Blue Star Ltd. (NSE: BLUESTARCO) Q4 FY22 Earnings Concall dated May. 06, 2022
Corporate Participants:
B. Thiagarajan — Managing Director & Executive Director
Neeraj Basur — Group Chief Financial Officer
Analysts:
Bhoomika Nair — DAM Capital — Analyst
Bhavin Vithlani — SBI Mutual Fund — Analyst
Ankur Sharma — HDFC Standard Life Insurance — Analyst
Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst
Anupam Gupta — IIFL Capital — Analyst
Sandeep Tulsiyan — JM Financial — Analyst
Ravi Swaminathan — Spark Capital — Analyst
Naval Seth — Emkay Global — Analyst
Manoj Gori — Equirus Securities — Analyst
Praveen Sahay — Edelweiss Financial — Analyst
Sujit Jain — ASK Investment Managers — Analyst
Vishal Biraia — Max Life Insurance — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the Q4 FY 2022 earnings conference call of Blue Star Limited. We have with us today from the management, Mr. B Thiagarajan, Managing Director, Blue Star Limited. [Operator Instructions] I now hand the conference over to Mr. B Thiagarajan. Thank you and over to you, sir.
B. Thiagarajan — Managing Director & Executive Director
Thank you. Good afternoon, ladies and gentlemen. It’s a pleasure interacting with you. I have stepped in, because as you are aware, Mr. Neeraj Basur has decided to leave Blue Star. So I wanted to provide continuity before the next Group CFO comes in. So perhaps this quarter and next quarter, I will interact with you over this quarterly investor call. First, I would like to place on record my deep sense of appreciation and gratitude to Mr. Neeraj Basur and Mr. Vir Advani joins me in conveying the same. He, for over eight years, did an exceptional job in taking our corporate financial services function to a next level. He played an active role in the implementation of digitalization programs, the enterprise risk management framework, and the — most importantly, the operational support, in bringing quite a few businesses well under control in terms of ROCE is concerned. So we will miss him and we wish him all the very best. And after my opening remarks, he is still going to continue with the highlights of the quarter. Before that, I wanted to also share with you that the quarterly results that you’ve seen, you must look at with one perspective that these results are achieved despite losing the summer season. And easily, in my estimate, we should have delivered something like INR75 crores to INR80 crores, if the summer season of 2021 would have been an active quarter, but that is unfortunate, but we will look at the results with that particular perspective, that this was possible even though the summer season was lost. The second important thing is that, we had a huge commodity price increase, and consequently, the price increases implemented by Blue Star on April 1, 2021, again, in July 1, 2021, again in October 1, 2021, and we continued with that and now on 1st April 2022, we have implemented a price increase.
So the commodity price increase is so much, and despite price increase, we have delivered lesser margin as per the cooling product segment is concerned. The other important highlight is also the fact that throughout the year, the free cash flows was excellent, and you will see when Neeraj speaks how we have performed in terms of the cash flows and the borrowings. Another important aspect is that the — every business, whether it is room air conditioners or commercial refrigeration or it is electromechanical projects, commercial air conditioning, professional electronics, each and every business performed exceedingly well. Lastly, the outlook is — you have the numbers of last quarter and I think you would have gone through, you would have analyzed in your own way, but the important thing that I want to share is the April had gone on well. The outlook for Q1 is very good, and despite the interest rate hikes, I still hold an optimistic view as far as the room air conditioner demand is concerned. With that, I will hand it over to Mr. Neeraj Basur for the opening remarks on the results and I’ll be happy to answer any questions later. Thank you very much.
Neeraj Basur — Group Chief Financial Officer
Thank you very much, Mr. Thiagarajan, and good afternoon, ladies and gentlemen. Firstly, it’s been a privilege and an honor for me all these years to have interacted with you so very regularly, and it’s been a great learning journey for me as well, and I wish you all the best in your respective endeavors. So as Mr. Thiagarajan has already said the context, I’ll now walk you through the key highlights of our prior financial results and business results for quarter four and the full year. First, let me take you through the financial highlights. The momentum that we gained in Q3 FY 2022 continued in Q4 FY 2022, despite a three-week disruption caused by the Omicron variant. The demand for our offerings across various segments not only continued, but also accelerated in the month of March. Further, the policy announcements in the Union Budget 2022-2023 resulted in positive business sentiment. The early onset of summer in some parts of the country also helped revenue growth in several product categories. In this backdrop, the company delivered record revenue and profits in Q4 FY 2022 and ended the year on a high note, despite losing the 2021 summer season. Financial highlights for the quarter ended March 31, 2022 on a consolidated basis are as follows:
First, revenue from operations for Q4 FY 2022 grew 39.5% to INR2,247.58 crores as compared to INR1,611.56 crore in Q4 FY 2021. EBITDA, excluding other income and finance income, for Q4 FY 2022 was INR142.95 crore, EBITDA margin of 6.4% of revenue as compared to INR101.81 crore, EBITDA margin 6.3% of revenue for Q4 FY 2021. Profit before tax grew 9.2% to INR113.91 crores in Q4 FY 2022 as compared to INR104.32 crore in Q4 FY 2021. Net profit for Q4 FY 2022 grew by 12% to INR76.27 crore as compared to INR68.09 crore in Q4 FY 2021. Healthy cash from operations enabled a reduction of INR97.9 crore in net borrowings in Q4 FY 2022 over Q3 FY 2022. Financial highlights for the full year ended March 31, 2022 on a consolidated basis are as follows: Revenue from operations for FY 2022 grew 41.8% to INR6,045.58 crore as compared to INR4,263.59 crore in FY 2021. EBITDA, excluding other income and finance income, for FY 2022 was INR346.47 crore, EBITDA margin of 5.7% of revenue as compared to INR239.81 crore, EBITDA margin 5.6% of revenue in FY 2021. Despite pressures on gross margin due to escalation in commodity prices, the impact of scale enabled preservation of profitability levels. PBT before exceptional items grew 69.8% to INR250.90 crore in FY 2022 as compared to INR147.75 crore in FY 2021. Tax expense for FY 2022 was INR82.9 crore as compared to INR47.09 crore in FY 2021. Net profit for FY 2022 grew by 66.9% to INR168 crore as compared to INR100.66 crore in FY 2021. The company has returned to growth path and a dividend of INR10 per share has been recommended by the Board. Carryforward order book as of March 31, 2022 grew by 10.2% to INR3,253.30 crore compared to INR2,952.42 crore as on March 31, 2021. Due to planned increase in inventory levels owing to advancement in the procurement of long lead raw materials and components in order to derisk supply chain constraints and capacity expansion capital investments in our new manufacturing projects at Wada and Sri City, the capital employed as of March 31, 2022 stood at INR1,087.69 crore, which as of March 31, 2021 was INR736.41 crore. Our strong operating cash flows ensured that we ended March 31, 2022 at a moderate net borrowing levels of INR67.14 crore, resulting in a debt-equity ratio of 0.07. March, 31, 2021, we had a net cash balance, positive balance, of INR151.45 crore.
