Blue Star Ltd (NSE: BLUESTARCO) Q2 2025 Earnings Call dated Nov. 07, 2024
Corporate Participants:
B. Thiagarajan — Managing Director and Executive Director
Nikhil Sohoni — Chief Financial Officer
Analysts:
Natasha Jain — Analyst
Bhoomika Nair — Analyst
Sonali Salgaonkar — Analyst
Praveen Sahay — Analyst
Akshen Thakkar — Analyst
Rahul Agarwal — Analyst
Dhruv Jain — Analyst
Presentation:
Operator
Ladies and gentlemen, good morning, and welcome to Blue Star Limited Q2 and H1 FY ’25 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. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. B. Thiagarajan. Thank you, and over to you, sir.
B. Thiagarajan — Managing Director and Executive Director
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 the — with a revenue growth of over 20% and operating profit growth of around 22% and a 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 that’s specifically the month of October.
All throughout, post the summer season, the room air conditioners 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%. This is happening after volume growth of over 53% in H1 for room air conditioners and revenue growth of around 45%. And in Q2 alone, the room air conditioners grew 27% and a revenue growth of around 25%.
Now the questions will come on segment wise that growth is not reflecting. We 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 treasury growth of 17%, Blue Star growth is reflected as 30%. And 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, you might have seen in my media interviews as well over the past two, three weeks, while there is — there are — there is a slowdown that is being reported in FMCG or automobile sector; fortunately, the room air conditioners 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’m not able to answer. Perhaps, a, the temperature conditions or the way we — people are getting used to air conditioning in other ways, whether it’s 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, that we continue to witness that more than 50% of the sale is happening in — 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 conditioner 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 27 of 2024, the related changes in terms of specification that has disrupted the supply chain and there are difficulties where we will — 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 the elections. And the commercial air conditioning business continues to do well in which, in our case, is part of segment 1. It is not part of segment 2 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 financial year FY ’25. And I think it will be another landmark here. We are proceeding with our investments where we are 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 refrigeration 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 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 the delivery of the material, those are going on as per the plan.
Overall, it is — 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 Nikhil.
Nikhil Sohoni — Chief Financial Officer
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 the 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 FY ’25 grew 20.4% to INR2,276 crores as compared to INR1,890 crores in Q2 FY ’24. EBITDA, excluding other income, for quarter 2 FY ’25, improved to INR149.3 crores, a margin of 6.6% of revenue as compared to INR122.7 crores and EBITDA margin of 6.5% of revenue in the quarter 2 of last year.
PBT grew 38.3% to INR131.4 crores in Q2 FY ’25 as compared to INR95 crores in Q2 FY ’24. Tax expense for Q2 FY ’25 was INR35 crores as compared to INR24.3 crores in Q2 FY ’24. Net profit grew 35.7% to INR96 crores in Q2 FY ’25 as compared to INR71 crores in Q2 FY ’24. Carryforward order book as of September 30, 2024, grew by 9.8% to INR6,598 crores as compared to INR6,008 crores as of September 30 last year. Carryforward order book as of March 31, 2024, stood at INR5,697 crores.
The capital employed as of September 30, 2024, increased to INR2,550 crores as compared to INR2,070 crores as of September 30, 2023. We continue to invest in manufacturing capacity, R&D and digitalization initiatives. The net cash position of INR185.26 crores as on September 30, 2024, as compared to net cash position of INR285.9 crores as of September 30, 2023. Coming to business highlights. Segment 1 that is electromechanical projects and commercial air conditioning. The segment 1 revenue grew by 32.6% to INR1,428.4 crores in quarter 2 of FY ’25 as compared to INR1,077.2 crores in quarter 2 of FY ’24.
Segment results was INR119.2 crores, which is 8.3% of revenue in quarter 2 of FY ’25 as compared to INR65.28 crores which was 6.1% of revenue in quarter 2 of FY ’24. Order inflow for the quarter was INR1,899 crores in quarter 2 of FY ’25 as compared to INR1,765 crores in quarter 2 FY ’24. 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 carryforward order book of the Electromechanical Projects business was INR5,037 crores as of September 30, 2024, as compared to INR4,609 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, health care 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 elections.
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 1 margin saw an improvement in Q2 FY ’25, rising to 8.3% of revenue compared to 6.1% of revenue in Q2 FY ’24. The improvement in margins is a result of changing mix of the business within the segment. Coming to Segment 2, that is Unitary Products. The Segment 2 revenue grew 5.1% to INR767 crores in Q2 FY ’25 as compared to INR729 crores in Q2 FY ’24. Segment result was INR53.9 crores that is 7% of revenue in Q2 FY ’25 as compared to INR61.6 crores with 8.4% of revenue in Q2 FY ’24.
