Blue Star Ltd (BLUESTARCO) Q3 FY23 Earnings Concall Transcript

Blue Star Ltd (NSE:BLUESTARCO) Q3 FY23 Earnings Concall dated Jan. 31, 2023.

Corporate Participants:

B Thiagarajan — Managing Director

Nikhil Sohoni — Group Chief Financial Officer

Analysts:

Ravi Swaminathan — Spark Capital Advisors — Analyst

Sandeep Tulsiyan — JM Financial — Analyst

Praveen Sahay — Prabhudas Lilladher — Analyst

Dhananjai Bagrodia — ASK Investment Managers — Analyst

Anupam Gupta — IIFL Securities — Analyst

Gopal Nawandhar — SBI Life Insurance — Analyst

Manoj Gori — Equirus Securities — Analyst

Atul Mehra — Motilal Oswal Asset Management — Analyst

Khadija Mantri — Sharekhan — Analyst

Rahul Gajare — Haitong Securities — Analyst

Shrinidhi Karlekar — HSBC — Analyst

Shrinidhi Karlekar — HSBC Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good evening and welcome to Blue Star Limited Q3 and Nine-M FY ’23 Earnings Conference Call. We have with us today from the management, Mr. B Thiagarajan, Managing Director, Blue Star Limited; and Mr. Nikhil Sohoni, Group Chief Financial Officer, Blue Star Limited. [Operator Instructions] Please note 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

Thank you. Good evening, ladies and gentlemen, thank you for joining this call. Actually, we should have done this tomorrow, being the union budget day, we thought that we will go ahead and complete this interaction today itself. You might have received the results which have been already uploaded.

As you can see, it is for the fifth consecutive quarter, we have done well. All segments have done well. As I have been intimating in the television channels or in the press and to some of you, the margin continue to be under pressure. And the good news is that we are on course to achieve what we wanted to achieve. So in our view, we are performing according to the plan that we had for the financial year.

In B2C segment, the preparations for the summer season is on and the Sri City factory has just gone on commercial production and we know that this particular quarter will be very important quarter for build-up to the summer. And in B2B segment, as you would have read, the order inflows are very healthy, order execution space is actually very satisfying and the Blue Star engineering and electronics or the Professional Electronics and Industrial segment, that is also doing well.

Now I have with me, Mr. Nikhil Sohoni, Group Chief Financial Officer, and he will give you the comprehensive update on the quarter ended December 31, 2022, and later on, he will answer your questions. Where I have to step in, I will step in.

In summary, we are very, very optimistic about the prospects for Blue Star for this financial year. We will continue to grow faster than the market. We will stay focused on costs. We will continue our policy of prudent capital allocation and we have set for ourselves pragmatic growth targets and I am certain that we will end the fourth quarter also on a high note and we are well-prepared for the summer season ahead as well. We know very well there will be certain headwinds as I had been telling and we have learned how to cope with that, beginning tomorrow itself. And I’m certain, in case there is custom duty increase on components, many of you will have a question how the margin will be impacting and how the summer season will be — so many capacities getting added, how the competition in room air conditioner segment will be, and whether there’ll be inflationary pressure or some other reason due to which, whether the project execution will slow down. Our risk management framework is comprehensive and we have — you have seen our track record and that is how we will proceed further.

So I’ll hand it over to Mr. Nikhil Sohoni for the comprehensive update on the quarter and then we will answer your questions. Thank you very much. Over to you, Nikhil.

Nikhil Sohoni — Group Chief Financial Officer

Thank you, Mr. Thiagarajan. Good evening, ladies and gentlemen. This is Nikhil Sohoni, and I’ll be providing you an overview of the results of the Blue Star for the quarter ended December 2022.

So despite inflationary pressures and general slowdown in the Western economies, business and consumer sentiments in India continued to be optimistic during the quarter. Inquiries and order inflows in our B2B business continued to be buoyant. Simultaneously, the demand for our B2C products continued to be healthy. Consequently, we ended the quarter on a high note with growth across all segments and a robust order book.

Financial highlights for the quarter ended December 31, 2022 on a consolidated basis are summarized below. Revenue from operations for Q3 FY ’23 grew by 18.7% to INR1,788.2 crores as compared to INR1,506.2 crores in Q3 of last year. EBITDA, excluding other income and finance income, for the quarter was INR104.7 crores which was a margin of 5.9% of revenue as compared to INR90.6 crores, a margin of 6% of revenue in the quarter three of last year.

Till Q2 of this year, the company was following a written-down value method for accounting depreciation. However, during the current financial period, the company has capitalized new capacities, including plant and machinery and factory building and due to this capacity expansion, it was decided to relook at the pattern of consumption of the future economic benefits of the property, plant and equipment. Having concluded that, it was decided that a straight-line method of depreciation reflects the pattern in which the benefit from the use of the assets are expected to be consummated. Accordingly, the depreciation method has been changed from WDV to straight-line method with effect from October 1, 2022. This led to a lower depreciation charge for the quarter by INR10.8 crores.

Profit before tax grew by INR80.1 crores in quarter three of current year as compared to INR70.3 crores in quarter three of last year. Tax expense for the current quarter was INR21.6 crores as compared to INR22.8 crores in the quarter three of last year. Net profit for quarter three grew to INR58.4 crores as compared to INR47.6 crores in the quarter three of last year. Carry-forward order book as of December 31, 2022 grew by 47.3% to a record INR4,862 crores as compared to INR3,301.3 crores as of December 31 of last year.

