← Throughline · holding view Deep analysis ↗ Q1 FY27
BLUESTARCO Blue Star Limited · Consumer durables Q1 FY27 · concall
Pattern: q2 margin blow out

Q1FY27 margin miss (2.9% UCP vs 8-8.5% prior target) forced a reset to 6.5%+ floor.

2 weak · 9 clean — pushback across 2 of 11 Q&A turns

Focused evidence 2 of 11

Natasha Jain · Phillip Capitalweak

Three questions: (1) Given import costs, copper up 9% sequentially, and tepid volumes, could Q2 margins be even more negative and the 6.5% full year Segment II EBIT guidance see further tapering? (2) On the trade schemes - was it direct discounting and how difficult will it be to roll back these discounts? (3) Is the data center MEP business margin accretive or just a top-line story?

I'll answer the last one first. The data center business is not a top-line alone, out of the MEP project verticals, if you take buildings or the infra projects like Metro Rail or electrical water, compared with that, the data center segment is attractive for the simple reason these are 8-month to 12-months commissioning projects, it doesn't last 3-4 years. The second thing is, the payment terms are very favourable. Third is, there are enough price escalation provisions on the metal prices, specifically, and on electrical items, so we are we are very happy with the MEP projects. Therefore, we are we I may not say that we are being given a premium or something like that, but we are the preferred contractors, it is compared with other segments, it is very attractive, so it is not a top-line story alone, it is a highly profitable business with good cash flows. Come to the room air conditioners, you are right, the Blue Star would like to be in that high-end premium segment. Our behavior would have been like that had it not been for the unprecedented increase in the input costs, and our behavior would have been different if it is not the year after a bad summer year. This consumer finance cost had significantly gone up, but it paid off, and we saw in the 15 days in May when we took that decision, our reversing the whole trend and gaining 10 basis points market share. In June, even though the summer ended, we ended up gaining around 50 basis points market share. I do not foresee in Q2 anything dramatically going to change in terms of the cost structure, input costs are going to be higher only. What I am expecting is the market operating prices should be better than what it is. We are determined; we will get back to our conventional margins in Q4. Our outlook, I had said that once upon a time it was a 12% margin industry and it came down to 9.5% to 10%, it came down to 8% to 8.5%, off late I have been saying with the capacity that has increased, and intense competition, and the entry-level buyers driving the growth, it more looks like 7.5% to 8%. I'm only hoping that, it should go back to 7.5% to 8%. Whether it will be 7% or 7.5%, we are unable to state.

Sonali Salgaonkar · Jefferiesweak

Are channel inventory levels normalized? At what level are they currently?

I don't think it is in alarming level, but it has not normalized. The anticipation was the summer will continue beyond June into July, that was the expectation. But June itself, after 10th it suddenly collapsed the demand. Therefore, the channels carry some more inventory, but I don't think it is an alarming level at all. The key question to be asked is that, when the channel will start buying the new inventory for the forthcoming festival season, I think in Kerala, it'll start just before Onam, rest of it during the Ganesh Chaturthi period onwards. This this month is going to be a lull. There is a lot of confusion with regard to the, when you say, there are the brands who hold the stocks in the field in their warehouses, then the trade have already bought it and they are selling it during the month. If you put together, my estimate is it will be 60 days should be normal and if you take the trade alone, 45 days should be normal.

▸ Other Q&A (9)
Manoj Gori · Equirus Capital

On RAC margins revival: what is the deferred cost impact from Q4, and what are the other initiatives to revive Unitary Products margins for rest of FY27? Also, on the MEP business - earlier guidance was 8-10% revenue growth for FY27. Are you upgrading guidance given the strong data center performance?