We had raised INR350 crore through issue of unsecured non-convertible debentures or NCD in June 2020 in order to strengthen our balance sheet with a repayment tenure of three years and a call option to repay 50% of the NCD in May 2022. Due to our strong current fund position, after meeting all the capacity expansions capital expenditure, we propose to exercise the said call option and reduce the residual NCD obligation by the end of May 2022. I’ll walk you through the business highlights for Q4 FY 2022 now. Segment 1, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment one revenue grew 45.6% to INR1,135.97 crore in Q4 FY 2022 as compared to INR779.96 crore in Q4 FY 2021. Segment result was INR75.84 crore, which is 6.7% of revenue in Q4 FY 2022 as against a profit of INR48.50 crore, which was 6.2% of revenue in Q4 FY 2021. Segment revenue for the year grew 44% to INR3,194.46 crore as compared to INR2,218.72 crore in FY 2021. Segment result was INR194.82 crore, which was 6.1% of revenue in FY 2022 as compared to INR106.49 crore, 4.8% of revenue last year. Order inflow for the quarter grew by 42% to INR932.05 crore as compared to INR656.54 crore in Q4 FY 2021.
Our Electro-Mechanical Projects business revival of capex cycle led to improved pace of project execution as compared to the previous quarter. With continued focus on the Make in India program, order inflow from the factories, data centers and infrastructure sectors continue to be encouraging. Commercial building sector revival was also witnessed. Carryforward order book of the Electro-Mechanical Projects business was INR2,295 crore as on March 31, 2022 as compared to INR2,149 crore as on March 31, 2021, a growth of 6.8%. Segment wise breakup of the carryforward order book of the Electro-Mechanical Projects business as of March 31, 2022 is as follows, and we share this with you once a year. Office, IT and non-IT, 24%; metro rail, 16%; water MEP projects, 16%; industrial, factory, data centers all put together, 13%; hospitals, 5%; airports, 5%; malls, 4%, and all other customer segments put together 17%. Commercial Air Conditioning Systems, a healthy flow of opportunities from the industrial, healthcare, and government customer segment supported by the revival of demand from the manufacturing light commercial and education segments enabled growth for the Commercial Air Conditioning business during the quarter. We continued to maintain our number one position in conventional and inverter ducted air-conditioning systems as well as scroll chillers. We remain number two in VRF and gained market share and moved up to the second position in screw chillers as well.
Our international business, the economic activities and consumer confidence continued in the Middle East and enabled growth in revenue during the quarter. Increased demand from QSR and the pharma industry enabled growth for our refrigeration business during the quarter. With a pickup in the business sentiment, the prospect for growth of our international business in the Middle East region continues to be positive. The project business in Qatar continued to do well. The operations at the joint venture at Malaysia continue to be impacted due to the restrictions on account of COVID. We will continue to focus on the expansion of the Blue Star product range and building brand awareness and brand visibility in different markets that we are present in. I will now move on to segment two, Unitary Products. Segment two revenue grew 32.3% to INR1,034.01 crore in Q4 FY 2022 as compared to INR781.81 crore in Q4 FY 2021. Segment result was INR72.05 crore, seven percent of revenue in Q4 FY 2022 as compared to INR62.06 crore, which was 7.9% of revenue in Q4 FY 2021. Continued headwinds in input costs, disruptions in the international supply chain and increased supply lead time led to a drop in segment margins for the quarter. Revenue for the year grew by 39.4% to INR2,603.77 crore in FY 2022 as compared to INR1,868.28 crore in FY 2021. Consequently, segment result improved to INR155.86 crore, which is 6% of revenue in FY 2022 as compared to INR108.82 crore, which was 5.8% of revenue in FY 2021. Cooling and Purifications Product business, strong pent-up demand coupled with positive consumer sentiment and an early onset of summer in some parts of the country enabled a 47% growth in revenue from our — for our Room Air Conditioner business during the quarter.
We grew faster than the market and ended the financial year with a market share of 13.25%, which was 13% in FY 2021. Our comprehensive range of affordable ACs continued to resonate well with the price-sensitive customers and the first-time buyers, especially in Tier 3, four and five markets and we further consolidated our position as a mass premium brand in our target customer segments. Due to continuing increase in commodity prices and logistics costs, we have implemented a price increase of two to three percent effective April 1, 2022. Our Commercial Refrigeration business now. Commercial Refrigeration business witnessed growth momentum with demand for deep freezers, modular cold rooms, visi coolers and supermarket refrigeration products from diverse segments such as dairy and ice cream, processed foods, pharma, QSRs and food delivery etc. We continue to maintain leadership position in deep freezers, storage water coolers and modular cold rooms. In modular cold rooms, demand from the QSRs has almost got restored back to pre-pandemic levels. Some of the breakthrough orders were from Ola Food Technologies, Reliance Retail, Dunzo Digital, Zomato, Dmart and proprietary cold room customers for mushroom and dry fruit storage. We continue to enjoy high market share in pharma segment for products and solutions such as cold rooms and medical refrigeration products.