Capital employed as on December 31 in the current year increased to INR1,505.6 crores as compared to INR1,107.4 crores as on December 31, 2021. This was owing to high inventory holding to prepare for the upcoming season and mitigate the supply-chain risks as well as the capital investments for manufacturing capacity expansion projects at Wada and by the subsidiary Blue Star Climatech at its plant at Sri City. Consequently, we have ended the quarter with a net borrowing of INR395.9 crores with a debt-equity ratio of 0.36 on a net basis as compared to a net borrowing of INR165.1 crore and a debt-equity of 0.18 as on December 31, 2021.

Coming to business highlights. The first Segment 1, the Electro-Mechanical Projects & Commercial Air Conditioning Systems segment, here the segment revenue grew 20.5% to INR1,000 crores in quarter three of the current year as compared to INR829.9 crores in the quarter three of last year. Segment result was INR71.7 crores, there was 7.2% of revenue in the current quarter, as compared to INR52.4 crores or 6.3% of revenue in the quarter three of last year. Order inflow for the quarter grew by 97.1%, to INR1,680.8 crores as compared to INR852.8 crores in the quarter three of last year.

Coming to Electro-Mechanical Projects business, the investment plan in infrastructure and manufacturing facilities continued to be actively pursued leading to an improvement in inquiries and order finalizations. We continue to witness healthy order inflow from all segments, including factories and data centers. We also booked significant orders in the newly entered railway electrification segment. Carry-forward order book for the Electro-Mechanical Projects business stood at INR3,685.2 crores as on December 31, 2022 as compared to INR2,310.87 crores as on December 31, 2021, which was a growth of 59.5%. Major orders were received during the quarter from Bangalore Metro Rail Corporation and Central Organization for Railway Electrification.

Coming to Commercial Air Conditioning System, the demand from government, industrial, healthcare and hospitality sectors continued to be encouraging. This, coupled with continued focus on channel expansion across Tier 1 [Phonetic], 2, 3 and 4 towns has enabled growth in the revenue during the quarter. We continue to maintain our Number 1 position in conventional and inverted ducted air conditioning system as well as scroll chillers and second position in VRFs and screw chillers. Some of the major orders received during the quarter were from Udaipur Cement Works Limited, Lands, Projects and Property, etc., to name a few. We have also received a major order from [Technical Issues] Municipal Corporation for a newly-launched state-of-art large capacity centrifugal chillers.

Coming to international business, we observed growth across all segments with increasing demand for our products in international markets. We witnessed strong demand for our room air conditioners and VRFs and ended the quarter with a healthy order book. The pace of execution of projects and order inflow in Qatar witnessed slowdowns due to preparations and restrictions in the run-up to the FIFA World Cup. The operations of the joint venture at Malaysia continues to be impacted, owing to the slowdown in construction and order finalization amidst image weak macroeconomic conditions in the country. We will continue to focus on the expansion of the Blue Star product range and build brand awareness and brand visibility in different markets that we are present in.

Coming to Segment 2, that is Unitary products, the revenue grew 15.1% to INR701.9 crores in the quarter three of the current year as compared to INR609.7 crores in the quarter three of last year. Segment result improved to INR51.8 crores, which was 7.4% of revenue in quarter three of the current year as compared to INR38.8 crores, 6.4% of revenue in quarter three of last year. This was due to benefit of scale and higher share of revenue from our own manufactured products.

Cooling and purification products business, despite subdued festive demand, our room air conditioner business registered a growth of 15% with channels beginning to stock up in December for the upcoming season. We grew in line with the market and maintained a market share of 13.25%. The new plant at Sri City commenced commercial production in January 2023 and is expected to add improvement in margins going forward.

Commercial refrigeration business, it continued to witness traction across all segments with a substantial increase in consumption levels. We also witnessed strong demand from Tier 3, 4 and 5 cities enabling growth in revenue for the quarter. We have also been receiving major orders for cold storage for logistics segment which is expected to offer significant opportunities in the coming months. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms. Some of the major orders received during the quarter were from Reliance Retail, Dr. Reddy’s Pharma, Milma, Epson [Phonetic] Agro and several proprietary agro customers to name a few.

Segment 3, that is Professional Electronics and Industrial Systems, here the revenue grew by 29.3% to INR86.2 crores in the current quarter as compared to INR66.7 crores in the quarter three of the last year. Segment result was INR10.9 crores in the current quarter as compared to INR12.8 crores in the quarter three of last year. We were impacted by planned investments in business development, marketing and other initiatives for future growth. We continued to witness strong demand for our healthcare offerings, driven by increasing awareness and investments in the sector. Demand for non-destructive testing business from industrial sector and data security solutions from BFSI sector also continued to be encouraging. Major orders were bagged from ArcelorMittal, Nippon Steel India Limited, Indian Overseas Bank, Bharat Heavy Electricals, ICICI Bank and Hero MotoCorp, to name a few. [Technical Issues]

We will continue to stay focused on rejigging our product portfolio, introduction of new product categories and expansion in domestic and international markets. Simultaneously, the company is investing in enhancing its R&D capabilities and various programs to mitigate supply-chain risks and profitability improvement. We are optimistic about the prospects for the fourth quarter.

With that, ladies and gentlemen, I’m done with the opening remarks. I’d like to now pass it back to the moderator, who will open the floor to questions. We’ll try and answer as many questions as we can. To the extent, we are unable to, we’ll get back to you via email. With that, we are open for questions.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] We have our first question from the line of Ravi Swaminathan with Spark Capital. Please go ahead.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Thanks a lot for taking my question and congrats on a good set of numbers. So we have seen margin expansion in the projects and cooling products business, more than 7%, we had clocked this quarter. How sustainable is this or how do we think about profitability in both the segments? And also on the professional E&I segment, it had dropped to 12.7% [Phonetic], historical numbers used to be 16%, 17% average. Why did it drop so much? [Technical Issues] thought process [Technical Issues].

