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  • 7 3BLUE STAR LIMITED

    Management Discussion and Analysis

    INTRODUCTION

    Blue Star is Indias leading air conditioning and commercial refrigeration company with over seven decades of experience in

    providing expert cooling solutions. Its credentials and unmatched expertise help it to enjoy a preferred partnership status

    with most of corporate and commercial India. Blue Stars central air conditioning systems are part of landmark buildings and

    mega structures such as airports, malls, hospitals and industrial establishments. In fact, every third commercial building in the

    country has a Blue Star product installed. The Companys integrated business model of a Manufacturer; Engineering, Procurement

    and Construction (EPC) services provider; and After-sales service provider enables it to offer end-to-end solutions to its

    customers across building, industrial and infrastructure segments. Its potent blend of technical know-how, talented workforce,

    design expertise, exceptional project execution capabilities and global footprint makes it the most preferred choice for

    mechanical, electrical and plumbing projects.

    Blue Star offers Indias widest range of air conditioning and commercial refrigeration products, as well as a comprehensive

    range of water purifiers, air purifiers and air coolers. It entered the residential air conditioners segment a few years ago, and

    has made deep inroads, with a market share of 11.5%. Blue Star is also the countrys largest after-sales air conditioning and

    commercial refrigeration service provider with a spectrum of world-class customer service solutions as well as value-added

    services. It has an extensive network of exclusive, multi-brand and modern retail format channel partners as well as service

    partners across the country. Blue Stars modern manufacturing facilities along with a proficient research and development

    team have given the Company an edge over its competitors. The business processes have been IT-enabled and the organisation

    has judiciously invested in state-of-the-art technologies with the objective of productivity and consistency across its deliverables.

    Blue Star has joint ventures in Qatar, Malaysia and Oman which undertake MEP (mechanical, electrical and plumbing) projects

    for residential, commercial and infrastructure purposes. The Company exports to 17 countries in the Middle East, Africa,

    SAARC and ASEAN regions, where its products stand the test of time in some of the most difficult climatic conditions in the

    world. This has helped enhance the Blue Star brand beyond India, while providing significant growth opportunities for its

    business, going a long way in establishing Blue Star as a true global player.

    Blue Stars other businesses include marketing and maintenance of imported professional electronic equipment and services,

    as well as industrial products and systems, which is handled by Blue Star Engineering & Electronics, a wholly owned subsidiary

    of the Company. It holds the repute of providing advanced technology products as well as turnkey engineering solutions that

    cater to several industries across the country.

    BUSINESS SEGMENTS

    In accordance with the nature of products and markets addressed, business drivers, and competitive positioning, the lines of

    business of Blue Star are segmented as follows:

    ELECTRO-MECHANICAL PROJECTS AND PACKAGED AIR CONDITIONING SYSTEMS

    This business segment covers the design, manufacturing, installation, commissioning and maintenance of central air conditioning

    plants, packaged/ducted systems and variable refrigerant flow (VRF) systems, as well as contracting services in electrification,

    plumbing and fire-fighting. After-sales services such as revamp, retrofit and upgrades also form part of this segment.

    UNITARY PRODUCTS

    Blue Star offers a wide variety of stylish, contemporary and energy-efficient room air conditioners for both residential as well

    as commercial applications. It also manufactures and markets a comprehensive range of commercial refrigeration products

    and cold chain equipment. The Company has recently added water purifiers, air purifiers and air coolers to its product

    portfolio.

  • 7 4 BLUE STAR LIMITED

    PROFESSIONAL ELECTRONICS AND INDUSTRIAL SYSTEMS

    For over six decades, Blue Star has been the exclusive distributor in India for many internationally renowned manufacturers

    of professional electronic equipment and services, as well as industrial products and systems. This business is managed by the

    Companys wholly owned subsidiary, Blue Star Engineering & Electronics Limited.

    INDUSTRY STRUCTURE AND DEVELOPMENTS

    AIR CONDITIONING

    In FY17, the estimated total market size for air conditioning in India was around `18500 crores. Of this, the market for central

    air conditioning, including central plants, packaged/ducted systems, VRF systems and other ancillary equipment, was about

    `6500 crores, while the market for room air conditioners comprised the balance `12000 crores.