We received large orders from Reliance Retail for supermarket refrigeration products for supply across the country apart from other retail players, including shell outlets. We also launched a new range of in indigenously designed and manufactured deep freezers and augmented our manufacturing footprint with our new world-class manufacturing facility at Wada, which is expected to get operationalized soon. Segment 3, Professional Electronics and Industrial Systems. Segment three revenue grew by 55.9% to INR77.60 crore in Q4 FY 2022 as compared to INR49.79 crore in Q4 FY 2021. Segment result was INR14.34 crore, which is 18.5% of revenue in Q4 FY 2022 as compared to INR7.22 crore, 14.5% of revenue in Q4 FY 2021. Segment revenue for the year grew by 40.1% to INR247.35 crore as compared to INR176.59 crore in FY 2021. Segment result was INR42.49 crore or 17.2% of revenue in FY 2022 as compared to INR33.81 crore or 19.1% of revenue in FY 2021. With the revival of corporate capex, we witnessed growth across all segments that we operate in. Growth in revenue from the healthcare and data security solutions business enabled a growth in revenue for the quarter. The testing machine business also continued to witness growth with the revival of investments in the manufacturing sector.
Major orders bagged were from Axis Bank, HDFC Bank, ICICI Bank, JSW Steel and Hindustan Aeronautics Limited, to name a few. With a wide portfolio of contemporary products and solutions, forming part of our offerings, the prospects for this business segment continue to be positive. Our overall business outlook now. Robust demand witnessed throughout the quarter enabled us to end the year on a strong note with healthy growth across all the business segments. After the washout of two consecutive summers, we expect strong growth in Q1 FY 2023. With ebbing of the pandemic impact, the business and market disruptions have progressively reduced, aiding growth and revival of opportunities. The launch of our new range of products in Room Air Conditioners and Commercial Refrigeration is expected to significantly aid growth going forward. With the increase in corporate capex and revival of demand from traditional customer segments, prospects for the Electro-Mechanical Projects and Commercial Air Conditioning business are encouraging. Given the ongoing geopolitical conflict between Russia and Ukraine, input cost pressures and supply chain challenges are expected to persist in the short term.
However, we have taken adequate measures to ensure availability of raw materials and components for the ongoing peak selling season. The cost optimization initiatives and prudent working capital management will help us to sustain growth and profitability. We would like to build on the momentum in Q3 FY 2022 and Q4 FY 2022 into Q1 FY 2023 and the subsequent quarters. With that, ladies and gentlemen, we are done with the opening remarks. I would like to now pass it back to the moderator who will open the floor to your questions. Mr. Thiagarajan will answer most of your questions. To the extent we are unable to address all your questions, we will get back to you via email. With that, we are now open for your questions. Thank you.
Questions and Answers:
Operator
Thank you very much. [Operator Instructions] The first question is from the line of Bhoomika Nair from DAM Capital. Please go ahead.
Bhoomika Nair — DAM Capital — Analyst
Yes. Good afternoon and congratulations for a good set of numbers. Sir, just wanted to understand this whole price hike and the cost escalations that we are seeing. You mentioned that in April, you’ve taken about a two to three kind of percent a price hike. Now, given the recent kind of March, April, due to the geopolitical issues, the kind of cost escalations that we are seeing and the freight costs sector, which are also going up, is this adequate enough to kind of take back our margins through that eight percent plus trajectory and how much more will we need to take? Also, if you can talk about the impact of full cost escalation once the BEE rating kicks in from 1st of July. That’s my first question.
Operator
Members of the management, we cannot hear you at the moment.
B. Thiagarajan — Managing Director & Executive Director
Are you able to hear?
Operator
Yes. Now we can hear you. Please go ahead, Sir.
B. Thiagarajan — Managing Director & Executive Director
So as you may recall, we have launched a new range of affordable premium air conditioners, which are re-engineered and the cost reduction has been achieved through this. Now, that is the very first action whereas we have looked at the products, unwanted features have been removed, given the fact that you have more than 90% of the buyers are first-time buyers, you have 65% of the buyers coming from Tier 3, 4, five markets, and the growth is driven by aspirational middle class, you have 45% of the sales coming from consumer finance related. Then you can imagine, they are looking for a product, which is functionally delivering air conditioning. So this is not only to manage the cost escalation. We also wanted to grow our market share from 12% to 15%. And without addressing this segment of the customer or the belly of the market, we will not reach there. So therefore, the entire range has been rejigged. Now, there are as many as 22 models, which are currently available, which are future ready, in the sense it takes into account the energy label change that will take place on 1st July, 2022. So you buy a four-star now, it will continue to remain as a four-star even when the energy label changes. Okay? That action is taken. Now, there are a set of actions connected with the procurement and the value chain. There is localization, there is backward integration, there are alternate vendors.
So China risk mitigation is part of our enterprise risk management framework. That also has been addressed. There are a few component manufacturers, specifically the compressor manufacturers who is GMCC, who is the global leader, he is going to commence the production. Trial production is on. That’s what I understand. Therefore, you are going to have a component ecosystem developing in the country very fast, thanks to the PLI scheme. So the other part of it is connected with Sri City. In all probability, we will commence the production in Q3 of FY 2022, which helps us — you — which helps us actually in terms of the logistics costs. So incoming raw material today is coming to Nhava Sheva Port, all the way it goes to Kala Amb in Himachal Pradesh and the finished goods are moving from Kala Amb all over the country. Southern region constitutes 45% of the sales. So therefore there is an inventory holding period. There is logistic costs. So you can imagine, around 10 to 12 days of inventory will be held up in transit only. Sri City, as the location can receive the raw material in the Ennore port or Krishnapatnam port, which are less than 50-kilometer distance from the factory. All the states, Telangana, Andhra Pradesh, Puducherry, Tamil Nadu, Kerala, Karnataka can be served overnight from Sri City. So there will be substantial cost savings once the Sri City plant commences production. Now we will — our principle is very clear. To the extent possible, we want to pass on the price increase to the market, but then the competition decides what — at what price we will be able to sell. So the goals are very clear. We will indeed pursue our market share goal of 15% by 2025.