There is no deferred cost from Q4 at all because you mentioned something like what is the deferred cost. The margin that we declared in Q4 is the right margin. Now it was a double-digit margin, if you recollect, okay? and there is no deferred cost into Q1 it is an actual cost that was incurred in Q4. How it has to be understood is that when you do the material accounting, it is on a rolling basis. So you will have an inventory of some old material also being there and as you move into the season, there will be a fresh material that will be coming in. The price increase that is to be passed on has not been passed on fully, that is the first part of it. Unfortunately, it did not change because many of our competitors had material, and they were maintaining lower prices. In the process, having understood that we lost a 50 basis point market share in April, what we should be doing is that our tertiary sales should be improved through consumer finance and other schemes so that the dealers are able to liquidate, so we incurred those costs. These costs came in May and June in a significant manner, which resulted in our bouncing back with a 10 basis point market share in tertiary sales. A gain, in June, I think we performed exceedingly well in the industry with a 50 basis point gain market share. So the margin that is declared is not due to any deferred costs and all, it's an actual margin that is what has taken place. Hopefully, old inventory across industry is getting exhausted, the market operating prices one hopes will go up and the second part is, fortunately it is a lean season. The second quarter is not a quarter, it will pick up from Onam season, Ganpati onwards towards the festival season. So the third part of the exercise is by Q4, we should have rejigged our product portfolio. Our calculation with the cost saving opportunities that we have got and our view of the market. I'm saying that 6.5% for full year may not be a challenge and we have to look at 7% to 7.5%. On MEP: I had indicated the CAGR for the room air conditioners as a category for the industry, over a 5-year period, 18% is looking good. I had also stated commercial air conditioner of the MEP projects in terms of CAGR, you should look at only 8% to 10% kind of growth. But what has significantly changed is the data center segment, where there is a huge rush to block the capacities of the vendors. Probably, the growth what we indicated as 8% to 10% may go up to 12% for a couple of years. This financial year, you can take that our order inflow will be Rs.3,000 Crore, and our revenue will be Rs.1,350 Crore from segment alone. This is likely to become an order inflow of around Rs.4,500 Crore next year and around Rs.2,100 Crore of revenue next year.

Saumil Mehta · Kotak MF

Three questions: (1) On commercial refrigeration - was the degrowth industry-wide demand destruction or specific market share loss due to competition? (2) Can Segment I margins structurally reach north of 8-8.5% as data center mix increases? (3) Can you split the UCP volume and value growth for Q1?

We have held on to our market share, there is absolutely no problem. Unlike, room air conditioners where you have a GFK data, we do not have, we have to go by industry data that is available, that business is through predominantly through the OEMs. I don't think there is a residential market of significant size. We know which are the rate contracts whether it is Amul or Mother Dairy or Havmor, so many ice cream brands what they are lifting from there. This is a, this is not a market share loss, the industry has not grown, and that's why we are hopeful at some point of time it has to revive. On Segment I margins: Certainly, as we move towards that peak, golden period of data center-dominated MEP segment, the margin should go up. On volume/value growth: My estimate is in Q1, room air conditioners market in volume terms grew by 21% is my estimate, and Blue Star grew by 18%. In revenue terms, the market grew by 25%, and Blue Star grew by 21%. These are all on the primary sales basis. You are seeing the revenue growth as 13% because commercial refrigeration has pulled it down. In secondary sales, Blue Star lost a market share of 30 bps compared with March or compared with FY26, which is 0.3% drop in tertiary sales. In the primary sales, because of that April huge dip, Blue Star lost 0.65% or 65 bps.

Praveen Sahay · Prabhudas Lilladher

On commercial AC: what was the growth in Q1 and what is the outlook? Also, what capex was done in Q1 and what is planned for the next 9 months?

Commercial AC space, is driven by today the manufacturing or industrial sector, which is doing well, data center chillers market is growing, while we have a 30% market share in data center MEP projects, and our market share will be 10% to 12% in data center chillers, because we compete with larger four or five multinational players and there the market share is not 30%. If you look at manufacturing, if you look at the other sector which had driven growth is the healthcare sector, the other sector which is also doing well is the education sector. The outlook will be that around 10% growth is easily possible in commercial air conditioning, and 15% I am not able to predict now.

Praveen Sahay · Prabhudas Lilladher

What capex was done in Q1 and how much is planned for the next 9 months?

