projects business was INR 5,037 crores as of September 30, 2024, as compared to INR 4,609 crores as of September 30, 2023, a growth of 9.3%.
Coming to commercial air conditioning, during the quarter, the focus was to accelerate deliveries and also improve the margins through the ongoing total cost management initiatives. The new product development initiatives are on track, and given the growth opportunities in manufacturing, data center, commercial real estate, healthcare, and education sector, the prospects for this business are excellent. On the international business front, the development of new products in the areas of decarbonization and energy efficiency, improvement for identified OEMs in Europe and North America are progressing well, and the field trials for a few products have been completed successfully. There is a slowdown in Europe, and the indications are that the demand will revive in 12 to 18 months. Certain shipments for the U.S. market have commenced, but the momentum is expected to pick up post the presidential election.
As we have explained in the past quarters, we would like to position ourselves as a manufacturer of innovative and reliable products for the respective markets and would give this business time for scaling. Segment one margins saw an improvement in Q2 FY25, rising to 8.3% of revenue compared to 6.1% of revenue in Q2 FY24. The improvement in margins is a result of changing mix of the business within the segment. Coming to segment two, that is unitary products, the segment two revenue grew 5.1% to INR 767 crores in Q2 FY25 as compared to INR 729 crores in Q2 FY24. Segment result was INR 53.9 crores, that is 7% of revenue in Q2 FY25 as compared to INR 61.6 crores, that is 8.4% of revenue in Q2 FY24.
Coming to cooling and purification products business, that is room air conditioners, this quarter has seen reasonable growth over the previous corresponding period in spite of this being a non-seasonal quarter. The demand for room air conditioners continues to be good, and we have maintained our market share at 13.75%. In anticipation of the forthcoming festival season, the dealers have begun stocking, as in the previous quarter, consumer finance-related sales are significant, and tier three, four, five markets continue to dominate. With the localization and scale benefits, the margins continue to improve. Coming to commercial refrigeration business, due to regulatory changes pertaining to BIS and quality control orders, production and sale of water coolers saw major disruption.
Further, in transitioning to the new standards, while attempting to manage the inventory of the old components, the margin for water coolers declined. There was a delay in ramping up production of the new range of state-of-the-art glass top deep freezers, which resulted in lower revenue growth. To sum up, it was an excellent quarter for RAC in terms of revenue and profitability growth. However, muted growth for commercial refrigeration products pulled down the revenue growth and profitability in segment two. Segment three, that is professional electronics and industrial systems, here the revenue did grow by 3.8% to INR 80.5 crores in Q2 of FY25 as compared to INR 83.7 crores in Q2 of FY24. Segment result was INR 5.2 crores, which was 6.4% of revenue in Q2 of FY25 as compared to INR 12.2 crores, that is 14.6% of revenue in Q2 FY24.
This business is largely dependent on import of high-tech capital equipment. The demand was expected to revive post-Union elections, but supply chain restrictions and uncertainties have resulted in long delays in finalization and execution of orders. We expect the growth to revive only in Q4 FY25. Finally, coming to business outlook, the prospects for room AC, electromechanical projects, and commercial air conditioning business are excellent. The commercial refrigeration business suffered in Q1 and Q2 of FY25 due to regulatory changes, but the prospects continue to be good.
We are persisting with investments in R&D, manufacturing, and digitalization, and our TCM initiatives continue to pay dividends. We expect FY25 to be another landmark year. Our growth-focused mindset, supported with prudential financial management, ensures a stable foundation for our short-term and long-term ambitions. With that, ladies and gentlemen, I'm done with the opening remarks. I would like to pass it back to the moderator, who will open the floor to questions. We'll try and answer as many questions as we can, and to the extent that we are unable to, we'll get back to you via email. With that, we are open for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the attached telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, in order to ensure that the management is able to address the questions from all the participants, please limit your questions to two per participant. I repeat, please limit your questions to two per participant. Thank you. The first question is from the line of Natasha Jain from Nirmal Bang Securities Private Limited. Please go ahead.