That goal remains unaltered, and hopefully even by FY 2024, if we can achieve depending on the market opening up, we will be able to do that. The second one is that we will continue to look at our products and make it affordable for the belly of the market. Three, cost reduction levers, every possible lever will be used. And finally, I also have a feeling that you will have — you will witness softening of commodity prices later this year. Earlier, we thought it will — the cycle will continue for 12 to 18 months. With this inflation and other measures that are taking place, I think it will come under control even by end of this calendar year. That’s where we are. So taking all this into account, I think we will get back to eight percent to 8.5% margin this year, operating margin. And you might have noticed another important development in the market, the advertising expense. What was happening previous to COVID, it is almost INR100 crore lower than what it is. That is my estimate. You are not seeing so much of money being spent by the category in the market. So that is another lever the brands will have, not only Blue Star. So therefore I would go with the assumption that it should be possible for us to do anything between eight percent to 8.5% as against seven percent, what we have delivered in the year ended 31st March, 2022. Sorry, this elaborate answer will help others who had the similar question as well.
Bhoomika Nair — DAM Capital — Analyst
Sure. Sir, this improvement in margin would be more back-ended. Near-term pressure on margins would kind of continue given the cost escalations and these benefits out of Sri City to only be more towards the end of the year that at the first —
B. Thiagarajan — Managing Director & Executive Director
I think Q1 itself, you will start witnessing. So you look at the margin of Q1, Q2, Q3, Q4, the products have been launched only in the month of January. So the demand is good. My estimate is we should be witnessing something in Q1 itself.
Bhoomika Nair — DAM Capital — Analyst
Got it, sir. Sir, the other thing was more — you did speak about indigenization and component ecosystem development over the medium term, but more from a very near-term perspective, given the supply chain disruption that we’re seeing and particularly in China lockdowns et cetera, and on the flip side, we have a very strong surge in demand for March, April, would there be shortage of material and inability to kind of supply to the strong demand that comes in by the end of the month or by the end of the season in that sense, in June, July?
B. Thiagarajan — Managing Director & Executive Director
The shortages, I was the first one to talk about the shortage, the — even before automobile industry. The shortage started in December 2020 and everyone was ignoring that. The December 2020 to March 2021, huge component shortage plus we had the ocean freight at three times and at that time, the automobile industry also didn’t speak about shortage of semiconductors and other stuff and that continues even today that there is a challenge. The mitigation measure is you have to plan in advance. In other words, what we would have held as a 45-day inventory, now we are holding something like 90-day inventory. Certain items, mad rush to block the quantities from the vendors like semiconductors. We have blocked till 2024 end. The quantities are blocked by — with the vendors. Right now, all that I can tell you is till July, we do not have a problem.
There was another madness that was going on that the market will grow by 50% to 75% this summer. I have been maintaining that it will be 20% to 25% market should grow over March — sorry, summer 2019, which is April, May, June, to July 2019, it should be 20% to 25%. If the market would have grown by 50% to 60%, there was another forecast, 75% growth over 2019 summer, there will be shortage. I don’t think up to 30% growth, there will be any shortage for Blue Star. Our goal is market may grow between 20% to 25%. We will grow from 25% to 30% growth over 2019 summer. If that is the growth, we do not have shortage. one or two locations, some SKU, maybe the shortage, but we are not worried about, till July, we don’t have. Right now August, September is being planned, but the feedback we have from the international vendors is by then, the logistics bottlenecks should be over. And from August, September, quite a few components are going to be available in India as well. Most importantly, the compressor should be available. Drives, we are no longer dependent on any imports. Of course, the chips are required and I think it should ease out by August, September.
Operator
Thank you. [Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Fund. Please go ahead.
Bhavin Vithlani — SBI Mutual Fund — Analyst
Yes. Thank you for the opportunity and congratulations for a great set of performance. So I have two questions. One is on the Commercial Refrigeration segment. What was the growth in the segment in the fiscal year gone by and what percentage of the business is the Commercial Ref. The second question is more on the services part. What is the share of the services in our business? I believe Commercial Refrigeration and both Commercial Air Conditioning, there will be an element of after-sales services. And on a slightly longer period, do you believe that the share of services grows as we see in some of the global multinationals and that kind of adds to these structural improvement in the margins for the company as a whole?
B. Thiagarajan — Managing Director & Executive Director
I am not able to get the last part. Multinational, what is the connection?
Bhavin Vithlani — SBI Mutual Fund — Analyst
So when we look at some of the global companies, likes of Daikin, Johnson Controls, so services is a significant part of the profitability for these companies, the after-sales services, because in room air conditioners, after-sales is actually not there, but the companies like — the OEMs like yours only do the after-sales in case of Commercial Refs and Commercial Air Conditioning. So is that something that we see structurally going up as your installed base rises and that kind of adds to your profitability on a longer period of time?
B. Thiagarajan — Managing Director & Executive Director
Okay. The — first of all, I wouldn’t be able to — I don’t know the financials of Daikin or Johnson, that too the breakup. We do not have any such official information. I won’t be able to comment on that. So the first part is Commercial Refrigeration. We are the player with the entire range other than the transport refrigeration. So we do otherwise right from water coolers, bottled water dispensers, deep freezers, ripening chambers, cold rooms, this part, we do. We do not undertake there. So for the turnkey projects, which are not sizable, but it will be involving quite a bit of bought out material, so we don’t do that. Other than that, in Commercial Refrigeration, we are the largest player, holding more than 30% market share in every category. So if you look at fast food chain, whether it is Yum! or McDonald’s or any — even food delivery like Swiggy, Zomato, everyone will be our customers. Ice cream, we will hold close to 40% market share in ice cream segment, whether it is for modular cold room or deep freezers. Now the — to close the commercial refrigeration part, the problem is with the market size of that. India is yet to mature and it will continue to grow and one day it should be as large as room air conditioner, but we are not there. The CAGR of close to 20% is being maintained. Let us see how that goes. Coming to Commercial Air Conditioning, we are number one in ducted air conditioning, ducted inverter, we are number one.
There is a segment which is VRF, which you are all familiar with. We are number two there, and there are chillers, where multinationals are there in this country and we are number two there again. And so you are right, the service revenue comes from, predominantly from, service revenue comes from even room air conditioners because we are a large institutional player there. But other than the residential perhaps, we may be the largest institutional player for room air conditioners even, like ATM or offices, quite a few national accounts by our split air conditioners. There the service revenue will be there, but predominantly, it comes from Commercial Air Conditioning Systems. As the volume grows, the AMC revenue grows. The — it will become a selective disclosure if we have to say that service alone, how much revenue we are earning or the profitability of that. It is profitable and not only we do the annual maintenance contract, we sell spare parts. We also undertake revamp and retrofit and replacement. So it is an integrated model, which Commercial Air Conditioning or Commercial Refrigeration business pursues. Thank you.