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 nonseasonal quarter. The demand for room 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 3, 4, 5 markets continue to dominate.
With the globalization 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 disruptions, 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-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 2. Segment 3, that is Professional Electronics and Industrial Systems. Here, the revenue degrew by 3.8% to INR80.5 crores in Q2 of FY ’25 as compared to INR83.7 crores in Q2 of FY ’24. Segment result was INR5.2 crores, which was 6.4% of revenue in Q2 of FY ’25, as compared to INR12.2 crores, that is 14.6% of revenue in Q2 FY ’24.
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 FY ’25. 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 FY ’25 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 FY ’25 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 ambition. 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 e-mail. With that, we are open for questions.
Questions and Answers:
Operator
Thank you very much. [Operator Instructions] The first question is from the line of Natasha Jain from Nirmal Bank Securities Private Limited. Please go ahead.
Natasha Jain
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 I’m asking the split. And a related question here is, while I understand that there has 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 and a medium-term outlook here, growth outlook?
B. Thiagarajan
Thank you. So I’ll try and explain. We are also internally trying to discuss and even in the Board, we are discussing how to go ahead and classify the segment. First of all, the segment classification as Electromechanical Projects and Commercial Air Conditioning and Unitary Products and the other Professional Electronics has continued for many years. Now what is in — what in case of Blue Star, that it is better because like you, some of you may be new to this.
Segment 1 has got Electromechanical Projects, which is EPC contracting business. It has got Commercial Air Conditioning, which are VRF systems or chillers or packaged air conditioners, which are 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 income of service 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 1 contains.
Segment 2 contents 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 lumps. Some years, it comes somewhere Middle East basically because it is not a business in which you will be able to compete, which we have stated because in 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 ask in the Middle East, we would have delivered, which is 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 1. Anything we are talking about products that are being developed or expenses today incurred for U.S. or Europe that goes into Segment 1. Now the question here is the room air conditioner versus commercial air conditioning, which has been a repeated question because the room air conditioner is a Star product, which is growing. 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 INR25,000 crores to INR28,000 crores, the commercial refrigeration market is INR4,000 crores. And our market share in commercial refrigeration is 30%. In room air conditioner market, our market share is 13.75% to 14% at this point of time. The question that is asked is that how — 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 Products segment. Now if I were to do that, actually, my EBIT itself can go up by INR200 crores. Now the question is that whether we should be reporting room air conditioners separately, commercial refrigeration products separately and commercial air conditioning products separately. That’s a debate internally, we are having. But the question is that, as I have been saying that I’m — 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 an information. Say, the peers, we 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 in tertiary which is the real thing that has happened in the marketplace. Now Blue Star’s room AC growth of Q2 is 27%. Revenue growth is 25%. And H1 Blue Star room AC growth in volume terms is 53%, revenue growth is 45%. These information are available in multiple forms through GfK or otherwise, you will know. Now — you have to bear with me. We are internally debating. We will take a decision at some point of time. That will be beginning of our financial year.
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 2 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 phased 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 INR28,000 crores is the market size of room air conditioners, where we enjoy 13.75% market share, close to 30% market share we enjoy in the INR4,000 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 nontariff barrier, unless your facility is approved by BIS, you will not be able to dispatch the products from a particular date. So what obviously we will do, you have gone ahead and produced the products for — I am being transparent to the extent possible I’m 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? Second — 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 consultations 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 we are using the old material to go ahead and exhaust it. And the selling a product which is supposed to be priced high, which will — costs 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 that any product that’s what of will happen. And — we are — 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 the, what we call it as HoReCa, which is the hotel restaurant, fast food, et cetera, et cetera. 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 rate, 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’m 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 sales that is a correlation. Because in summer, we exhausted our stock, you know that, we couldn’t bill in June itself. And — so I’m 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? It’s simple. And Segment 1 and Segment 2 of ours and other competitors that you see.
Blue Star’s growth as well as Blue Star margin is the industry benchmark. And I have done that, and I can tell you that figure, if you were to add Segment 1 and the Segment 2 of ours, — in a minute, I will give you that figure as well. If you add both Segment 1 and Segment 2 — 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 1 and Segment 2 together, the revenue — because commercial air conditioning, commercial air conditioning service in our case is part of the Electromechanical Project segment, not part of the Unitary segment.