B Thiagarajan — Managing Director

Ravi, thank you for the question. Thank you for joining the call as well. See, in the Electro-Mechanical Projects business, so, you are aware, it is electro-mechanical projects and packaged air conditioning, that’s a combined segment actually. There are quite a bit of equipment sale as well. So quarter-to-quarter, this margin may vary depending on the product mix. Somewhere the products will be higher, somewhere the projects will be higher. Now the other thing is also which project is getting executed faster. There are — it’s not that all projects are booked in the same margin. Now, we are very happy that we could deliver this margin this quarter, but the outlook, we will continue to maintain as 6% to 6.5%, okay? Now, anything comes more than that in a particular quarter, it is welcome. I would like to maintain 6% to 6.5% in that segment. Now in the cooling products segment, there has not been — you are aware that we had increased the prices five times consecutively and but post summer we have been maintaining the same price level because you have to manage the market share versus the margin that we’ll earn. This is one part of it.

Two, we sincerely hope that the commodity prices softening will help us to improve the margins. We had indicated in the last conference call, our margin will — may improve, but then it is getting offset by the rupee depreciation. So that is an issue there. Now, whether — the obvious question, which somebody else is going to ask is, will we be increasing the prices going forward. Now, we are in a off-season, the build-up to the summer is going to take place and new range of products are getting introduced and quite a bit of those products will be from Sri City also. Now, this again is in the public domain. I had talked about it, you are — Sri City provides not only the new affordable range of products, it is also going to be cost-efficient location, basically, because incoming raw material as well as outbound material meant for which Blue Star will be sourcing from Blue Star Climatech Limited is likely to provide some — of course, in this financial year, one month, two, three months of production is not going to make it, but the story is there, there is a leverage in terms of logistics and working capital. So you can imagine that 10 to 12 days the material was in the transit pipeline itself. Here in Sri City, can serve overnight any of the locations in South.

So there is — is there a room for price increase? We have to necessarily watch who is launching which product during the season. From now on, you will see — I think our product launches will be from February 7th onwards in various locations. You have to watch how — what is being, and eventually the market determines the price. We are clear about our direction to grow our market share to 15%, that is not going to be at any cost. We have to manage our costs in order to compete there to get there. Second, we will be going ahead and ensuring that we deliver the profits. The outlook there remains unaltered. It is 8% to 8.5% operating margin. We are very confident. We will try to deliver more, this way we are. Equally, you should look at the — when it comes to the PBT, part of it, there is interest depreciation on the capex cycle we are into. See, we are very happy about the capex cycle across the country because we are benefiting through the business that is coming in, in many segments actually, whether it is VRF, packaged air conditioning or it is connected to the electro-mechanical projects, we are seeing this capex cycle is benefiting us immensely. But Blue Star also is into a high capex cycle. After Wada plant, it is Sri City Phase 1 and Sri City Phase 2 will come up within a year.

So therefore we are — and as Nikhil explained, we have changed the methodology to the straight-line method. And we are prudent in ensuring that our capacity expansion in line with our growth. So therefore, the bottom line is, it is — the margin pressure will continue due to competition, but we are very clear about our goal. And I think we have delivered what we promised earlier, only exceeded and I am confident that we will do that.

Ravi Swaminathan — Spark Capital Advisors — Analyst

And the professional E&I segment, sir, margins…

B Thiagarajan — Managing Director

Yeah, so I’m sorry, I forgot about that question. Look, that segment, I don’t think the top line and bottom line should have any correlation at all for the simple reason, you do have — it is also agency business, you are getting some — we are a system integrator. Our own manufactured items are not there at all. You are getting something and you are doing the value addition locally, number one. Number two is, in the medical electronics business, we are doing refurbishing as well. Exactly like projects business, in one quarter something will happen, another quarter something will not happen. So I am of the view, there is — top line to bottom line comparison there on a regular basis will not be a right thing to do. You have to see on a full year basis how it is, and it will be — the margin of last year will be maintained there.

Ravi Swaminathan — Spark Capital Advisors — Analyst

Got it, sir, thanks a lot.

Operator

Thank you. [Operator Instructions] We have the next question from the line of Sandeep Tulsiyan with JM Financial. Please go ahead.

Sandeep Tulsiyan — JM Financial — Analyst

Yeah, hi, good evening, sir. First question is pertaining to the industry profitability where, of course, a lot of guys are sitting at local capacity that will increase materially, but at the same time, we see, barring the two listed Voltas, Vestar [Phonetic], all the other listed players are making a loss, right from Lloyd to IFB or Whirlpool or Hitachi. So where do you see the profitability normalizing over what time period going forward? If you could give your thoughts on that, please.

B Thiagarajan — Managing Director

Yeah, so this is a period where multiple things are happening, right? So that’s why this question will keep coming up. It’s not only you as analyst, as management, we or our Board, all stakeholders keep asking the same question. What’s really happening? One is India’s penetration in room air conditioner segment is very, very low, it is sub-7% penetration it has got. The question is, at some point of a time it should rapidly move up to touch at least 25%. So there is a huge market growth opportunity is there. And that’s how it has happened in many segments. It’s going to be explosive growth in terms of demand. And even the weather conditions are changing and urbanization and disposable income, that is where that part is happening.

Now, importantly, some point of a time, it is not affordable, not because of the capital cost, but the recurring cost. But thanks to the energy labeling, air conditioner consumes only 20% of what it consumed in 2020 in terms of energy, so therefore that energy efficiency is helping people to actually reduce their recurring expenses. So there is a growth that is going to take place. Thanks to the PLI scheme, there is indigenization that is taking place and there is a capacity expansion that is taking place. And therefore, there is going to be also the — there is production happening in a big way in the country. The PLI itself is also going to be based on the incremental sales over FY ’22 — sorry FY ’21, so the — every brand wants to derive PLI benefit, they have to go ahead and show incremental sale in that particular component which was imported earlier, now you are making yourself, because it is not on the finished goods.