Bhavin Vithlani — SBI Mutual Fund — Analyst
Sure. Just a follow-up on this. More qualitatively, is the profitability higher than the profitability of the original equipment sales?
B. Thiagarajan — Managing Director & Executive Director
Original equipment sale, at a gross margin level? Operating margin level?
Bhavin Vithlani — SBI Mutual Fund — Analyst
Either way. So let’s say, is the services margins much higher than the new product sales margins?
B. Thiagarajan — Managing Director & Executive Director
The gross margin level, both should be same, but then in the product manufacturing, you have the capex invested. In service, there is no capex that are in — it is not a capital intensive one. Okay? In the operating margin level, it will be much higher service.
Bhavin Vithlani — SBI Mutual Fund — Analyst
Thank you so much for taking my question.
Operator
Thank you. The next question is from the line of Ankur Sharma from HDFC Standard Life Insurance. Go ahead.
Ankur Sharma — HDFC Standard Life Insurance — Analyst
[Indecipherable ]Thanks for your time. Two questions, one, if you could talk about the competitive landscape on the room AC side, any significant changes that you want to highlight? Any players getting aggressive and all — otherwise? And also the kind of connected with the import ban on ACs with gas, right, so has that led to any consolidation? Yes.
B. Thiagarajan — Managing Director & Executive Director
I couldn’t follow the last part. Court —
Ankur Sharma — HDFC Standard Life Insurance — Analyst
So I meant, post the ban which came in on compressors — the gas filled compressors, right? So has that led to any of the Japanese brands losing share or have they kind of managed to now start assembly in India [Indecipherable] So has that led to any consolidation is what I meant in the larger players.
B. Thiagarajan — Managing Director & Executive Director
No, the structural changes are as follows. Like who is supposed to be playing in this particular category, all are there, multinationals. one or two are left out and they will also be there. So the competitive landscape is not going to change. Okay? Whomsoever have to come in, they have come in. The second is, it is driven by the penetration, which is at six percent and we are of the view that it will — within three years, it will reach 10% penetration and the — therefore, every player, whomsoever was playing will start playing very aggressively. This is the second part of it. The third is that the capacity is going to double within three years’ time, thanks to the PLI scheme. Everyone has invested there. And the PLI, how it works, PLI works not based on the investment. Investment is actually one part of it, one exact is you have got the incremental sale over FY 2021. So therefore if someone invests in the PLI scheme, he won’t earn the incentive unless and until he is showing the incremental sale over FY 2021 and the percentage of it. It is six percent of the incremental sale you will get as a PLI. So therefore everyone will be trying to sell more in order to earn the incentive. Therefore you can imagine, production capacity is doubling, they have to earn the PLI. Therefore people will compete. In other words, the PLI, whatever companies are going to earn that INR4,000 crore, INR5,000 crore will be discounted to the consumer only. I don’t think it will add to the bottom line at the end of the day, but that is good because scale will be built and component ecosystem will come.
The combination of this will result in higher margins, which is what happened across the globe. So the problem of this industry is still we are talking about a INR15,000 crore industry. And so why analysts are investing time itself sometime I wonder that it is — for such a huge country, INR15,000 crore market is very surprising, but good days are here. For next five years, it will be a golden period for room air conditioners. It will grow exponentially one — because of these factors I told you. There is a component ecosystem. Everyone have invested in PLI and the temperatures are going up. People want to mitigate the summer by installing air conditioners. The Tier three, four, five markets are ready to consume these products. Therefore, I am certain that there will be accelerated growth. Now, come to the competition. So I am of the view, the Indian players, including Blue Star blossomed while liberalization took place. By chance, if liberalization wouldn’t have taken place and the Korean, Japanese players wouldn’t have come in, it will not be the Indian companies, which will be shining. All of us began to grow, all of us began to invest in R&D, manufacturing and you are seeing the results now. The Indian players are doing well despite the multinational competition. So here is the period.
There is a high growth period, intense competition. It will benefit companies like Blue Star. That is how we look at it. So — and there are no challenges whatsoever that — the legislation like gas filled should not come, it is fine. In any case, people are ready to manufacture here. See, the manufacturing hesitancy was basically because of two reasons. number one is that you do have the scale issue. The second is that you are not able to — there was a — if you want to quickly enter the market, go ahead and enter. That is deterred now, one, because of the legislation. The second is the energy label changes itself. You — everyone will have to develop a new product for a new energy label, even if there is a vendor in China, but those days are over and you will see the Indian component ecosystem, large number of units manufactured in India, and the consumption growth. So it is good. We will be able to compete as far as Blue Star is concerned in — none of the parts, whether it is a product, pricing, promotion, distribution, we may not fall short of anyone else. And where there is a gap, we are already acting and investing it.
Ankur Sharma — HDFC Standard Life Insurance — Analyst
Okay. Wonderful. And just another one on the overall industry growth in volumes for the current fiscal. Any number you want to put there versus, I think, 2019 was the peak volumes, I think, last time around. So where do you think this year could turn out to do?
B. Thiagarajan — Managing Director & Executive Director
So right from February, I have been saying that the market should grow between 20% to 25% during the summer season. And our target is to grow between 25% to 30%. And when the summer is intense, there have been reports that it will grow by 50%, 70% so on and so forth, but I think at that kind of growth, A, material will not be available, but then you have seen the interest rate, EMIs are going up. So there will be some kind of correction. So I think the range is 25% to 30% should happen.
Operator
Thank you. I have a request Ankur Sharma to rejoin the queue. In the interest of time we would request for participants to limit your question to one at a time now. Thank you. [Operator Instructions] The next question is from the line of Renjith Sivaram from Mahindra Manulife Mutual Fund. Please go ahead.
Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst
Yes. Hi and congrats on good set of numbers. Sir, one thing which you see is that the trade receivables have increased by close to INR400 crores and inventories have increased close to INR260 crore. So what’s your — is that a timing issue or you — is that some conscious decision on the inventories at least given the summer?
B. Thiagarajan — Managing Director & Executive Director
Mr. Neeraj Basur will respond to that.