The revenue growth for Q2 will be 22%, H1 will be 26%. EBIT growth of — for Q2 will be 36%, H1 will be 54%. And the total EBIT will be for H1 will be 7.2% and the 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 have reported that figure. Thank you.
Natasha Jain
Understood, sir. Sir, just one last question in terms of commercial export order, at least, we had shipped some quantities to U.S. So how has the feedback been there? And have we onboarded more clients?
B. Thiagarajan
I don’t think — we are working currently with one client who have taken some products. The other — there was a — if you Google, you will understand, there’s a refrigerant migration to [Indecipherable] by U.S. And old refrigerant, there was a deadline that was set. And before the deadline, the shipments have taken place. So that customer is happy. And the question is there were more quantities asked for, but only that much we can do in order to meet those deadlines. And 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’ll answer because I’m again repeating, whatever I can say, because we have nothing to hide. The whole Trump administration, how they will view, it’s a clear thing of Make in America, not even Make in 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 with — 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.
Natasha Jain
Thank you so much sir.
Operator
Thank you. [Operator Instructions] The next question is from the line of Bhoomika Nair from DAM Capital. Please go ahead.
Bhoomika Nair
Yeah, good afternoon sir and thank you for the opportunity. Sir, 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, et cetera. 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?
B. Thiagarajan
So the — I explained about commercial — there is nothing to worry. It is a transition with regard to the technical changes. It’s lasting[Phonetic] according to me. The fact of the matter is it came at a time when if it is 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’m saying our room air conditioner growth — revenue growth is 25% revenue growth. And you have the Segment 2 growth. And I’m saying two reasons. One is commercial refrigeration impacted. Two is a 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.
Bhoomika Nair
So things will normalize into the next quarter, which is 3Q onwards, it will reflect the.
B. Thiagarajan
Even in October, it has normalized. There is nothing to worry at all. So the Segment 1 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 version. It is all fast-track products compared with commercial buildings, which used to drag on and infra projects which used to drag on. Otherwise, Segment 1s 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 2. And you are seeing a much larger growth there. Here, you’re saying Segment 1 is a growth. That is why I combined Segment 1 and Segment 2 and read out the figure. And this whole thing is confusing you. I’m sorry for this, but I’m not able to help.
Bhoomika Nair
Sure. So sir, just on data center. Can you elaborate what exactly and what percentage of the data center capex we do?
B. Thiagarajan
In data centers, we do complete MEP work like in quite a few cases, they may — 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, and we do produce chillers meant for data center. And it’s not the entire equipment connected with data center that we do. And 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.
Bhoomika Nair
Sure sir. Thank you so much.
Operator
Thank you. The next question is from the line of Sonali Salgaonkar from Jefferies India. Please go ahead.
Sonali Salgaonkar
Sir, thank you for the opportunity. Sir, my first question is on 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 ’24 volume and revenue numbers. So could you please repeat those again?
B. Thiagarajan
I will start with October. October volume growth is 30% and the revenue growth is 28%, okay? Now — when I — okay, come to the market share why it is not happening. The question is, it was in Q1, we had planned only for 25% growth. So with the 25% growth, we could have done 30% at — but we managed to do more than 50% growth. Still, we lost sales in May as well as June. And I think we would have grown lesser than the industry is my assessment. And the commercial — we have significant amount of — we are one of the leading players in — room air conditioner meant for B2B part of it, institutions, like ATM or a small office, et cetera, et cetera. 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. And generally, in summer season, that particular part of it will not go. It compensate during the off-season period. So 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 in FY ’25, 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.
Sonali Salgaonkar
Understood. Sir, my second question is regarding this commercial refrigeration, and we understand that these are interim hiccups. From when do you expect the improved — start seeing the improvement in this vertical? And secondly, do we retain our FY ’25 guidance that we cited in Q1 earnings call of about 20%, 25% top line growth and 8.5% to 9% operating margin?
B. Thiagarajan
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 remains. There is no change in that at all.
Sonali Salgaonkar
Understood. Thank you very much sir. All the best.
B. Thiagarajan
Thank you.
Operator
Thank you. The next question is from the line of Praveen Sahay from Prabhudas Lilladher Private Limited. Please go ahead.
Praveen Sahay
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 summer. So how has been? And do you expect this kind of growth to continue in the coming quarters as well?