So therefore the companies — I have been maintaining this that they have the headroom actually as the PLI benefit also in order to pass on and grow the market. They want to grow and they will get the PLI benefit if they grow and in the process, the market also is going to grow. Now, competitive intensity will be high whenever there is going to be growth Why everybody is eyeing this market, because they know this penetration is going to grow, whether it is Bureau of Energy Efficiency or Ozone Cell, India Cooling Action Plan, all of them — bilateral agencies, all of them are actually worried about the huge growth that is going to take place and therefore what all has to be done in order that our carbon footprint is — so their figure also shows there is going to be huge growth. So the opportunity is there, competition is intensifying.

Now from Blue Star point of view, we are prepared to compete. So look back, 2010 we were — as you look, you are a last entrant, how you will survive as a B2B company in B2C part of it, we did. Then they said look, beyond 5% market share, whether you will grow, you’re largely institutional player. So we did grow. When it became double-digit, will it become double-digit, that was the question. Now, the market share, we are moving up towards 15%. We have not stated we want to become Number 1, we have not stated we want to become Number 2, we have not stated that we want to become a 20% market share player. Our goal, we believe, is doable, and our segments and our product portfolio will have to be looked at closely, which we are working. What we have done is only now 50% plus, we have some more to do in order to ensure that we are able to deliver consistent results in terms of product portfolio, in terms of distribution footprint, in terms of our own manufacturing capacity, all our actions are taking place.

Now if you ask me your question where the margin will end up, I’m not able to answer that at all, because it is dependent on who are all going to do what. But I am confident that Blue Star will reach 15% market share. Blue Star will deliver at least 8% operating margin. That much visibility conviction we have got. And we know which segment we have to focus. We are a player who is significant in institutional sales. We are Number 1 there. We do extremely well in quite a few markets in quite a few geographies. Within India, we hold Number 1 or Number 2 position. We have to replicate that largely in the North India market, in the Hindi speaking belt, by and large. So I am not, this is what I keep telling internally as well, able to or I’m not willing to, rather, think about what will be two years from now, what will be three years from now for the simple reason, this business itself is like T20 cricket, which I keep repeating.

Second is, right now, my team, my management, my colleagues on the Board, all of them I say, this is like the test match cricket, take session by session. Have a long-term goal, which is pragmatic and keep doing the corrective actions then and there. That is the only way to deliver consistent results. If you ask me, at any cost I am going to get the market share? No, Blue Star will not do that. This is where I am. You can be — one can endlessly worry about what will happen in two-year, three-year timeframe, I am against that internally and you are all justified in asking that question. So in strategic planning point of view, we have set out that we will grow faster than the market, we will attempt 15% market share by FY ’25, and that goal remains. And 8% to 8.5% operating margin is the goal, we are doing every action, every decision is done keeping that in mind. And whether one summer will be good, another summer will be washed out, we are prepared for that.

Now, equally Blue Star’s portfolio, if you look at it, we have kept buy on B2B as well as B2C. This answer is — I’m taking time to answer because number of others who are following you will get the clear perspective and direction. Thank you.

Sandeep Tulsiyan — JM Financial — Analyst

Thank you so much for that, sir. Second question is on the numbers. The unallocable expense has increased materially if you look at it on a year-on-year basis, although segmental numbers look good. How should we read that number? is it predominantly E&P expenses which is being shown up here and we should associate this with the Unitary Products segment?

B Thiagarajan — Managing Director

See the — one of the reasons for unallocated may be — unallocated you’re talking about, right?

Sandeep Tulsiyan — JM Financial — Analyst

Yes, unallocated.

B Thiagarajan — Managing Director

See, some of the expenses may be connected with — I am — it is not one lump sum item which is changing, point number one. There are multiple items. So the — some are connected with basically the forex gain-loss which are really unallocable. It is bought across and there is one item there, there is second item, there are certain professional fees, which we have incurred in order to either improve the manufacturing margins or manufacturing excellence. There are some exercises that are going on within the company. And there was a campaign cutting across the product lines, there is — it is in the marketing expenses. So really there is no lump sum item nor it is going to be the trend. Our policy of allocating everything that is identifiable with the business that continues here.

Sandeep Tulsiyan — JM Financial — Analyst

Okay. Thank you so much, sir, for taking these questions.

Operator

Thank you. We have the next question from the line of Praveen Sahay with Prabhudas Lilladher. Please go ahead.

Praveen Sahay — Prabhudas Lilladher — Analyst

Yeah, thank you for taking my question. And my question pertaining to what you had guided, the new range of product going to be increased. So it will be largely the mass premium product segment which will be from the Sri City?

B Thiagarajan — Managing Director

Sri City will produce both. For understanding, now we are classifying in three ways now. One is affordable, second is affordable premium and third is premium. So our three-year strategic plan is based on these segments now. It is not the entire thing is affordable premium because we are doing something affordable as well, something premium as well. Now, Sri City, as well as Himachal plant will produce all kind of products. The new products that are going to be launched predominantly are in the affordable range. Some are in the premium range as well. And because we are — I told you we’re a Number 1player in institutional segment and high-end residential customers as well, so there are some products that are required for that segment as well, which are premium. Affordable is needed, because you want the margins to be protected. At the same time, you want to grow the market share in Hindi speaking belt. So the products that will be launched for the seasons will be a mix of these two.