Neeraj Basur — Group Chief Financial Officer
Hi, Renjith, thanks for the question. See, it’s all linked with the scale step change that happened in FY 2022. If you see our revenue growth specifically in quarter four is close to 40% and obviously that result in higher billing, and obviously, some of that billing will be reflected in receivables. It’s all normal. Nothing to be worried about. It’s all fine in collectibles. Now, as far as inventory is concerned, there are two reasons. One, Mr. Thiagarajan already covered. We have consciously taken a call to advance procurement of some long lead-time raw material components because we wanted to make sure our quarter one production runs normally. So partly it is that. And also the remaining part again is the same scale change reason. And obviously, as you heard him talk about growth that’s expected in the next financial year and some of that was to support that. So it’s all absolutely normal and we are continuing to look at very healthy operating cash flows, as you heard us speak about it in the beginning as well.
Operator
Thank you. I would request to Sharam to rejoin the queue. The next question is from the line of Anupam Gupta from IIFL Capital. Please go ahead.
Anupam Gupta — IIFL Capital — Analyst
Good afternoon. Mr. Thiagarajan, you gave a pretty detailed picture on the portfolio changes, which you are doing. Similarly, can you comment on the distribution side of it, how you are expanding? So I think last year, you were at close to about 7,000 retail points, which you were there and you have talked about higher focus on the north, and also on the Tier three, four, five markets. So just give us slightly more color on how the distribution is being focused on for driving this growth.
B. Thiagarajan — Managing Director & Executive Director
Thank you. So there has been a systemic change that has been happening. While we were worried about two summer seasons are lost so on and so forth, what has been happening is the — one, the e-commerce part of it. Today, at around 17%, I don’t know the summer season. It may be 20% of the sales may be happening through e-commerce. That is one part of it. There we were [Indecipherable] for the simple reason, the pricing is the only thing that the e-commerce platform drives the sales and we were worried about our profitability. But we got that right. For the past couple of years, our share in e-commerce is coming closer to the share of the industry itself. So that is not an issue. Now, there are modern retailers or the power retailers who are having multiple stores and they are — their behavior will be similar to that of the e-commerce. So therefore, that is also a significant segment that is there. So we handle e-commerce as well as modern trade. This too, we are not behind at all. We are well-versed there. There are dedicated teams and everything that is — that needs to be done has been done in terms of product prices, service standards, profitability so on and so forth. The area you mentioned is right. It is to do with the North Indian market, which is highly price-sensitive, number one. number two is, geographically it is well spread and other than the cities I am talking. Like, for example, you take something like Moradabad, Meerut, all these markets will be very significant markets and it will continue to grow. And therefore our — how we do is that we do have the estimate of town wise market and what our share should be.
So if our all India market share is 13.25%, why in Moradabad we are not 13.25%, which counter is we’re selling, where we are not selling. Now, it will not be a retailer directly. It will be a distributor, which means one distributor handling some 600, 700 sub-dealers and we are correcting that part of it. Right now it is not about the outlet numbers. I have stated in our interactions again and again that appointing a dealer is the easiest of the job for the simple reason he is going to ask you for certain commission structure, and quite a few dealers will be asking you for a display unit, quite a few dealers will be also charging for the space and quite a few dealers will ask for a in-shop demonstrator. So when you walk into a store, the in-shop demonstrators are all placed to buy in most stores. It is placed by the brands actually. So therefore appointing a dealer is not the issue. The issue is that, which are those potential counters where your share is low, how you will bring it up in line with the all-India average. This is the process that we are on. We have achieved significant success from Q3 onwards. Q3, Q4, our numbers are good because of the corrections that have taken place in the North Indian market. And this exercise will continue through summer and beyond. So our process is well defined there.
I do not have any concern with regard to that as well. Now, the connected aspect is, you have got a dealer, you have got the product out there, you have got a strategy to reach that market share, but then the pull for the brand. So the very reason why a company like Blue Star, which is close to eight decades of existence, seen as an engineering company, we are ensuring that our connect with the consumer for room air conditioners is perfect. That is why Virat Kohli was brought in and he will continue to be our brand ambassador. So that distribution part is also taken care of. And we — in terms of media, again, the vernacular dailies we have been doing for the past couple of years, this summer it is going on. And to our surprise, the digital consumption is also high in Tier three, four, five towns. So significant amount of our advertising is in digital mediums as well, like this year, we will — the summer, we are spending close to 30% of our advertising expenses in digital. So that should answer your question.
Operator
Thank you. The next question is from the line of Sandeep Tulsiyan from JM Financial. Please go ahead.
Sandeep Tulsiyan — JM Financial — Analyst
Yes, good afternoon. Sir, my first question is pertaining to the order inflows. We have reported a very strong growth in inflows as well as execution in the current quarter. So if you could highlight, give more color where are these orders coming in from. Are there any large orders, which got concentrated in the fourth quarter or is it more small value orders, many number of small value orders, which are driving this growth? And also if you could give the market share in each of the categories, the ducted, VRF as well as screw chillers where we are. That’s the first question.
B. Thiagarajan — Managing Director & Executive Director
So as you know, the carried forward order book is INR3,253 crores as of 31st March, 2022, roughly around 10% higher than the previous period, that is 31st March, 2021. Order inflow has been uniform throughout the quarter, and the segment one, it is not seasonal in nature, the orders keep flowing, but in terms of execution, the Q4 may be a much bigger quarter compared with the other quarters. The orders are coming from, first one is the manufacturing sector. The capacity expansion is happening. PLI is applicable for quite a few sectors, including mobile phones so on and so fourth, automobile, EV, say, for example, the Ola [Indecipherable] factory MEP has been done by us. So the first segment that is driving growth is the manufacturing, followed by data centers. We are a leading player there. The third one is connected with the offices segment itself, specifically IT. Some point of a time in 2020, we shared with you we are worried that the world has changed. The — I don’t know whether people will go back to office so on and so forth. Slowly, IT itself is consuming a lot of office space. So it has come back. Now, this is — and then you have the infra segment; airports, metro railway, water. This part is the next one that is driving. Now, go to the packaged air conditioning, VRF, which are light commercial space.