B. Thiagarajan
So first is the GfK. GfK is tertiary sales figures. What is really picked up by the customer, which is what should determine your market share or growth. It’s not I dump it on a dealer. And the — 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. So first of all, more than 50% of the sales are happening through organized power or modern retailers like Croma, Vijay Sales and Jio, so on and so forth and the regional retailers, Satya, Vivek, Vasanth, et cetera. Now — or Bajaj.
Now the — they all have a robust system of what they — what the counters are selling, what are their inventory levels, how they have to schedule the inventories. It’s the same like e-commerce that you cannot dump the stock there. The question is price may be negotiated on a quantity, but the quantity material will move this manner. Where you will be able to dump our 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.
Then — those days, it was a China imported one, more than 50% of the material. But today, it is all manufactured. And if it is Sri City, all the southern states whether it is Telangana, Andhra Pradesh, Tamil Nadu, Kerala, Karnataka, Puducherry — these are all overnight deliveries. Right now, my assessment is there are no huge inventories lined. And 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. And the old days have gone. This is my assessment. And 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. I don’t — bottom line is there is no inventory pressure.
Praveen Sahay
Great. Good to hear that. Second question is, sir, related to your gross margin. For [Technical Issue] there is improvement in the gross margin as an overall financials. So if you can highlight what led to that improvement?
B. Thiagarajan
Nikhil can.
Nikhil Sohoni
So that — see, 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 their margin. This is in line with the margin improvements, which you are seeing in EBIT and also which is reflected in the Segment 1 as well as whatever improvement would have happened in RAC to a certain extent.
Praveen Sahay
So is that a product mix or some realization benefits here?
Nikhil Sohoni
It is product mix as well as some amount of material cost also. There is a continuous reengineering, which anyway goes on, which also contributes to it.
Praveen Sahay
Okay. Thank you sir and all the best.
B. Thiagarajan
Thank you.
Operator
Thank you. The next question is from the line of Akshen Thakkar from Fidelity Investments. Please go ahead.
Akshen Thakkar
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 1, first half margins have been very strong. You had called out some one off 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% to 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 1? That’s question one.
B. Thiagarajan
So you complete the questions, I’ll answer. So what is the second question?
Akshen Thakkar
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 grow 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%. So we wanted to get a sense of how large the export number was last year?
B. Thiagarajan
So 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 the commercial air conditioning and room air conditioning, unitary products segment, then I don’t have the access to that figure, perhaps you have the access, okay? That’s a problem in my — but I have nothing to hide. I’m telling you room air conditioners’ 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 they’re slightly negatively grown, but there is clear room air conditioners, billing that happened to the international market and we are not in the business. It will be unless specifically, somebody asks for it. There is 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 minus 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 INR4,000 crores. I enjoy 30% market share and the INR28,000 crores-plus is 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 the room air conditioner? This.
And there is a record that is set that room air conditioning, commercial air conditioning can be combined elsewhere. And then the question will come, what is commercial air conditioning? This. Now come to the margin question of yours. I am stating very clearly, Segment 1 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 at, let’s 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 should be the margin for Segment 1. And 8.5% should be the margin for Segment 2. We are not changing that guidance at all. In the particular quarter, it is looking very high.
Akshen Thakkar
Got it. Yes. Lastly, just a suggestion. I think over a period of time, if you could engage with investors, et cetera, just to get disclosures to a level where it makes us easier for us to.
B. Thiagarajan
I wish you, I’m more than and I’m even proposing the industry together also should meet. I keep telling even the SEBI also. I need segment reporting of — even though ROC filing will be there of Daikin or LG or any one multinational operating here. Now you take competitors who are in consumer, durables, all that are we getting the figure of air conditioners alone there? And all we are getting commercial air conditioning and residential air conditioning separated. It is not. I keep asking in a number of forums.
See, one day, a standard may have been 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 is 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’m 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 conditions 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 sorry, the question is that as investors, you should know what is — 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 wouldn’t be able to give some loose disclosures.
Akshen Thakkar
For sure. For sure.
B. Thiagarajan
Thank you.
Akshen Thakkar
Alright. Thank you so much sir.
Operator
Thank you. The next question is from the line of Rahul Agarwal from Ikigai Asset Management. Please go ahead.
Rahul Agarwal
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 INR300 crores on the working capital in the first half, which has resulted into almost maybe operating cash flow for the period. What has led to this? Is it purely because the higher EMP sales, which is basically projects plus commercial AC which was led to higher working capital? And where do you expect this to stabilize by March ’25?