Praveen Sahay — Prabhudas Lilladher — Analyst

Thank you for that. One clarification on what you had said about the 8.5% margin target. So, fair to understand that whatever the benefit from the Sri City you will receive, it will pass on to the margin. It will not consider for the some price action to gain market share?

B Thiagarajan — Managing Director

I will not be able to commit something like this. So the question is — I’m again repeating. The operating margin that we are supposed to deliver is or we want to deliver is the 8% to 8.5%. We have to grow faster than the market because the scale brings in lot of benefits as well. Because of the scale, leverage is very high in this business. Now whether — as a analyst, you have to be taking into account your PLI benefit also will accrue to Blue Star, you must very well do that. Okay? Now whether I am keeping it separately as a profit and all I won’t be able for the simple reason, if you do these actions it’ll flow in EBIT or PBT or PAT, okay? So therefore your understanding is right. There is also a PLI, which is like, I will save something in material, something due to scale and operating leverage. Like that, there is also a PLI benefit that is available. But you should know that this year we are not getting any PLI benefit till March 2023. If there is a PLI benefit, it will be in the subsequent year. Again, it is not going to flow every quarter, right? When you see our first quarter of FY ’24, second quarter, third quarter, no PLI would have come in. You have to be showing the incremental sale, you have to be getting the chartered accountant certificate filed with DPIIT and then you have to get that money. So therefore, it is already there assuming there is a inherent benefit one is going to get.

Praveen Sahay — Prabhudas Lilladher — Analyst

Got it, sir, thank you.

Operator

Thank you. We have next question from the line of Dhananjai Bagrodia with ASK Investment Managers. Please go ahead.

Dhananjai Bagrodia — ASK Investment Managers — Analyst

Sir, congratulations on a great set of numbers again. So just wanted to know with Sri City now we’ve been focusing on it and lot more other players are also started focusing on South. How would that, in terms of so much capacity coming, impact, A? And B, what margin working capital asset turnover do we see for this project?

B Thiagarajan — Managing Director

Yeah, so the Sri City in our case is going to be — because we never had a factory in the South, so from Himachal Pradesh, incoming raw material as well as outgoing material have to — we were incurring huge costs there and you have to hold the inventory of raw material as well as the finished goods also, that 10-day period. So therefore, there is a cost leverage out there. In any case, our Himachal plant has reached its full capacity for — in fact, if we wouldn’t have commissioned this factory in record time, we would have fallen short of materials. So it has come up — come out in order to meet the requirements, even Q4 requirement is going to be met by our getting the material from Blue Star Climatech Limited. Now — so that is — that is what — that is how it will impact.

Now, what will be the working capital, it is not changing at all. In fact, working capital turns will improve because of Sri City, okay? 10-day kind of finished goods inventory can be lower, around seven-day raw material inventory can be lower and transportation costs you can imagine that Sri City to Chennai or Sri City to Madurai or Sri City to Kochi versus Kalaamb near Chandigarh too. So that is a clear cost-saving that is going to happen. Now, therefore, the working capital requirement or working capital turns will be lower. Now, if you are asking about the interest depreciation, yes, you have invested in a factory and the breakeven period I think is in the order of around three years or so like any other investment.

Dhananjai Bagrodia — ASK Investment Managers — Analyst

Okay. Sure, sir. And sir, just this may be little longer term question, but sir, what are we doing in terms of our positioning in room AC, where we are being able to see such strong growth and, let’s say, a market leader is not being able to see the similar growth and it’s not like we are undercutting them in prices? So are we going through different channels? What would be our strategy in this?

B Thiagarajan — Managing Director

Honestly, I do not know at all. The question is that perhaps we were underperforming in the past because you were all ask — the competitor is doing much better, why you are not doing was the question. Right? So we were — obviously, we had some inefficiencies we are catching up with. So I would sincerely believe that, because for more than eight, nine quarters — see, if you look at the market leader versus ours, on a lagging basis, market share or the volume, we were more or less following. At some point of a time, we diluted [Phonetic] because some scale benefit would have happened to the leader or whatever it is. And now the questions we were answering not only to you, to our team, our Board, everybody, why we are not catching up with. Now I won’t be able to answer why they caught up with. So the point is we had inefficiencies, probably.

Dhananjai Bagrodia — ASK Investment Managers — Analyst

And sir, are we available with many large retailers like some of the ones which — or are we more with, let’s say, smaller mom-and-pop shops? Because lot of the large retailers still are still working with only the little of the global brands or the Indian leader.

B Thiagarajan — Managing Director

Never. See, I don’t think distribution is a challenge or bias or anything like that at all. The question is and he has got a set of customers. And that client how he will serve. He has got his geography, his history, he needs certain products, certain features, certain price points. We have disclosed this that in quite a few geographies, at that price point, Blue Star will not be able to make the margin targets of ours. We didn’t want to grow our market share by under-selling it. So you have to be in there repositioned. It’s only a two to three-year story that we are repositioning our product portfolio and we are getting there and still some more work to be done. It’s not — 70% work is over in terms of product portfolio. See, there is — at the end of the day, you have to segment the market very, very — in a minute micro way because when we say — take India as a whole, where we may have, say, 130 billion [Phonetic] people are there. In quite a few product categories, it is only 30 million people are even in FMCG and there are quite a few categories, the customer base is only 1 million. So that is the situation in India as it grows. So we were very clear, 10% — up to 10% market share, you could grow. Beyond 10% unless and until you address those segments, you won’t.

So the moment you have a product for that segment, that dealer will go ahead and say, yes, I am able to display your product also. Otherwise it is not that they are against taking Blue Star product, but the thing is it’ll lie there, he doesn’t get a customer who is willing to pay that premium, but we have corrected it.