Thank you for the opportunity and good morning, gentlemen. My first question is on the UCP segment. Firstly, if you could give us some sense as to what is the split between RAC and non-RAC? The reason why I ask is you've stated in your press release that your margin decline of 140 basis points was predominantly led by commercial refrigeration. So that's the background why I'm asking the split. And a related question here is, while I understand that there have been regulatory changes and delay in ramp-up of some of our products, is there also some kind of slowdown that you're seeing? Because we've been hearing this commentary for commercial refrigeration for a couple of quarters now and even from peers.
So if you could just throw a little detailed color as to what segments within this is driving growth and where are we possibly seeing some slowdown in a medium-term outlook here, growth outlook?
Thank you. So I'll try and explain. We are also internally trying to discuss, and even on the board, we are discussing how to go ahead and classify the segment. First of all, the segment classification has electromechanical projects and commercial air conditioning and the unitary products and the other professional products continued for many years. Now, what is in what in case of Blue Star? That is better because, like you, some of you may be new to this. Segment one has got electromechanical projects, which is EPC contracting business. It has got commercial air conditioning, which are VRF systems or chillers or package air conditioners, which are our own manufactured equipment. It is more like a room air conditioner only. We manufacture those. We compete with the same players in the market, and it has got the related service income as well.
Now, it is a contracting business, MEP. It has got commercial air conditioning manufacturing, marketing, commercial air conditioning service. That's what the segment one contains. Segment two contains room air conditioners, and it has got the commercial refrigeration products. It has got related service obligations that we need to do. There is an international part of it, which is you are aware that we are not into residential part. Residential part comes in lump. Some years it comes some way, Middle East, basically, because it is not a business in which you will be able to compete, which we have stated. Because when China is there for India to export room air conditioners or commercial refrigeration products is difficult. There could be years where some specific customer of ours asked in the Middle East we would have delivered, which incidentally is the case last year.
Now, the international business, which has just come in, it is B2B in nature, so it is part of segment one. Anything we are talking about products that are being developed or expenses today incurred for US or Europe that goes into segment one. Now, the question here is room air conditioner versus commercial air conditioning, which has been a repeated question because the room air conditioner is a star product which is going. In fact, commercial refrigeration also grows at the same rate, but relatively it is a smaller market size. That is the problem. Commercial refrigeration, we have larger market share. So to put in perspective, let's say room air conditioner market size is around 25,000-28,000 crores. The commercial refrigeration market is 4,000 crores. And our market share in commercial refrigeration is 30%.
In room air conditioner market, our market share is 13.75%-14% at this point of time. The question that is asked is that whether we can segregate and give. Selectively, we cannot give. There is another thing that is happening. Some of our peers have commercial air conditioning and commercial air conditioning related service also clubbed under unitary product segment. Now, if I were to do that, actually my EBIT itself can go up by INR 200 crores. Now, the question is that whether we should be reporting room air conditioner separately, commercial refrigeration product separately, and commercial air conditioning product separately. That's a debate internally we are having. But the question is that, as I have been saying, that I keep raising this in many forums, that multinationals who are my competitor, it's a black box.
I won't be able to get any information whatsoever, whereas they will be able to get every information that is disclosed by us. Now, there is no uniform standard for removing or dissecting and providing information. Say the peers you are not asking report commercial air conditioning related separately at all. Now, that is a debate internally we have got how best we can provide. We believe in transparency. I have absolutely no problem in giving you every information without being accused of selective disclosure to one set of people alone. Now, I can tell you this much, that go by the GfK data which is published. Q2, the growth of the industry is 17%. Blue Star growth is 30%.
H1, room air conditioner growth of the industry is 31% in volume terms, and 55% is Blue Star growth, the tertiary offtake , which is a real thing that has happened in the marketplace. Now, Blue Star's room AC growth. Room AC growth of Q2 is 27%. Revenue growth is 25%. And H1, Blue Star's room AC growth in volume terms is 53%. Revenue growth is 45%. This information is available in multiple forms through GfK, or otherwise you will know. Now, you'll bear with me. We are internally debating. We will take a decision at some point of a time. That will be beginning of a financial. I'm not committing anything. It has to be considered by the audit committee as well as the board to be saying how we are going to report.
