While heat wave in most parts of the country has been making headlines, it was still not good enough to boost sales of air conditioners, according to B Thiagarajan, executive director, Blue Star.In an interview to CNBC-TV18, Thiagarajan says the company is in the business for the long-term and continues to be positive on the same.
Thiagarajan is bullish on the company’s performance and expects to growth at a CAGR of 15-20 percent in FY16.
Below is the verbatim transcript of B Thiagarajan’s interview with Reema Tendulkar and Sumaira Abidi on CNBC-TV18.
Reema: Your cooling products business has been doing well. In the January to March quarter it recorded a growth of nearly 27 percent. In the summer season in April, May as well as half of June, the early part of June, how has the momentum been in cooling products? What can be the kind of sales growth we should expect in peak season?
A: The figures are not out. The summer has not been a very strong summer. Practically, it rained in most parts of the country at some point or the other. But I come from a school of thought whether one week of hot summer will trigger a purchase or one week of rain will spoil the purchase. So, therefore it has not been a washout per se as originally anticipated. I still hold the view that the season which is not ending in June, it will end in July if you take Northern India into account will post a 10 percent growth for the entire market. Our goal has been to exceed the market growth by another 100 basis points which means we want to grow by 20 percent. So, our growth should be somewhere between 15-20 percent in the entire cooling products which includes apart from home air conditioners, deep-freezers as well as cold rooms. The bottom-line is summer has not been strong. One would anticipate a 20 percent growth. The market would have grown only by 10 percent.
Sumaira: So, since this higher margin cooling products division has also a higher contribution to your earnings before interest, taxes, depreciation and amortization (EBITDA), could we expect some bit of tempering in your margins in Q1 of FY16?
A: I do not think so. In operating margin terms we have reached a particular scale. Here, again, I want to emphasise the importance of long-term game plan rather than one particular summer or so. We are here to stay in the residential segment. Three years we have posted remarkable success in this and we are exceeding 10 percent market share. We would like to grow further in this particular area. And therefore I am not really worried about one particular summer not being strong or so. And even if the margins are not going to be same as last year, it will not be due to this demand. Basically I am concerned about the exchange rate. The dollar to rupee has gone up. Commodity prices have been favourable last year, it may not be favourable. But, we are still optimistic about this business because we will be crossing three lakh numbers or Rs 1,000 crore of turn over in this business alone - room air conditioners. Therefore the scale will provide the leverage in terms of margins. Going forward in a couple years, we will be into backward integration and finally modernising our production. So, strictly speaking one summer it does not matter at all. We will look forward to play this game in a much stronger manner.
Reema: One clarification, you said that 10 percent industry growth as well as a company growth forecast of 15-20 percent, was that for the Q1 quarter or was it for FY16?
A: Q1 quarter as well as FY16. Strictly speaking, the first quarter will set the tone. I think it will represent the whole year as well. Our internal goal is to grow at least 15 percent but it will be anywhere between 15-20 percent.
Reema: I think I heard you say that your market share has crossed 10 percent now. So, this would compare to a nine percent market share that you had as of December. So, in the quarter gone by, you increased it by 100 basis points, right?
A: Here again, there has been several questions; number one is when you are talking about markets share I am talking about the room air conditioner as the category not the residential segment alone. Because we are fairly a larger player in the institutional segment as well. I think by this quarter we will cross that 10 percentage point. We were somewhere around 9 and we are gaining market share even this summer.
Sumaira: Then your other vertical which is EMPO - electro mechanical projects, now for the last few years we had seen some bit of pressure over here. However, this time around things are looking not so bad revenues are up nearly about 5 percent even EBIT margins sort of closer to that 5 percent mark. Are things on the mend over here and by when do you expect margins to start expanding and for the revenue to actually grow in double digits?
A: Year-on- year (YoY) we will be far better because it is not because the market has revised because they have cleaned up your books and we are feeling that the swing will represent a better performance as compared to previous year. Definitely the market has not revived for that segment at all. The order inflow is very poor; speed of execution is a matter of concern actually. I don’t think we are every optimistic about segment one.
It will perform still better than the previous year because we performed very badly last couple of years. The segments which are some what looking up or the office segment or the light commercial segment like shop, showrooms and boutique which don’t require any kind of major land clearances or environmental clearance or huge investments and therefore we have to wait for another one year for it to return to a high growth path. This is what I would say.
Sumaira: This time around for your numbers, we have seen quite a bit of one offs. You had other income coming in of nearly four crore, there was also exceptional gains of nearly Rs 38 crore, a tax reversal as well. Going forward with these one offs not being there, what is the guidance you could give us for FY16?
A: It will be a good year for Blue Star recovering further, though the segment one electromechanical projects may not revive a high growth trajectory. Blue Star has sustained its performance over the years, despite the construction industry’s slow down. So, all that I can say is that FY16 will be far better than FY15. So you will, within a month’s time look at the Q1 results, it would be, we thought originally FY16 is going to be a remarkable year. I do not think, considering the external market environment it will be so. But compared to Fy15, it will be far more rewarding year. And as we march into FY18, where we will be having our three year strategy plan, we are very much optimistic it is doable. Our goal is to cross Rs 5,000 crore turn over. A lot of investments are taking place, that is why I mentioned that we are not worried about one weak summer or so, building both in residential, light commercial segment as well as large commercial segment.
Similarly the manufacturing footprint expansion which we are doing as you know that by December 2016, we have already invested in the very large facility in the South, that exercise is on. We are trying to grow our market in the South Asian Association for Regional Cooperation (SAARC) countries, Middle-east and North Africa in order to expand our global footprint. So, on the whole it will be a superior year. I am not able to state the exact figures, what it will be. So, the one off gains may not be there but we will perform exceedingly well.
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