Dhananjai Bagrodia — ASK Investment Managers — Analyst

Sure. Okay. Sir…

Operator

I’m sorry to interrupt. Sir, please come back in the question queue.

Dhananjai Bagrodia — ASK Investment Managers — Analyst

Thank you.

Operator

Thank you. [Operator Instructions] We have next question from the line of Anupam Gupta from IIFL Securities. Please go ahead.

Anupam Gupta — IIFL Securities — Analyst

Thanks for the opportunity, sir. So the first question is related to the project business. So clearly, order inflows and order book are growing very well for you. How do you see the outlook here for the next few quarters? And should ideally the revenue or execution should also follow there or do you see any slowdown in execution run rate at this point of time or, let’s say, couple of quarters down the line?

B Thiagarajan — Managing Director

The execution pace will be good. In fact, there is lot of pressure in quite a few projects to get it executed. The capex obviously did not happen according to the plans of many of the customers and then they were in pandemic. And all of them are willing to catch up and they would like to be ready when the global recession is over, they are able to go ahead and supply. Same way, quite a few infra projects, the public sector undertakings would like to complete as early as possible. So there is — unless and until something completely unforeseen happens, everybody is putting pressure to get their projects executed. So revenue will follow the order inflow. So if you ask me about order inflow outlook, the inquiry funnel is good. The — across the segments, we get — surprisingly, even the office space is getting consumed.

Anupam Gupta — IIFL Securities — Analyst

Okay, okay, understand. And sir, second question…

B Thiagarajan — Managing Director

The question is that whether there will be headwinds. I am again telling you that there — I’m talking as I witness, headwinds are going to be there. Tomorrow itself, something — some sentiment can change after the union budget and all but we are confident that — see, first of all, I have to — for the benefit of you and others, I have to tell. We are talking about if it is room air conditioner, some INR17,500 crore market. In 2023, for this country, one particular category INR17,500 crores, looks very miniscule actually. And same way, what is the total number of projects on MEP getting finalized in a year, it is some INR6,500 crores. It is only 20% of what this country wants is getting built. There is a 80% more to be. So, it is in that flux where it is going to be providing consistent growth. I’m not saying it is going to bombard in a big way and so much. But the growth opportunities are good for our industry.

Anupam Gupta — IIFL Securities — Analyst

Sure. I understand that, sir. And the second question is related to the margins in this quarter specifically. So given that you have changed the depreciation policy, if I look at the EBIT margins for both the segments, it obviously is higher because of lower depreciation if I look Q-on-Q or Y-o-Y. So ideally, your margin guidance should also be higher just because the depreciation would be lower incrementally going ahead at the segment EBIT level. So is that the right reading? Or would you still maintain your margin guidance at 8%, 8.5% for project — for products and 6%, 6.5% for projects?

B Thiagarajan — Managing Director

So the — when we give — so far, our track record has been good. By and large we have met what we have been indicating. The question is our minimum margin target is that, okay? Now, it is going to increase, it can happen. But all that I’m saying in our outlook is we are maintaining the same margin level.

Anupam Gupta — IIFL Securities — Analyst

Sure. Okay. Understand. That’s helpful. Thank you.

Operator

Thank you. We have next question from the line of Gopal Nawandhar with SBI Life Insurance. Please go ahead.

Gopal Nawandhar — SBI Life Insurance — Analyst

Yeah. Hi, sir. Thanks a lot for the opportunity. Sir, can you just give the rationale for the change in the depreciation accounting method? And is it like across all plant and machinery we have changed? Or is it just only for the new capex which you have completed?

Nikhil Sohoni — Group Chief Financial Officer

Yeah. So if you look at it, the change will be across because what the standard requires or all the accounting estimates require is that we have to take into account what is the change in the pattern of consumption going forward. As you would have heard during the call, that we have invested heavily in capacities this year, which means that there is additional capacity which has been put up, both at Sri City, at Wada, which requires us to review the pattern of consumption for all our assets. And looking at that, it was felt appropriate that this is the right time to look at whether straight-line method is a proper way of doing the depreciation.

If you look at the policy, it has always been that the useful life of an asset is defined as around 20 years. And normally any asset for a manufacturing company, it has to be equally depreciated over a period of time. If you go by WDV method, which also is an acceptable method, almost 70% to 75% of the asset will get depreciated in 10 years. So we have to look at the kind of industry. But of course, we have been following it historically. And the estimate requires us that only when there is a trigger, we can give it a relook. So this year, given that we have capitalized a large part of the plant and machinery, there was an opportunity to give that relook, and that is the reason why it was carried out.

Gopal Nawandhar — SBI Life Insurance — Analyst

So what is the capex for — what was the capitalized amount for Sri City plant?

Nikhil Sohoni — Group Chief Financial Officer

It is not only for Sri City plant. We have also capitalized Wada, the current year. And the total capitalization in the current year is in the region of around INR280 crores.

Gopal Nawandhar — SBI Life Insurance — Analyst

So if I multiply this amount by 15 points, takes whatever it is, multiply by 20. So that amount comes to INR300 crores. So are we saying there is no remaining depreciable amount from the past projects or?

B Thiagarajan — Managing Director

No, how INR300 crores? See, the capitalization for the full year will be INR280 crores only.

Gopal Nawandhar — SBI Life Insurance — Analyst

Sorry. My bad, my bad.

B Thiagarajan — Managing Director

And the thing is it is not that the new method. The old method had a depreciation, new method has a depreciation, right? So this quarter, we have the figure which is INR10 crores is the impact.

Gopal Nawandhar — SBI Life Insurance — Analyst

Impact, yes.

B Thiagarajan — Managing Director

This quarter. And YTD also is only INR10 crores impact, okay?