Now, whether products all to be together or it is commercial refrigeration separately in segment two alone, we will also keep in mind how the competitors are reporting and what constraints I have got in terms of disclosing the figures. Okay? But we are very well aware of the matter. That's where I'm leaving it. Now, coming to what is the real issue in commercial refrigeration? As I told you, you will be able to relate to this, that some INR 28,000 crore is the market size of room air conditioner, where we enjoy 13.75% market share, close to 30% market share we enjoy in the INR 4,000 crore market. That is one data point you have got. And now, in that particular commercial refrigeration products, I have got numerous. There are cold rooms. There are deep freezers and freezing equipment. And then there are water coolers.
Water coolers continue to be a very profitable part of the segment. Deep freezer is a profitable part of the business. Now, March 27, there was a regulatory change that came in as a part of a very non-tariff barrier. Unless your facility is approved by BIS, you will not be able to dispatch the products from a particular date. So what obviously you will do, you have gone ahead and produced the products for the summer. I am being transparent to the extent possible. I am disclosing. I don't know who will ask me what questions. So when you had the inventory, obviously you are passing it away to the dealers at that particular point of time because you won't be able to because this order came in all of a sudden. Okay?
So therefore, the tertiary sale would have been taken care of for water coolers during the summer season with what was delivered by us. There is no problem. Now, what is to be done? The government at that point of time had said that the standards are going to be changed in their consultation thereon. These standards are related to outlet temperature of the water cooler. And therefore, you had certain raw material with which you have to complete the production, which is as per old specification. There are new specifications as per which you are supposed to produce new water coolers. In this transition, there are two things that are happening. Number one, there is a revenue loss because tertiary sale enough material was available with the dealers.
Second part is they are using the old material to go ahead and exhaust it and selling a product which is supposed to be priced high, which will become high at the price at which it was prevailing. So the margins have shrunk. There is a third problem is the new products are to be manufactured quickly. So this is a momentary problem that is a real setback in the water cooler industry. Now, come to the deep freezers. That regulation came in in January itself. Now, we decided that this particular product will have to be fully manufactured, and we decided we will expand the range even up to 200 liter, 100 liter. And there is a massive program of indigenization that is going on. Indian market is used to Chinese prices. And when you make in India, it is going to be expensive.
There is absolutely no doubt in any product that sort will happen, and we took a call that we will make everything in India only. We are not going to depend on China, and in the manufacturing and getting the margins improved, it is taking time. This is about all. Fundamentally, the market is growing driven by consumption of ice cream and other frozen products, driven by pharmaceutical industry, driven by what we call it as HoReCa, which is the hotel, restaurant, fast food, etc., etc. These are the sectors which are driving. It is also driven by the retail sector, so there is no problem with regard to the growth. There is no problem that is going to be there going forward from end of Q3 to Q4. There is not going to be any problem.
In this transition, the growth of room air conditioners is not matched by this business. That's all the issue is. Now, the last part of it. I mentioned to you that room air conditioners are not exported by us anywhere except when there is a specific, maybe a labor camp. It is connected with one of our B2B customers asking for. In the figures of Q2 last year, there was an export to the Middle East of room air conditioner, which is not there. So therefore, despite room air conditioner revenue growing by 25%, it could be a selective disclosure. I am disclosing it to you, which is correlated with the GfK findings itself of our growing 30%. In fact, I think in Q2 we have grown much more than many competitors as per GfK report.
In the tertiary sale, that is a correlation because in summer, we exhausted our stock. You know that we couldn't build in June itself. And so I am disclosing that figure to you. So there is nothing to worry. Now, come to this part of it. Some competitor is having commercial air conditioning part of the unitary products. How do I compare? Simple. Add segment one and segment two of ours and other competitors, and you'll see Blue Star's growth as well as Blue Star margin is an industry benchmark. And I have done that. And I can tell you that figure if you were to add segment one and segment two of ours. In a minute, I will give you that figure as well. If you add both segment one and segment two, can I take out that margin?
If you add both, I'm giving you that as well for your information. So with that, this subject will come to full clarity. I'm just reading out to you. If I add segment one and segment two together, the revenue because commercial air conditioning, commercial refrigeration service in our case is part of electromechanical projects segment, not part of unitary segment. The revenue growth for Q2 will be 22%. H1 will be 26%. EBIT growth for Q2 will be 36%. H1 will be 54%. And total EBIT will be for H1 will be 7.2%, and Q2 will be sorry, 8.7% for H1. Q2 will be 7.9%. So that 7.9% and 8.7% are industry benchmark. I don't think anybody has reported that figure. Thank you.