There was a lull, but again here, manufacturing is driving, number one. Second is connected with the small hotels, small offices, many healthcare; 50-bed hospital, 100-bed hospital, these are the growth drivers. And some segments, which used to do well, that’s not happening, we have to wait and see like marriage halls or education institutions. I think it will come back. Now, the — geographically, if you see, I have shared this again. The Tier three, four are doing extremely well. In a dealer award, you will see it is not a Bombay dealer who is number one, but a Belgaum dealer will be number one, or an Aurangabad dealer. That’s how it is happening there because those cities are beginning to air condition the shops, showroom, boutiques, so on and so forth. Now, go to the market share part of your question. So in the MEP part of it, it is — the market is very huge. We are selective. We are interested in doing the job where the cash flows are good and it is profitable. Otherwise, we are not madly running after. We can scale up, but we will be measured there because we want to improve the margin there. We want to have a clean balance sheet. That is our goal there. But still, it will grow at 25% CAGR. Market share has got no meaning there. And even in infra projects like airport or metro, you may be ending up being a L1 in order to grow your market share.
So we are very clear there what we will do, but we will grow still at 25% because there are shortage of MEP contractors. Now, the market share for chillers, we should be close to 18%. In case of VRFs, we will be close to between 20% to 22%. And again, in VRF, we are not playing in the residential tower segment, which are large buildings, which are equipped with the VRF system. So we go very cautiously there because these residential towers get concluded and the jobs get extended and the occupancy will have to come into accept your product and it is a different ballgame altogether. So therefore, even without that residential segment, we will be having a 22% market share. We are number two there. In chiller, we are number two. And it is pertinent to note that as an Indian player against multinationals, we are number two. And in inverter ducted or the ducted, which are consumed largely by shops, showroom, boutiques, we are number one.
Operator
Thank you. The next question is from the line of Ravi Swaminathan from Spark Capital. Please go ahead.
Ravi Swaminathan — Spark Capital — Analyst
Thank you for taking the question. My first question is with respect to the cooling product segment, the breakup between air conditioners and non-air conditioner revenue. And what kind of revenue growth do you expect in the entire cooling products segment for FY 2023?
B. Thiagarajan — Managing Director & Executive Director
Last part is what kind of?
Ravi Swaminathan — Spark Capital — Analyst
Revenue growth do you expect for FY 2023 for cooling products?
B. Thiagarajan — Managing Director & Executive Director
Fine. So the — if I were to give a breakup, that will also be selective disclosure. So the question is, all that I can say is substantial part is room air conditioners because refrigeration market is very, very negligible. Okay? So the — and we operate, as I told you that we do not operate in refrigeration projects. We do not operate in the transport refrigeration. So the addressable market, which we will do, will be 4,000 and the INR16,000 crores will be the market for the room air conditioner in a normal year. In the COVID impacted year, it may be INR12,500 to INR13,000 crore. So it will be a selective disclosure there. Now if you — our estimate is, or I won’t say our estimate. Our ambition is to grow that segment by at least 25%, and going by what is happening in the summer, it should be possible.
Ravi Swaminathan — Spark Capital — Analyst
The cooling products, the entire segment you are saying, for FY 2022?
B. Thiagarajan — Managing Director & Executive Director
That’s right. That’s right.
Ravi Swaminathan — Spark Capital — Analyst
Got it, sir. And with respect to the margins in the EMP business, it has been quite healthy at six percent. Are you confident of maintaining such kind of margins vis-a-vis the earlier we used to clock 4.5%, five percent margins. Will we be able to sustain the six percent margin?
B. Thiagarajan — Managing Director & Executive Director
I think so. What we have delivered, it should be possible to sustain and even improve upon because the construction cycle is on. I know you were always skeptical about this segment. I know that for decade together, but your good time has come. This construction cycle is on. Contractors are not available. And one is rushing like those days that how fast you can execute.
Operator
Thank youThe next question is from the line of Naval Seth from Emkay Global. Please go ahead
Naval Seth — Emkay Global — Analyst
Yes. Thank you for the opportunity. I have one question. Can you elaborate on that 47% growth in RAC? How various regions would have done, like east, west, north, south? Because south, as per our checks, suggested that was quite kind of weak in March, but picked up in April. So how things have panned out in 4Q?
B. Thiagarajan — Managing Director & Executive Director
I don’t — I do not see any difference at all. The big quarrel I have with analysts is this. You are comparing the growth with a COVID impacted year. Okay? And in a COVID impacted year, you know the different locations had different lockdown restrictions. Somebody allowed the retail, somebody allowed the e-commerce. It was madness last year. So I will not go by last year to this year the growth has come from this region because it is based on somebody poorly performed will show you a huge growth. With my team also, that is the same thing I keep pointing out. Don’t say it is 50% last year. Your performance was bad. So the — if you ask me right now what is happening, right now, the growth is significant, in double digits in every location, including very large markets like Chennai. East may be relatively lower growth. And in this, I will look at only Chennai, Tamil Nadu, Andhra Pradesh, Maharashtra, Gujarat, entire NCR and Punjab. And for us in UP, it is building our market share, we don’t and every location here are competing with each other and all of them are doing well.
Operator
Thank you. The next question is from the line of Manoj Gori from Equirus Securities. Please go ahead.
Manoj Gori — Equirus Securities — Analyst
My question has been answered. Many thanks.
Operator
Thank you. The next question is from the line of Praveen Sahay from Edelweiss Financial. Please go ahead.
Praveen Sahay — Edelweiss Financial — Analyst
Hi. Is there any downtrading happening in the market? And how is the inventory level in the — in the market right now?
B. Thiagarajan — Managing Director & Executive Director
I think the information, again, I know about Blue Star, we do not have an inventory problem. At least we do not foresee that till June definitely, but what I am being told by the dealers is there are shortages in quite a few markets and that’s what I was told.
Operator
Thank you. The next question is from the line of Sujit Jain from ASK Investment Managers. Please go ahead.
Sujit Jain — ASK Investment Managers — Analyst
Sir, just wanted to check the 10% to 11% price increase you would have taken for room ACs for FY 2022. Was it sufficient for the RM inflation? And if that was not sufficient, to what extent it was not sufficient?