Gopal Nawandhar — SBI Life Insurance — Analyst

Yeah. That’s because we are doing…

B Thiagarajan — Managing Director

Back to the sense that INR10 crores benefit has accrued because of the change in methodology, which is disclosed as disclosure as well.

Gopal Nawandhar — SBI Life Insurance — Analyst

Right, sir. Just continuing from the…

Operator

[Operator Instructions] We have next question from the line of Manoj Gori with Equirus Securities. Please go ahead.

Manoj Gori — Equirus Securities — Analyst

Yeah. Thanks for the opportunity sir. Sir, just want to reconfirm, you said about 15% market share. So probably, if I am wrong, please correct me, is this 15% for FY ’24 or ’25 that we are guiding for or we are aspiring for?

B Thiagarajan — Managing Director

Can you repeat the question? Can you repeat the question?

Manoj Gori — Equirus Securities — Analyst

Yeah. My question was you indicated that 15% market share in room ACs by FY ’25. So probably what I presume earlier you have stated 15% market share in FY ’24. So — or CY ’24, so correct me here if I am wrong.

B Thiagarajan — Managing Director

It is FY ’25.

Manoj Gori — Equirus Securities — Analyst

It’s FY ’25. So probably this year we should be exiting somewhere around 13.5% to 13.75%. And probably next two years, we will be looking for another 100 basis points to 150 basis points of market share gain.

B Thiagarajan — Managing Director

That’s right.

Manoj Gori — Equirus Securities — Analyst

Right sir. Sir, that’s all from my end sir. Thanks and wish you all the best.

B Thiagarajan — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] We have next question from the line of Atul Mehra with Motilal Oswal Asset Management. Please go ahead.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Hi, good evening and congratulations on good results. Sir, just one question in terms of competitive intensity. Again, in a scenario where, like you said, if the market penetration is so low and it has so much room, there can be competition for whom market share would be a priority over margin, while our philosophy is [Indecipherable] So in an environment where more of competition focuses on market share over margins, like how would you react in terms of would you still want to maintain 8.5% at the cost of market share? Or would you revalue at that point of time? Thanks.

B Thiagarajan — Managing Director

A genuine question. And the thing is we are very clear that about a few things. Number one, we want to be a air conditioning, refrigeration-focused company, okay? The questions have come up whether we will get into white goods, etc.. Yeah, as of now, we do not have any plans at all. The second one is, within this there is opportunities within India. And we have stated that we will enhance our international footprint. This is the second part of it. Third is, there is a huge construction cycle that is happening and capacity addition is happening. That is going to benefit not only the segment one, and if so many — so much of development is happening, actually the penetration should grow, that market should grow. Now one can go on and say that I will keep growing the market share and — at the cost of margin. It is not making sense to us at all. At the end of the day, the shareholders are looking for the returns. So one may do the calculation and say that, look, you have a fool-proof model that you go ahead and dilute the prices your market share will go up which is not so.

You don’t have data sufficiently to say, I go on and dilute my margin by 1%, my market share will grow like this because in the market somebody else will drop. And at the end of the day, the whole industry will be going down like this. Now, you will also see that what kind of margin the leaders in this category has produced and how long they produce and how sustainable it is. And we are having that data point. At the moment, I do not have any data to show that you can improve your market share. I’m again saying, nothing is guaranteed. If I go ahead and reduce the price, immediately I will go ahead and improve the market share in a sustainable basis, I am not very sure at all. The consumer can be opportunistic one quarter itself, somebody else will drop the prices. Now product like room air conditioners has a brand value. Consumer preference and price alone is not the factor.

So it will — according to me, according to our company’s philosophy, it will be very futile exercise to go ahead and say, I want to become instead of 15%, 20% and I’ll go ahead and dilute my margin to 6%. There is no rationale for this at all. And the moment I go down that path, my product will sell only on price. And each time I want to deliver to a dealer or a distributor, they will only be asking for a reduction in price. Blue Star brand is valuable and — okay, at the end of the day, how it will change the — in ROCE and for Blue Star, return on capital employed is — we are doing well and we should continue to do well there. So this is where we are. Now you want to deliver more shareholder value by representing product categories in which you are not present or you want to indigenize more, improve the margins, you want to go out and expand your international footprint, that is a strategy which will create long-term value.

Now this, we are mentally very clear. And there is no desperation for us to be moving up the ranking and improve the market share by diluting the margins. We don’t have some deep pockets to be doing that. And any industry did it, it has [Indecipherable]. And my own understanding is that kind of a game, no brand has survived.

Atul Mehra — Motilal Oswal Asset Management — Analyst

Makes a lot of sense, sir. Sir, just one follow-up question is in the form of — in terms of manufacturing, like, we have been one of the early, in terms of movers, in terms of understanding the value of manufacturing and so on. Like, we have been doing that since quite some time. But moving forward, your views on outsourcing to some of the PLI players versus setting up your own manufacturing from a three to five-year perspective. Would you say that, like, the proportion of own manufacturing will go up structurally speaking in the next five years or so?

B Thiagarajan — Managing Director

Very clearly, finished goods, we will not be importing at all, we should not be outsourcing at all. Components, yes, we will outsource. If you look at our PLI, it is only for sheet metal and powder coating. We have not invested in motors, we have not invested in drives, and we have not invested in plastic injection molding. So therefore, these components, we have able to get it from the PLI player. We have our PLI players for each of these categories. So we will not completely outsource and put a label and sell. It is not possible for us, it is not going to give us either the margins or it is not going to give us the brand value.

Operator

Thank you. We have next question from the line of Khadija Mantri with Sharekhan. Please go ahead.

Khadija Mantri — Sharekhan — Analyst

Hello?

Operator

Yes, ma’am, please go ahead.