Understood. Sir, just one last question. In terms of commercial export order, I believe we had shipped some quantities to the U.S. How's the feedback been there, and have we onboarded more clients?
I don't think they are onboarded. We are working currently with one client who has taken some products. The other client, there was, if you Google, you'll understand there's a refrigerant migration to have to go by U.S. Old refrigerant, there was a deadline that was set, and before the deadline, the shipments have taken place. So that customer is happy. The question is, there were more quantities asked for, but there's only that much we can do in order to meet those deadlines. The other customer is in the process of validating the product. In three to four months' time, we should know where we stand.
But equally, this also I will answer because I'm again repeating whatever I can state because we have nothing to hide. The whole Trump administration, how they will view, it's a clear thing of making America. We are not even making Mexico. And how the industry there will proceed with. And I can tell you that the Chinese players, Japanese players, Korean players, and we are very, very small compared with them. What is going to happen? We do not know. And we have flagged this also because we are developing products for others. We have asked this question as well, what we should do, how we should proceed. And I suppose in the next two to three weeks, some clarity should emerge with regard to this.
Thank you so much, sir.
Thank you. Ladies and gentlemen, please limit your questions to two per participant. The next question is from the lineup. Bhoomika Nair from DAM Capital. Please go ahead.
Yeah, good afternoon, sir, and thank you for the opportunity. So you mentioned about the water cooler aspect of the new government BIS terms kind of impacting the quarter. If you can just give some, is it possible to get some idea of how much of a decline we saw, and when do we see things stabilizing out here in terms of growth coming back? Question number one. And question number two is on the projects business. We've seen a very strong growth profile, margin improvement, etc. You did mention about data centers being one of the segments which is also helping in terms of the segment performance.
Since it's something new that we're doing over the last couple of years, if you can talk about what exactly we do there and what percentage of the data center CapEx do we cater to so that we can try to understand how large this business can become for us over the period of years?
So I explained about commercial. There is nothing to worry. It is a transition with regard to the technical changes. It's a C-class thing according to me. The fact of the matter is it came at a time when you could have happening post-summer. It would have been far better. And don't worry about it. The impact is this. I told you, you will be able to very easily figure this out, right? I am saying our room air conditioner revenue growth is 25% revenue growth. And you have the segment two growth.
I am saying two reasons. One is commercial refrigeration impacted. Two is significant amount of exports to Middle East of room air conditioners was there, which is not there this year. So don't worry about it. It's a one-quarter issue, and it is not to be worried about even in next quarter. So there is nothing to worry.
So things will normalize into the next quarter, which is Q3 onwards. It will reflect the.
Even in October, it has normalized. There is nothing to worry at all.
Thank you.
The segment one is driven basically by commercial air conditioning products. And that is what is driving its huge profitability growth and revenue growth. The projects business continues to be growing at the same rate only. There is nothing dramatic that has happened except that manufacturing and data centers are products which are safe to execute. We hold the leadership position. It is all fast-track products compared with commercial buildings which used to drag on or infra projects which used to drag on. Otherwise, segment one's continued good performance is due to the commercial air conditioning products and service being part of that segment, which I again explained.
In somebody else's case, it is part of segment two and you are seeing the much larger growth there. Here you are seeing segment one as a growth. That is why I combined segment one and segment two and read out the figure and this whole thing is confusing you. I am sorry for this, but I am not able to help.
Sure, so just on data center, can you elaborate what exactly and what percentage of the data center CapEx we do?
In data centers, we do incomplete MEP work. In quite a few cases, civil is very limited there. They may ask you to take related civil work also, and it is ducting, piping, insulation, electrical, plumbing. That is a part we do, and there is a cooling part of it. We do produce chillers meant for data center. It's not the entire equipment connected with data center that we do. We are, in a manner of speaking, an important system integrator there. That is a part of it, and our significant amount of business so far has been in offering solutions as an MEP contractor for all leading, not all, most of the leading data center service providers.