In Q1, the capex has been in the region of around Rs.60 Crore to Rs.70 Crore. And annually, if you see, our capex, when I say capex, it includes capex, it includes R&D intangibles spends, if any, on product development as well as, you know, any digital spends that we do, overall, the growth-related spend should be in the region of around Rs.300 Crore to Rs.350 Crore if everything goes as per plan.

Sonali Salgaonkar · Jefferies

You attempted to pass on part of the cost surge but kept prices in tandem with the market at about 5%. How much price hike is required to recoup the lost margins from here on?

I strictly speaking, even in the month of May, 8% more was needed. Yesterday, the copper has touched record price, I don't know today what it is. The rupee is still volatile, and the petroleum-based products prices will keep going up. Ideally you pass on additional 8%, but that is not going to be available, it all depends on how the market is going to behave. So, you have to go ahead and reduce the cost. There is no other go. I don't think market will be accepting it.

Aditya Bhartia · Investec

Given we increased prices only in line with the industry at around 5%, what led to the market share loss? And what does product rejig entail? Are we confident it can be completed by Q3 to benefit from the festive season and Q4?

The first part is that, I don't think there were many brands had increased it even by 5%. The prices were, the products at older prices were available even in the month of June. Despite being a good summer, so that means products have been manufactured, the people who strategically bought the commodities, knowing that it is going up, and they were able to operate with 3.5% to 4% margin. It is not that even that 5% was passed on by the other brands. We had many brands who had not even increased it by 5%. The second part is that Blue Star's own thing could have been that, had we known, we would have reengineered the products. What should have been different in retrospective is that all that it is needed is the lowest cost entry-level products, predominantly, 90% has to be that. Now, your question is whether in 6 months it can be done? It can be done, there is no problem. There are quite a few levers have to be used, the alternate makes of the components, some portfolio we may have to outsource, in certain other cases, the products will have to be redesigned. We have already plans to cut down some of the models and replace it with cost competitive models. What will not change is, we are very clear in terms of brand positioning, it has to be durable products, it has to be highly reliable products, it should be differentiated. Within that element, we have to compete on price as well. It is not that we will go down the path of cheap products, which is not the idea at all, but we have enough levers.

Rahul Agarwal · IKIGAI Asset

On exports: what is the current export run rate, how does FY27 look, and what is the opportunity in US and Europe? The USD100 million additional target for FY28 - is it only US?

There are 3 distinct markets. There is our traditional Middle East, Africa market, which is muted for obvious reasons, that we have to wait for this crisis to be over. The most profitable market for air conditioning industry is North America, that is the most profitable market for any brand and then comes Europe. The 2 products that we are pursuing are air-to-air heat pump, air-to-water heat pump. And these are to replace the conventional heating systems out there. U.S. is beginning to move in the direction that too with the new refrigerants and we were also very clear we won't directly enter in our brand, which is an expensive proposition, profitable opportunity is manufacturing products for other brands there under a CDM route. CDM is custom, design and manufacturing, which means your brand in U.S. has decided that I won't introduce these, these models, these features, and you custom design for them, and you manufacture and export. This process takes a long time, With a couple of customers, we have progressed. Our shipments are taking place. Trial order has completed 2 seasons of summer and winter now, it is on the verge of scaling. There, this complication over the past 12 months of which tariff, there is a derivative tariff, there is suddenly 100% free trade agreement is hanging. Despite that, we have done that revenue figure, and as we continue, the shipments are beginning to take place, all are waiting for when this trade-related issues will get resolved, that's where US is. It is not scaling now, only for that reason, otherwise they are, the customers are desperate to get this product, it is a huge success there. In both US and Europe, we are seen as China Plus One. Food news, the learning curve is over, these products are perfected, these products are working. We hope this tariff thing cannot linger for a long time, and we should be growing.

Rahul Agarwal · IKIGAI Asset

USD100 million is going to be additional revenue over and above FY26 exports in FY28?

Yes, coming to, in case if you wanted to know the export numbers, in the current year, the rupee has moved, so taking an average, you can put it at around USD80 million to USD85 million in the current FY26, the reported year, last year. And year before that, it would have been in the region of around USD55 million to USD60 million. So, around last year growth will be around 40% in exports. Yes, additional over FY26 and by FY28.