B. Thiagarajan
Mr. Nikhil Sohoni will explain to you. It’s not there. It is actually we are investing in the components, mainly for the rest of the year and the summer season because you are aware, there are supply chain disruption and there are many non-tariff barriers that are being brought away. Some manufacturers their approvals will be expiring, and that is the reason. You have anything else.
Nikhil Sohoni
Yes. So that is the primary reason. As far as working capital goes, is now nothing related to projects in that. This is particularly with respect to components, which we are kind of to ensure sustain the supply chain, some stocking is what is required. So that’s what is the only thing.
Rahul Agarwal
Okay. And next question was on capacity and capex. If you could just explain in terms of new product pipeline, what should we expect from Blue Star over the next six to 12 months? And I’m not asking for specific products. What I wanted to know was overall on a three, four segment basis, where is the company investing money for and what’s the budget like?
B. Thiagarajan
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 1. There are data center chillers. There are certain process application chillers, including brine chillers and centrifugal chillers we have taken to the next range and in other words, commercial air conditioning, we are a comprehensive player. We are there in [Indecipherable] system. We are in screw chillers, we are in scroll chillers, we are in process chillers, we are in centrifugal chillers. We are in — we have introduced some data center chillers.
We are expanding the range of data center chillers. That is a planned road map. 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 every price point. And that is the reason why we are growing. The next part is that you would have also noticed that we have been introducing somewhere around 75 SKUs every season. At this juncture, going by the last summer season, there 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, a car is running 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 and which means it is redesigning the equipment and launching certain heavy-duty model, many more. That is on the anvil. The AI-enabled, WiFi-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.
Rahul Agarwal
And the budget is about INR300 crores to INR400 crores a year, right?
Nikhil Sohoni
Yes. On capital expenditure.
B. Thiagarajan
On capex, it is. That capex and product development would be seen together.
Rahul Agarwal
Okay. And working capital, you explained the reason that we should see a normalcy by March ’25 balance sheet, is that correct?
B. Thiagarajan
I think so. That is what is planned. The question is I will 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 you 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. So things are changing dramatically.
It is improving. In the meanwhile, we do not want a situation there, you will be falling short of components for manufacturing because in value terms, it may not be significant, but complete manufacturing line may be start of a particular component. And the second part is that since Sri City has become one important hub, Sri City and Chennai, there are vendors — vendor ecosystem that is 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% till 2030 is a projection. And this year, next year, it may be 25% to 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.
Rahul Agarwal
Got it sir. Very clear. Thank you so much and best wishes for the rest of the year.
B. Thiagarajan
Thank you.
Operator
Thank you. The next question is from the line of Dhruv Jain from AMBIT Capital. Please go ahead.
Dhruv Jain
Thank you for the opportunity. Sir, in the earlier part of the call, you were mentioning about how is the market size of commercial refrigeration and your market share, I just wanted to understand the same for the commercial AC part, what’s the market size like? And how are we thinking about growth in your own market share in this vertical, given there are more opportunities like data centers emerging in this vertical?
B. Thiagarajan
Yes. I think my estimate is anywhere between INR5,000 crores to INR6,000 crores because more and more applications are coming in even in process chillers. See, 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 INR6,000 crores as a market size of commercial air conditioning. And we may be playing in that market in — mostly around INR4,500 crores of that market, we will be addressing and our market share should be around 20% there.
Dhruv Jain
Got it, sir. And sir, how should we think about growth in this vertical? And we also mentioned that we’ve also seen — this vertical has also seen growth because of summer, et cetera. But from a structural three-year or five-year point of view, right, how should we think about growth for you in this vertical?
B. Thiagarajan
See, it will be driven again by the construction sector, right? It is what are the segments that it serves. It is a large infra, social as well as the public infrastructure like airports, metro, railway and hotel, 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% to 20% every year equipment part.
Dhruv Jain
Okay. And sir, just one question. I know you 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?
B. Thiagarajan
So we will attempt to give you that. We don’t have any problem in disclosing the electromechanical projects part of it. Infrastructure, commercial buildings, factories and data center, 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 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.
Dhruv Jain
Got it sir. Thank you so much and all the best.
B. Thiagarajan
Thank you.
Operator
Ladies and gentlemen, we’ll take this as a last question. I would now like to hand the conference over to Mr. Nikhil Sohoni for closing comments.
Nikhil Sohoni
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 e-mail or in person. Thank you.
Operator
[Operator Closing Remarks]