Sure, sir. Thank you so much.
Thank you. The next question is from the line. Sonali Salgaonkar from Jefferies India. Please go ahead.
Sir, thank you for the opportunity. So my first question is, and please help us understand. As per the GfK data that you have quoted, we have outgrown and outpaced the industry by a very large margin, perceivably in H1. And even so, we have retained our RAC market share at about 13.75%. So can you just help us understand the dynamics? And also, you quoted October 2024 volume and revenue numbers. So could you please repeat those again?
I will start with October. October volume growth is 30%, and the revenue growth is 28%. Okay? Now, when I come to the market share why it is not happening. The question is, it was in Q1. We had planned only for 25% growth. With the 25% growth, we could have done 30%. But we managed to do more than 50% growth. Still, we lost sales in May as well as June. I think we would have grown lesser than the industry, my assessment. The commercial, we have significant amount of we are one of the leading players in room air conditioners meant for B2B part of it, institutions like ATM or a small office, etc., etc. But that part of it is not generally captured by GfK. GfK captures only the retail sales. It is based on retail audit.
Now, during the election period, there had been a slowdown in the B2B part of the sales. Generally, in summer season, that particular part of it will not go. They need to compensate during the off-season period. Our assessment is that it should be somewhere around 13.75% only. Though our own teams say it is 14, but we took a call. It should be 13.75 only because of Q1. But definitely, we are not. It is important for me to disclose that also. Our original goal is FY25. We will reach 15% market share. I don't think we are going to reach that this year. If we close with 14%, we will be happy.
Understood. So my second question is regarding this commercial refrigeration. And we understand that these are interim hiccups. From when do you expect to start seeing the improvement in this vertical? And secondly, do we retain our FY25 guidance that we cited in Q1 earnings call of about 20%-25% upside growth and 8.5%-9% operating margin?
The commercial refrigeration part is already resolved. October onwards, there shouldn't be any problem. And we continue to maintain. It will be the top line growth of 25% to 30% in room air conditioners or the unitary products as a whole and margin guideline remain. There is no change in that at all.
Understood. Thank you very much, sir. All the best.
Thank you.
Thank you. The next question is from the lineup. Praveen Sahay from Prabhudas Lilladher Private Limited. Please go ahead.
Thank you for the opportunity. My question is related to the RAC industry because you had given our numbers for the GfK as well as of yours. The growth has been very strong. Industry growth for the first half has been around 31%. You grew by around 45% in volume, even in October, 30%. So how is the channel inventory at this juncture? And usually, we see in the end of Q3, there is some start of the inventory filling for the summers. So, how has it been? And do you expect this kind of a growth to continue in the coming quarters as well?
First is GfK. GfK is a tertiary sales result, which is really picked up at that point, which is what should determine your market share or growth. It's not, "I dump it on a dealer." And in our case, Q1, we exhausted the material. We couldn't. If it is so, we would have improved our market share. So what has happened is predominantly sold by us during the quarter only. Now, the dealers have become much more process-oriented. First of all, more than 50% of the sales are happening through organized retail or modern retailers like Croma, Vijay Sales, and Jio, so on and so forth, and the regional retailers, Sathya, Vijay, Vasanth, etc., or Bajaj.
Now, they all have a robust system of what the counters are selling, what are the inventory levels, how they have to schedule the inventory. It is same like e-commerce that you cannot dump the stock there. The person is right, maybe negotiated on a quantity, but the quantity material will move in the startup. Whereas you will be able to dump a stock in a quarter could be distributors who are handling so many people, and you would have seen our capital employed figure there, and it is managed extremely well, and we do not believe. We discourage that. There is no question of dumping material on anyone at all. In those days, it was a China-imported one, more than 50% of the material. Today, it is all manufactured.
If it is TCM, all the southern states, whether it is Tamil Nadu, Kerala, Karnataka, which are all overnight deliveries. Right now, my assessment is there are no huge inventories lying. I do not think in future such a situation will arise. The dealers are very clear about this. That I negotiate a rate for a particular quantity, but I lift it according to what I need. The old days have gone. This is my assessment. When I talk to the dealers, they are very clear. They are monitoring hour to hour what is their sale and the inventory across their stores. Bottom line is there is no inventory pressure. Great. Good to hear that. Second question is, sir, related to your gross margin. For quarter, there is an improvement in the gross margin as an overall financials.