Nirransh Jain · BNP Paribas

In Q4, you indicated roughly 5% BEE-rating price hike plus another 8% on commodity inflation. But Q1 price action seems to be around 3-4%. Is this gap largely due to discounting? And how are we looking at ASP increases for the next three quarters?

No, your understanding is only partially right. The 5 plus 8 that is 13 is supposed to be passed on, we could succeed in passing on only around 5, some models 3, some models 4, some models 5. We failed or it was not possible for us to pass on the rest at all. This is in terms of the gross margin. Then you have got the operating costs that are there, what happens is when you are pushing the tertiary sale, you are going to be incurring costs in consumer finance and other costs, in-shop promotions, advertising. So, the combined effect is resulting in a margin erosion, this what it is. So balance 8 is not passed on. The month of July-August is not a big one, the September it should pick up, and only when sale is there you can adjust the margin. I see only a marginal improvement happening in Q2. Q3 will be, assuming the festival season does well, it should be doing well. Q4 should be doing well because by then we will be ready with many new other cost saving in the product or the cost take-out from the products, or a new portfolio, a mix of what we may outsource and what we will make ourselves. I had stated that I am able to disclose that 6.5% is possible full year. Our aspiration is 7.5%. So, 7% or 7.5% we have to wait and see how we progress each quarter. Structurally, the unfortunate part will be if it is to drop to 6.5% industry. I don't think it will happen given that the 18% growth CAGR is going to take place. This industry at this stage going by what all has happened in television or washing machines or refrigerator, I think it will hold on to 7% to 7.5%.

