Demonetization may impact Q3 sales of products: Blue Star

In an interview to CNBC-TV18, Vir Advani, MD of Blue Star spoke about the results and his outlook for the company."In tier I and tier II markets, about 30 percent of sales are done in cash. In tier III, tier IV and tier V markets, about 60 percent of business is done in cash. There is going to be a short-term that is Q3 impact on our sales of products on account of the demonetization", he said.Below is the verbatim transcript of Vir Advani’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Your volume of growth, can you give us some idea in terms of your air conditioner business and compare as much as your own expectations?A: I will just clarify that you did mention that the growth has not been that strong. When we compared Q2 of last year to this year we have grown 16 percent in revenue and 69 percent at the profit before tax (PBT) before exceptional items. The reason you don’t see there growth is that quarter two of FY16 has our IT business, Blue Star Infotech business consolidated there of last year. Last year that had revenue of Rs 75 crore and a profit of Rs 5 crore in the quarter last year. If you remove that then we have had reasonably strong growth.However, coming specifically to our lines of business segment one which is a projects business had about a 14 percent growth, profit has not grown by more than 2 percent. Main issue there has been a speed of execution in cash flow that continues to be a concern for us. However, on the positive side the order book is up 15 percent over last year and so that is a good sign for the future.The real exciting part of the growth for the quarter has been our unitary products business where we have grown quite substantially both on the revenues as well as on the profit side. I am happy to tell you that the market grew about 11 percent in Q2 -- this is room air conditioners. Blue Star grew 21 percent and that growth continued into the festival season into Onam as well as Diwali where the market grew about 20 percent and we grew 30 percent in the festival seasons, so all around the room air conditioner business.Latha: Then why is the consolidated EBITDA down?A: You need to remove the IT business from last year that is one thing that we need to do. Once we remove that it becomes a lot more comparable, which is what I mentioned to you that on a comparable basis you will see a 69 percent improvement before exceptional items because Q2 of last year we had an exceptional loss. So, it isn’t correct to compare that to this year. However, purely on an operating basis, we are very happy with the performance in quarter two and we are expecting that the year should continue to be strong.Sonia: What percentage of our transactions are handled in cash? I am asking you because of the recent demonetization scheme. There is an expectation that a lot of the demand could get crunched down for the sectors like yours because of that?A: I will talk about consumer durables and the room air conditioner business of ours in particular because that is what you are interested in this context. Tier I and II markets room air conditioner sales -- this is from our dealers to the end customer -- about 30 percent of sales are done in cash. Of course between our dealers and us everything is done in cheque obviously. However, in the market about 30 percent is done in cash.In tier III, IV and V markets, about 60 percent of business is done in cash. Now obviously, there is going to be a short-term and when I say short-term I mean a Q3 impact on our sales of unitary products on account of the demonetisation. By Q4 we expect things to improve so it should have improved well in time for our summer season. However, on a long-term basis it should be fantastic for the business.I do want to draw your attention however, is that why I am saying Q3 and Q4 we will have some challenges is that you have to understand that room air conditioners buyers are first time buyers. I am very clear that this is not where the black money is coming into this is essentially in tier III, IV and V markets. Consumers typically go to the bank pull out the money and then come to the dealers and gives him Rs 30,000 and 35,000 for a room air conditioners because of that. So, I am not worried about the bigger impact from a black money point of view, I am more concerned about the immediate availability of legal tender in the market. However, from a long-term point of view as a company we are very optimistic about the positive drive that this will do for us.