So if you can highlight what led to that improvement. So that, when you look at the gross margin, it will be inclusive of all businesses. And as we have reflected some time back, both room air conditioner, commercial air conditioning, and service all will be part of this in addition to, of course, the projects business and our commercial refrigeration business. So that on a quarter-on-quarter basis, if you see last year, while it was around 24.8%, this year we have reported at around 26.5%. So there is an improvement in that margin. This is in line with the margin improvements which you are seeing in EBIT and also which is reflected in the segment one as well as whatever improvement would happen in RSE too, to a certain extent. So is that a product mix or some realization benefits you have? It is product mix.
It is product mix as well as some amount of material cost also. There is a continuous re-engineering which anyway goes on, which also contributes to it.
Okay. Thank you, sir, and all the best.
Thank you.
Thank you. The next question is from the lineup, Akshen Thakkar from Fidelity Investments. Please go ahead.
Hi team. Congratulations on a good set of numbers. A couple of questions and then just a suggestion at the end. Both the questions are on margins only. So if I look at segment one, first half margins have been very strong. You had called out some one-offs last quarter, but this quarter seems to be more recurring. Now, first half margins are at 9%, and in the last call, you've spoken about margins at the 7.5%-8% band. Even if I were to assume full year margins at 8%, we are only looking at 7%, 7.5% in second half. So any reason to revisit the margin guidance in segment one? That's question one.
So you complete the questions, and I'll answer what is the second question.
Sure. Second question is around the unitary product business. I guess the math, which is not clear, I get your reluctance to call out how large is commercial refrigeration, cooler business, and fully support you on that. But just to make it a little easy to understand, if you could help us quantify what is the export order in Q2 last year because that would have been gone to zero completely, right? So it just helps us make sense because if room AC is 70%-75% of sales, and that's grown at 25%, for overall segment to go 5%, I don't know if the commercial refrigeration business has declined, which I don't think it might have to such an extent to get to 5%. If you wanted to get a sense of how large the export number was last year.
I appreciate your question. There is no reluctance. It is about the difficulty of being selective disclosure. That's about all. The second is that, see, my competition reports with commercial air conditioning in room air conditioning, unitary product segment. Then I don't have the access to that figure. Perhaps you have access, okay? That's a problem in my book, but I have nothing to hide. I'm telling you, room air conditioner revenue growth in Q2 is 25%. Volume growth is 27%, okay?
Now, I have also stated that the commercial refrigeration has not grown, and it is just coming back, okay? You may assume that it is flat or it is slightly negatively grown. But there is a clear room air conditioner billing that happened to the international market, and we are not in that business. It will be unless specifically somebody asked for. There is a labor camp. There is a villa being constructed like that. It was there last year, Q2. That's about all. Overall, it is coming as -5% or something like that or 5% growth. 5% growth, it is coming. And that's about all. So there is no reluctance here. I don't want to be seen as I am and I have told you, the market size of the commercial refrigeration is INR 4,000 crore.
I enjoy 30% market share, and the INR 28,000 crore plus is the room air conditioner market. And I'm also stating that we are internally trying to figure it out because in every call, this question is coming, "What is room air conditioner?" And there is a record that is set that room air conditioner and commercial air conditioning can be combined elsewhere. And then the question will come, "What is commercial air conditioning?" Now, come to the margin question of yours. I am stating very clearly, segment one margin is good because of the equipment part of it. The commercial air conditioning equipment that is there that is doing extremely well like room air conditioner. That's about all. Now, also in projects, it comes as let us say, for example, project weightage is lower there. Your margin will be very high. And the overall guidance is not changing.
It is somewhere around the 7.5%. It should be 7% to 7.5% only. It should be the margin for segment one. And 8.5% should be the margin for segment two. We are not changing that guidance at all. In the particular quarter, it is looking very high.
Got it. Lastly, just a suggestion. I think over a period of time, if you could engage with investors or sell side just to get disclosures to a level where it makes it easier for us to forecast.