▸ Prepared remarks (5 blocks)
Thank you. Good morning, ladies and gentlemen. We are here to share with you the highlights of Q1 FY27 financial results, which were approved by our Board yesterday. Thank you for joining this call. Before I hand it over to Mr. Nikhil Sohoni, I wanted to point out a few things. The first one is you might have seen the results, particularly the margins for segment II would have been disappointing to you. We will clarify the facts behind these numbers. Broadly, we have fallen short of the expectations, but the fundamentals are strong. We expect to bounce back in the next 9 months, you need not to worry, I will provide that outlook as well. If you specifically look at the segment I, you would have seen that we have grown more than <strong>15.1%</strong> in terms of revenue and the margins were down by around 112 basis points, primarily due to input costs on commodity prices, the exchange rate. That is the impact that's going to be further more in segment II as well. In segment II, the revenue growth you will be seeing is around 13%, a significant drop in the EBIT margins by around 300 basis points from 5.8% in Q1FY26 to 2.9%. If you look at the Jan to June period for segment II, the EBIT margin has been more or less flat, that is 7.3% to around 7.1%, and the drop is not significant for the H1 part of it. In terms of the market share some of you would have seen the GFK reports. In April, we lost around 50 basis points for Room Air Conditioners, in May we gained around 10 basis points and in June, we gained around 50 basis points. This is where the full story lies about the numbers. We entered the financial year with the hope that we will be able to pass on the commodity price and other input cost increase to the consumers. The total impact that we wanted to pass on was around 13%, what we could pass on was only 5%. In April, the summer set in much later. We embarked on corrections from the second half of May itself and we gained market share by 10 basis points and in June additional 50 basis points. Q1 as a whole in the secondary tertiary sales our market share erosion is just 30 basis points, which is not significant. Now we closed the year with around 14.25%, we will be marginally lower than 14% market share.
This market share management has happened basically by maintaining the prices in line with what is prevailing in the market and incurring huge expenditure in terms of consumer schemes because we wanted the tertiary sales volume to go down because at some point of a time, primary sales will have to begin. The segment II revenue growth, one may wonder, while GFK is reporting a decent growth, why the revenue growth is this. GFK is a secondary tertiary data, which more or less correlates with the primary sales data. The real problem is the Commercial Refrigeration business, which has degrown by around 15% and it is primarily due to deep freezers and the cold rooms, specifically the ice cream as well as the frozen food and the quick service business segment did not do well. On the whole, segment II revenue drop is appearing to be 13% because of commercial refrigeration. The bottom line is as follows, that we took a hit in the operating margin in order to more or less maintain our market share, still the, the commodity prices are going up. Our expectation is that this should correct over the rest of the year because at some point of a time, we expect market prices also to go up. Now the outlook, our estimate is that the revival will happen sometime end of August to September as the festival season begins. The corrections are going to happen significantly in Q3 as well as Q4 because we are taking several actions, including rejigging our product portfolio, that exercise has begun. As of now, we have a visibility to close the year with an operating margin of over 6.5% for segment II in financial year FY27. As far as segment I is concerned, the margin outlook remains the same, 6.5% to 7%. Our big focus is to manage between the market share and the margins. In Q1, which is an aberration, we could manage the tertiary market share more or less at the same level as we were last year. We took a hit in the margin, now the focus will have to shift to rejigging the product portfolio. Otherwise, the fundamentals are strong, and we look forward to closing the year on a higher note.
Number one, our continued leadership position in the data center MEP projects segment. We have close to around RS.<strong>1,500 Crore</strong> of order inflow from this segment alone, taking the total pending order book or the carried forward order book as on 30th June 2026 to over RS.7,700 Crore. We expect the order inflow for the full financial year from data center MEP projects to be around Rs.3,000 Crore and in revenue terms, it should translate to close to around Rs 1,400 Crore. As I had stated, the data center MEP projects will constitute close to 20% of our revenue at around RS.4,000 Crore coming from the data center MEP projects alone by FY29. So that segment is the one which is performing exceedingly well. The second highlight will be the net cash position. We have managed our working capital well. The inventories are under control and our debt position is very strong, and we are having a net cash position of Rs.900 Crore, more than Rs.500 Crore higher cash than last year last year, it was some Rs.371 Crore of cash. The carried forward order book is very healthy at Rs.
<strong>7,764 Crore</strong>, so the B2B part of the business should be doing well. The singular focus in the next 6 months to 9 months will be improving the margins for the room air conditioners specifically. We are certain that we will hold on to the market share. That's not the issue, the issue is we have to rejig the product portfolio and even as the competition intensifies, how we will close the year with a margin of over 6.5%. Ideally, we would like to be 7% to 7.5%, which I do not have the view as of now. We will wait for the war to end and how the exchange rate, how the commodity prices are going to move. On the whole, I mentioned to ET Now this morning, it's a four test match series. The first match is lost, and there are three more matches, which you have to bounce back and win, and I'm certain we will win. With that, I hand over to Nikhil. Thank you.
Thiagarajan. Good morning, ladies and gentlemen. This is Nikhil Sohoni, and I will be providing you an overview of the results of Blue Star Limited for the quarter ended June 2026. Since many of you would have gone through the results, I'll keep this brief so that we get more time for Q&A session. Coming to financial highlights. As we had indicated previously, Q1 FY27 was a challenging quarter with many headwinds, including unprecedented escalation in commodity prices, depreciation of rupee, delayed onset of summer season and a huge inventory pile up of room ACs in the trade. While the revenue growth for the quarter was 13%, the margins were impacted. A key positive was the strong inflow of data center MEP project orders, reflecting the sustained momentum in this high-growth segment. The financial highlights for the Q1 FY27 on a consolidated basis are summarized as follows. Revenue, as you've already seen, revenue from operations of Q1 FY27 have grown by 13.3% to Rs.3,378 Crore as compared to Rs.2,982 Crore in Q1 FY26 and the PBT before exceptional items dropped by 23.7% to Rs.125.6 Crore as compared to Rs.164.6 Crore in Q1 FY26. The carry forward order book as on June 30, 2026, grew by 13.5% to Rs.7,764 Crore as compared to RS.6,843 Crore as on June 30, 2025. Carry forward order book as on March 31 stood at RS.6,923 Crore. The quarter ended with a strong net cash position of RS.900 Crore as on June 30, 2026, as compared to a net cash position of RS.371 Crore as on June 30, 2025.
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