B. Thiagarajan — Managing Director & Executive Director
You know that. If you see our operating margin, from 7.9%, it has come down to 7%. Okay? So the question is, it is — I understand in the operating margin level, we could manage because there were some cost leverage in the operating costs. I think it is around 2.5% lesser. That they in — if — in other words, if you would have increased the prices by something like 14.5%, we would have maintained the margin, but it is not the case because the price is decided by the market and you have got certain goals in terms of the volumes. And I think in Q1, that shouldn’t be because in April, we have taken the price increase. In taking price increase, we are not dictated by anyone at all. We do it, and right from January, that’s — 2021, that is what we are doing.
Sujit Jain — ASK Investment Managers — Analyst
And after April price increase, now you are fully covered for the price inflation in the raw materials.
B. Thiagarajan — Managing Director & Executive Director
Not sure. For this — we are sure up to summer. We do not know about July, August, September at all. Our decision is that, if, if — even though this conversation will be uploaded in SEBI website or whatever it is, I am making this statement. If the sale is very high and you are running out of the inventory and you have to do some quick purchases, which is not the case. If that happens, we may have to review the prices by June first week itself. If the demand is like what we — I am saying, the market may grow by 25%, we will grow by 30%, our stated review of prices is July first week. That time, we have to see July, August, September, what will be the raw material prices that will be prevailing. Now, I have also stated this in the television interviews. If the commodity prices come down due to this inflation containment measures, we will be a brand to go ahead and even reduce the prices if required. So the decision for July, August, September, but that decision will cover the festival season as well, we will take it on July. And you know one more thing, with the interest rate hike, the EMI is going to go up or the consumer finance related, that buyout expenses we will have. So therefore, Q1 is not a problem. Q2 revision by July 1. If by chance, the market continues to explode the run out of the material, by June first week, we have to look at it depending on how we are going to mobilize this material.
Operator
Thank you. The next question is from the line of Vishal Biraia from Max Life Insurance. Please go ahead.
Vishal Biraia — Max Life Insurance — Analyst
Thank you. Sir, in the new plant at Wada that we plan to commission, specifically for Commercial Refrigeration, what could be the increase in localization that we will see? And how does this compare to our peers in Commercial Ref specifically? Thank you.
B. Thiagarajan — Managing Director & Executive Director
So this factory is coming up basically for our — first of all, we had a factory in Ahmedabad, which manufactured only 400 and 500 liter deep freezers. There is 300 liter, there is 250 liter, there are 100 liter, there is 75 liter. Now, you can easily imagine that the — predominantly the deep freezers are used for ice cream distribution. The OEMs are the ice cream brands. Now, what is actually — what has been happening is that when the ice cream penetration goes to smaller towns, smaller retailers, so are they — how are they going to grow their business? They will go on appointing the retailers and those kirana shops are going to be selling through with a deep freezer that will occupy a space. So you can look at this trend. Over the years, the skew is towards 300 liter, 200 liter, 100 liter because in a Tier five town, that retailer’s consumption, it will be lower, he will not stay. So the demand for lower capacity deep freezers has been growing. And this was manufactured for us in China.
Two, three OEMs were manufacturing for us, but in line with our ERM, the enterprise risk management framework, we wanted to de-risk China. The work has been going on for the past three years. As per that, we decided to go ahead and do 300 liter this year; 200 liter next year. In the meanwhile, even 400, 500 Ahmedabad plant has reached its full capacity this summer. With great difficulty, we are managing now the Ahmedabad plant. So therefore, in — Wada factory is coming up, A, for expanding 400, 500 and 300 is fully indigenized this year. We are stopping the imports, and later part, the next summer season 250, then later on 100. It is a phased program. This is the reason for setting up this factory. So therefore it is to do with the capacity expansion indigenization. Now, you asked a question, to what extent it is backward integrated. It is only the compressors that are imported there. All other components are available in India. It is PUF insulation, it is sheet metal, it is condenser. So the — everything else is available. Here it is only the compressor. It is not manufactured in the country and it’s — I don’t think it will be manufactured. That, we depend on the international vendors.
Vishal Biraia — Max Life Insurance — Analyst
Okay. And sir, when you compare us to some of the peers that we have in Commercial Refrigeration, how would — where would we stand in terms of import content and localization? And also in terms of margins, could you elaborate a bit on that? So how do you see this high growth — so basically is operating leverage here playing out because of the high growth and we are working at utilizations currently?
B. Thiagarajan — Managing Director & Executive Director
As I told you, it is and we are addressing a INR4,000 crore market and the — it is highly fragmented. There are deep freezer players, but they may not be cold room player. There are — there may be cold room player, by he may not be doing ripening, for example. And there are regional players, which will not be preferred by large national accounts. Say, for example, brands like Amul, Mother Dairy, Yum!, Swiggy. These are all large national customers. And like Reliance, for example, Reliance, the retail, we — is a very major customer for us. So therefore it is highly fragmented. You have numerous local players. That market is — I will compare this to 1990 air conditioner market. It will change because first January 2023, there is an energy labeling that is coming for deep freezer. At that point of time, you will see some kind of change, consolidation that is taking place. But otherwise, if you take deep freezers standalone, we will be the market leader, number one.
And if you take the modular cold room, we will be number one. If you are looking at across, whether it is fruit, vegetable, flower, floriculture, agriculture, sericulture, including silk, there are many applications. We will be the only player dominating in that segment. But our problem is the market size is not significant enough. The future, it should be one of the very large — with a 5-year time, I am seeing it is a very big game-changer for Blue Star. That’s why we continue to invest in manufacturing or R&D. So if you ask me the profitability, I — we don’t have any clue at all. There are many, many guys who are importing from somewhere and no results are published, and you can go to Registrar of Companies information, that will be also sketchy. So I do not know. If you broadly ask me, is commercial refrigeration business more profitable than room air conditioner, yes, it is more profitable than room air conditioners. And again, I am comparing with the benchmark room air conditioner margin prevailing in the country.
Vishal Biraia — Max Life Insurance — Analyst
Thank you.
Operator
Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. B Thiagarajan for closing comments.
B. Thiagarajan — Managing Director & Executive Director
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 of any — in case any of your questions were not fully answered, and we will be happy to provide you with additional details by email or in person. Thank you very much and goodbye.
Operator
[Operator Closing Remarks]