Expect 20% growth in FY18; festive season should go well for AC biz: Blue Star

In an interview to CNBC-TV18, B Thiagarajan, Joint MD of Blue Star spoke about the happenings pre and post goods and services tax (GST) in the company and gave his outlook for FY18.

Thiagarajan said May onwards destocking was commencing; May, June and July wasn't good. August onwards we are seeing stocking happening, he said.

He expects this trend to continue during festival season.

Talking about water purifier business, he said this market is growing at a compound annual growth rate (CAGR) of 15 percent.

Thiagarajan expects Rs 500 crore of revenue from water purifier business.

He expects 20 percent growth in FY18.

According to him festive season should go well for the air conditioner (AC) business.

Not looking at any acquisition opportunity at this point, said Thiagarajan.

Below is the verbatim transcript of the interview:

Latha: Are you seeing any rebound in output after the destocking you saw in the first quarter?

A: Indeed in the month of August itself we saw rebound. As May onwards destocking was commencing. May, June, July wasn't good but August onwards we are seeing stocking happening and therefore some kind of growth compared with the last year. I expect this trend will continue during the festival season.

Surabhi: I want to talk about the new line that you are introducing - water purifiers. You are getting into this part of the business. What are the margins for this product and what does that mean for the overall margins?

A: The margins will be much-much better than air-conditioning space when it reaches the steady state. The reason for getting in this diversification, into an unrelated business -- we have been air-conditioning, refrigeration player and room air-conditioner business has been doing well, commercial refrigeration is beginning to do extremely well with food processing and processed food consumption going up.

Blue Star as a brand can be leveraged in residential space plus the great insight that we have got is that the growth has been driven by the growing middleclass consumption specifically in tier three, four, five markets. So as a part of our strategic plan, if we have to grow at the rate of 15 percent CAGR plus, we have to look at certain categories. We wanted to be in water. The market is growing at a CAGR of 15 percent there. It is reasonably big market and today it is around Rs 4,000 crore. We expect it will be around Rs 10,000 crore by 2021. It is an engineered product. It has got after sales service element and Blue Star as a trusted brand can do well in that space. So in our test marketing stage the response is very good. We have acquired more than 10,000 customers. I think in about three years' time we will be able to get around 10 percent market share which means we will be able to achieve at least Rs 500 crore of turnover.

The operating margins in this business will be in the order of around 16 percent compared with 10.5-11 percent in the case of room air conditioners. Right now this particular industry is spending extensively in advertising, as you might have seen, but as the market expands that expense part will be moderated out and the after sales revenue will sustain because it is a service intensive product. We are very excited about this particular part of the business.

Latha: If I can put numbers to my first question, even Q1 revenue growth was about 20 percent. What are you expecting for the full year and what is secular growth revenue?

A: I am going by what I am seeing in the market. August was good. I see festival season going on well and agriculture income is the other part of it which is, in my opinion, it is going to be a promising one. Given all this I expect the industry will end up with at least 10 percent growth. Blue Star's own goal is to close it around 20 percent growth for FY18. I hope that the market will grow by 20 percent and we will close by 30 percent but market is likely to grow only by 10 percent and I expect room air conditioner business to close with around 20 percent.

The one and the only concern we have is that after demonetisation, goods and services tax (GST) and now there is label change due on January 1, 2018. The second thing is the commodity prices; in all your interviews (on the channel), each one is talking about the same. I hope that stabilises at some point of a time. I am not so much worried about this particular part of the business. We have to ride this margin pressure out.

Anuj: Any acquisition that you have planned. There are a couple of brands which are in the market right now. Are you looking at anyone?

A: We have been getting many proposals like that. We are not into acquisition. We have enough on our hand to leverage. The water purifier business is one, electromechanical project business, as we had reported, is showing some signs of revival, our order inflow in that part of the business is extremely good. In shop, showroom, boutique, the medium space air conditioning business is good. Commercial refrigeration is doing exceedingly well and I anticipate at some point of a time the government will open up foreign direct investment (FDI) in multi brand retail both for employment purpose and another for kick-starting the economy and we are preparing for it. I am looking forward to the government announcing FDI in multi brand retail. So internally we have enough things to do. No acquisition plans at all.