I agree too. I am more than and I am even proposing the industry together also should meet. I keep telling even the industry also I need the segment reporting even though our ROC filing will be there of Daikin or LG or anyone multinational operating here. Now, you take competitors who are in consumer durables, all. Are we getting the figure of air conditioners alone there? And/or we are getting commercial air conditioning and residential air conditioning separated. It is not. I keep asking in a number of quarters.
See, one day, a standard may have to be set that this is how the companies will report. I do understand your difficulty. I am fully with you in this. And we as a board also are asking that, "Look, we have nothing to hide in this." As long as it is a level playing field of disclosures. See, look, there is a competitor who is including commercial air conditioning and related service into unitary products. And here, unitary products, I am including commercial refrigeration alone. Now, if you ask me for this breakup and that breakup also, you should be asking. Now, there are consumer durable players who are reporting as one segment. Then air conditioners out of that has to be given.
Now, should I be saying, "Look, forget about others. I alone should disclose"? That is what we are internally debating. And I am for it. The question is that as investors, you should know what every segment is. But the problem in the conference call is unless I have changed it everywhere, unless I have restated last year, unless the board has taken on record, unless it is the beginning of the year, I won't be able to give some loose disclosures.
For sure. For sure. All right. Thank you so much, sir.
Thank you. The next question is from the lineup, Rahul Agarwal from Ikigai Asset Management. Please go ahead.
Yeah. Hi, sir. Good afternoon and festive greetings to everybody at Blue Star. Sir, just one question on balance sheet and cash flow. Looks like we've invested about 300 crore on the working capital in the first half, which resulted into almost nearly operating cash flow for the period. What has led to this? Is it purely because the higher MEP sales, which is basically projects plus commercial AC, which has led to higher working capital? And where do you expect this to stabilize by March 2025?
Yeah. Mr. Nikhil Sohoni will explain to you. It's not there. It is actually we are investing in the components meant for the rest of the year and the summer season. Because you are aware, there are supply chain disruptions. And there are many non-tariff barriers that are being brought with some manufacturers. Their approvals will be expiring. And that is the reason. Anything else? Yeah. So that is the primary reason as far as working capital goes. There is nothing related to projects in that. This is particularly with respect to components, which we are kind of to ensure or sustain the supply chain, some stocking is what is required. So that's what is the only thing.
Okay. And next question was on capacity and CapEx. If we just explain in terms of new product pipeline, what should we expect from Blue Star over the next 6-12 months? And I'm not asking for specific products. What I wanted to know was overall on a three- or four-segment basis, where is the company investing money for and what's the budget like?
So I think we keep the product launches are scheduled. In the commercial air conditioning space, we completed the product launch. And that is not to do with the season, which is part of the segment one. There are data center chillers. There are certain process application chillers, including brine chillers, and the centrifugal chillers we have taken to the next range. In other words, commercial air conditioning, we are a comprehensive player. We are there in VRF system. We are in screw chillers. We are in scroll chillers. We are in process chillers. We are in centrifugal chillers. We have introduced some data center chillers. We are expanding that range of data center chillers. That is the plan, roadmap.
In the room air conditioner segment, it is not an energy label change here, but with the aspiration, what is the direction? The direction is we should have products at the every price point, and that is the reason why we are growing. The next part is that you would also notice that we have been introducing somewhere around 75 SKUs every season. At this juncture, going by the last summer season, where the extreme summer conditions call for heavy-duty air conditioners. So if it is not designed for those conditions, it will not be able to deliver the required cooling during the summer season. This was one of the customer experience issues during the summer season.
In fact, quite a few customers ended up asking, "Your car AC or two-wheeler is running at the temperature. Why air conditioner alone at high temperature is not delivering that kind of cooling when they need that cooling?" which means it is redesigning the equipment and launching certain heavy-duty models, many more that is on the anvil. The AI-enabled, Wi-Fi-enabled machines are being asked for by young generation or certain customers, and we are introducing that as well. The product launches are scheduled in February, and we will be announcing that.
In commercial refrigeration, as I told you, that we have just completed that water cooler redesign, and we will be launching a few more models there. And we will be going ahead and launching a new range of deep freezers for certain applications also. These are the plans going forward.