    During the year, Government-funded infrastructure projects fuelled growth while private investments stayed subdued,

    resulting in a sluggish market, especially post demonetisation. Healthcare, education and metro segments benefitted from

    Government investments. In the buildings segment, offices, hospitals and ITeS gained some traction, but the factories

    segment remained tepid.

    On the other hand, the room air conditioners market grew significantly on account of a harsh summer and increased demand

    during the festive season. The rise in disposable incomes of the growing middle-class consumers and enhanced demand

    from Tier 3/4/5 markets continued to drive growth. In spite of the effects of demonetisation and relatively sluggish demand

    in the last quarter of the review period, the industry registered a healthy growth of 20%, in terms of value. The industry

    also faced margin pressures in the second half of the year under review, on account of high inventory and increase in

    commodity prices.

    COMMERCIAL REFRIGERATION

    The commercial refrigeration segment includes a wide range of products such as deep freezers, water coolers, bottled water

    dispensers, visi coolers, reach-in as well as under-counter chillers and freezers, ultra-low temperature freezers, cold rooms,

    bottle coolers and ice machines. Rapid changes in consumption patterns across customer segments, coupled with enhanced

    consumer awareness, and the fast-growing segments such as food, dairy and pharmaceutical industries contributed to the

    growth in this segment.

    SEGMENT-WISE ANALYSIS

    The revenue and results break-up in terms of business segments were as follows:

    ELECTRO-MECHANICAL PROJECTS AND PACKAGED AIR CONDITIONING SYSTEMS

    The Electro-Mechanical Projects and Packaged Air Conditioning Systems business continued to be the largest segment,

    accounting for 51% of the Companys Total Segment Revenue.

    In the electro-mechanical projects business, while the market witnessed modest growth propelled by Government-funded

    Management Discussion and Analysis

    Segment-wise Results Break-upSegment-wise Revenue Break-up

  • 7 5BLUE STAR LIMITED

    Management Discussion and Analysis

    Air Conditioning and Plumbing Services forTerminal 2, Mumbai International Airport

    Electrical Substation for GujaratInternational Finance Tec-City (GIFT)

    Refrigeration System forHatsun Agro Products, Chennai

    SOME PRESTIGIOUS INSTALLATIONS

  • 7 6 BLUE STAR LIMITED

    Management Discussion and Analysis

    Mechanical, Electrical and PlumbingServices for Namma Metro, Bengaluru

    Central Air Conditioning forAshoka University, Haryana

    Mechanical, Electrical and PlumbingServices for Dr Oetker, Rajasthan

  • 7 7BLUE STAR LIMITED

    infrastructure projects, profitability of this segment grew mainly due to execution of higher order book in select

    sub-segments, and an increase in billing from new projects. Large value projects were limited to the metro rail segment, and

    scarcity of capital flow dampened growth in the heavy industrial space. While Tier 2 and 3 cities showed signs of improvement,

    cash flow continued to be a concern with pressure on margins.

    Blue Stars value proposition of Superior Project Delivery helped the electro-mechanical projects business differentiate

    itself from competition and connect well with decision makers. The order inflow crossed `1000 crores in this domain during

    the review period. There was a concerted effort to improve the quality of new orders, with respect to margins as well as

    commercial terms. During the year under review, the Company focused on enhancing multi-service orders (mechanical,

    electrical, plumbing and fire-fighting), which resulted in 48% of new orders coming from multi-service projects. Many of

    these orders were awarded by select developers and key accounts across the country. The business also gained inroads into

    favourable segments such as factories and educational institutions. Blue Star won the Best MEP Contractor 2016 runner-up

    award from Construction Week India for the Bengaluru Metro project.

    Some significant orders received by the electro-mechanical projects business during the year included Sands Infinit IT Park,

    Kochi; Apollo Proton Therapy and Cancer Care Hospital, Chennai; Amazon IT Services, Hyderabad; 1973 by Omkar, Mumbai;

    Ireo, Delhi; Piramal Agastya Corporate Park, Mumbai; Embassy Tech Village, Bengaluru; HCL Technologies, Lucknow; Wipro

    Technologies, Bengaluru; Lodha New Cuffe