Khadija Mantri — Sharekhan — Analyst

Yeah. Sir, I wanted to know what is your estimate for the room air conditioner industry growth for FY ’23 and FY ’24.

B Thiagarajan — Managing Director

See, March will be a very big month, okay? Now, my estimate, okay, there are many views in the industry, I am of the view in value terms, it will grow by 15%, the industry, minimum. That is what is my estimate.

Khadija Mantri — Sharekhan — Analyst

That is for Q4.

B Thiagarajan — Managing Director

No, full year, FY ’24 over FY ’23 for room air conditioner, the growth should be at least 15%.

Khadija Mantri — Sharekhan — Analyst

Okay, sir. Fair enough. And sir, also you have observed that one of our competitor, there are talks that they have lost market share. So have we been able to gain a little bit of that market share in some of the regions?

B Thiagarajan — Managing Director

If you ask about this quarter, it is stable. Full financial year, we have gained marginally.

Khadija Mantri — Sharekhan — Analyst

Okay, but have we gained it from our competitor like or maybe from — or is it because of our penetration into new regions?

B Thiagarajan — Managing Director

No. It is a goal that certain unrepresented markets or the product segments we should enter and we have entered. Obviously, we have gained, okay?

Operator

Thank you. We have next question from the line of Rahul Gajare with Haitong Securities. Please go ahead.

Rahul Gajare — Haitong Securities — Analyst

Yes, sir, good evening. I just have one question. Sir, on the inventory, can you discuss the inventory level of Blue Star and that of the industry right now before the season starts?

B Thiagarajan — Managing Director

So before the season starts, you have seen the Q3 capital employed, that includes inventory actually for the segments. I will not be able to figure out at all, because what happens — the question is that March, April, May, June I guess all competitors would have started producing and stocking. And it will depend on their strategy. My 40-year experience what I gut feel, everybody will hold 20% to 25% more inventory than the previous year because they will anticipate the market to be growing at least by 25% during summer. That’s how all of them plan. Then they will course correct as it moves on. And there is another factor, the lead time for some of the components have been higher. So therefore they will go ahead and probably, so — now, it is not the finished goods story. I don’t think the import is happening these days is finished goods. It’s the components. So absolute inventory levels for room air conditioner segment, my guess is inventory — everybody will plan for at least 25% more than last year.

Rahul Gajare — Haitong Securities — Analyst

Sir, let me just rephrase. I actually — when I am talking about inventory, I meant inventory which was not sold, so old inventory. I’m sure…

B Thiagarajan — Managing Director

No, I don’t think if there will be — very negligible, it will be. I do not think so at all. In Q2, it would have been because there was a energy level change and the festival season. Some players said that they didn’t do well, so on and so forth. Right now, it will not be at all. They will be now producing inventory for the — for 4Q new models, summer preparation. I don’t think inventory is an issue at all. It is not.

Rahul Gajare — Haitong Securities — Analyst

Right, sir. Thank you. That’s very helpful and all the best. Thanks.

Operator

Thank you. We have next question from the line of Shrinidhi with HSBC. Please go ahead.

Shrinidhi Karlekar — HSBC — Analyst

Yeah, hi. Thank you for the opportunity and congratulations on good set of numbers. Sir, you attributed some of the margin resilience that you demonstrated in room AC business to own manufactured products. So wondering, would it be possible to share how much of your finished products are currently coming from own manufacturing and how is it likely to evolve over the next two to three years as Sri City ramps up?

B Thiagarajan — Managing Director

See, the question is that, whether it is last year, this year, it is our own manufactured product. Whether it is manufactured in Himachal or whether it is manufactured in Sri City is the only difference. Now, Sri City, in Q4, will constitute — I think, my rough estimate is that out of our Q4 sales — Q3 Sri City products have not come in. So commercial production started only on 1 January. The dispatch was on 31 December, something would have happened, some capitalization or building or something like that. Now, if you ask me for this particular quarter, something like 15% of annual sales will be coming in this financial year from Sri City.

Shrinidhi Karlekar — HSBC — Analyst

And, sir, correct me if I’m wrong, so are you saying that all of the finished air conditioner that Blue Star will sell in FY ’23, all those came from in-house manufacturing?

B Thiagarajan — Managing Director

Yeah, yeah, yeah. Anyway, the government had stopped the import because of certain other regulations that you will get it from…

Shrinidhi Karlekar — HSBC — Analyst

No. I was wondering, so not even domestic assemblers of the finished products are not procuring that at all, is it?

B Thiagarajan — Managing Director

Window air conditioners, which is less than some 5%, 6% of our total sales, window air conditioners, which are — it is not split air conditioners, that we outsource. All other conditioners, we manufacture ourselves. Components, quite a bit is getting imported by all players today because India doesn’t have that component ecosystem.

Shrinidhi Karlekar — HSBC Securities — Analyst

Right. And sir, second question I have is that you had come out with this affordable product range. Wondering, is this product range margin-neutral, margin-additive or margin-dilutive at an overall level?

B Thiagarajan — Managing Director

Margin-neutral. The range is launched in order, what would have done, you would have diluted the prices and lose the margin. This product range is benchmarked against what is available in the market or what is the customer expectation. Against that we are protecting our margins.

Shrinidhi Karlekar — HSBC Securities — Analyst

Right. Thank you sir, and all the very best.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’d now like to hand the conference back over to Mr. Nikhil Sohoni for closing comments. Over to you, sir.

Nikhil Sohoni — Group Chief Financial Officer

So good evening, and thank you very much, ladies and gentlemen. With this, we conclude the quarter’s earning call. Do feel free to revert to us in case any of your questions were not fully answered, and we’ll be happy to provide you additional details by email or in person.

Operator

[Operator Closing Remarks]