And the budget is about INR 300-400 crore a year, right?
Yeah. On capital expenditure. On CapEx statement, yeah. That's CapEx and product development would be put together.
Okay. And working capital, you explained the reason why we should see a normalcy by March 2025 balance sheet. Is that correct?
I think so. That is what is planned. The question is, and I'll be much more transparent here. See, there are a few components which are all in India supply chain is supposed to develop: the compressors, copper tubes, and electronics. Somewhere, it is a capacity constraint locally. Somewhere, it is the quality constraint because Indian manufacturers will make it for the first time. Somewhere, it is connected with the cost because we are replacing China. Somewhere, the Chinese players who have invested here are not able to expand. They are waiting for some clearance or visa, so on and so forth. The things are changing dramatically. It is improving.
In the meanwhile, we do not want a situation where you will be falling short of components or manufacturers. Because in value terms, it may not be significant, but a complete manufacturing line may be started of a particular component. And the second part is that since Sri City has become one important hub, Sri City and Chennai, there are vendor ecosystems that are developing there. And that development approval, these are taking time also. So the full capacity may not be coming from there as well. So we are taking that also into consideration for a huge growth, which is CAGR of 20% until 2030, the projection. And this year, next year, it may be 25%-30% growth.
And so I think it should be this kind of higher inventory should be till end of summer, is my view. I don't think very smooth supply chain is going to happen so very fast because of the reason I explained.
Got it, sir. Very clear. Thank you so much. And best wishes for the rest of the year.
Thank you.
Thank you. The next question is from the lineup, Dhruv Jain from Ambit Capital. Please go ahead.
Thank you for the opportunity. Sir, in the earlier part of the call, you were mentioning about how's the market size of commercial refrigeration and market share. I just wanted to understand the same for the commercial AC part. What's the market size like, and how are you thinking about growth in your own market share in this vertical, given there are newer opportunities like data centers emerging in this vertical?
Yeah. I think my estimate is anywhere between INR 5,000 crore to INR 6,000 crores because more and more applications are coming in, even in process chillers. The data center, again, is an evolving thing. Multiple types of cooling are being deployed. As the industry grows, many innovative solutions will be happening from the chip manufacturers onwards to server manufacturers. There are multiple technologies. It's a very complex, advanced one. As of now, you can take it as something like INR 6,000 crores as a market size of commercial air conditioning, and we may be playing in that market in mostly around INR 4,500 crores of that market we will be addressing, and our market share should be around 20% there.
Got it, sir. And sir, how should we think about growth in this vertical? And you also mentioned that we've also seen this vertical is also seeing growth because of summer, etc. But from a structural three-year or five-year point of view, right, how should we think about growth for you in this vertical?
See, it will be driven again by the consumption sector, right? It is one of the segments that it serves. It is large infra, social, as well as the public infrastructure like airports, metro railway, and hotels, hospitals, which require large chillers. Shop, showroom, boutiques, this will consume the VRF systems or the packaged air conditioning systems. My assessment is that easily that should also grow by 15%-20% every year.
Thank you. Okay. And sir, just one question. I know we don't give out disclosure with respect to order book, but if I recall correctly, about five years back, I think commercial buildings used to be a very large part of your MEP order book. I just wanted to understand what's the diversification of orders like in that vertical from a risk as well as an opportunity point of view.
o they will attempt to give you that. We don't have any problem in disclosing the electromechanical project part of it, infrastructure, commercial buildings, factories, and data centers, how those orders are distributed. We will try to give it to you perhaps in the next call or something like that. Right now, the commercial buildings should be only 20%, and the infrastructure should be around 30%. That's what I feel. 35% should be infrastructure projects. The factories and data centers are a significant part of our focus.
The market may not be that. But market will be very large in buildings. Market will be very large in this one. But our success rate or our focus and where we want to play. So there is a skew towards factories and data centers.
Noted, sir. Thank you so much for all the best.
Thank you.
Thank you. Ladies and gentlemen, we'll take this as the last question. I would now like to hand the conference over to Mr. Nikhil Sohoni for closing comments.
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 queries were not fully answered, and we'll be happy to provide you with additional details by email or in person. Thank you.
Thank you. On behalf of Blue Star Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.