Ladies and Gentlemen:

It gives me great pleasure to welcome you to the 56th Annual General Meeting of your Company.

Business Scene

Last year showed a brisk acceleration of economic growth in India largely because of an excellent monsoon which boosted demand for a wide range of products and services. As a result of the economic revival, 2004-05 has begun on a buoyant note for the country and for Blue Star.

The Company's unaudited 1st quarter results have just been announced today. Total Income has grown by 25% from Rs 142.48 crores to Rs 178.60 crores, while Net Profit has increased by a significant 36% to Rs 3.61 crores. Especially encouraging is the healthy order inflow in the same period which has jumped from Rs 188.74 crores to Rs 234.72 crores. With a comfortable backlog of orders in hand the Company's financial performance this year should continue to improve.

The Future Of The Indian Manufacturing And Services Sectors

As recently as a couple of years ago, many Indian manufacturers were apprehensive about their future because of the problems of poor infrastructure, and the slow progress on urgently needed economic, legal and labour reforms. They were worried that as imports opened up and customs duties came down in line with the WTO Agreement, foreign competitors would grab a bigger share of the Indian market jeopardising the survival of the weaker local companies.

As we all know, that bleak scenario did not materialise. In spite of a dull economy and disappointing progress on reforms, Indian manufacturing companies have been busy putting their house in order. They have right-sized their organizations, tightened financial controls, modernised their plants, and focused on cost reduction, productivity improvement and quality assurance. The major improvement in Corporate financial results in recent times is proof of their growing success.

Indian industry has developed its own solutions to the multitude of problems that they are faced with. Unlike China, which has become a formidable industrial power in the mass production of a huge variety of standard goods, India is leveraging its own areas of strength in low cost yet highly capable technical manpower. Besides achievements in software services, the country is recognized as a competitive supplier of other technical and skilled services. The same human skills are being used in the industrial sector to design and manufacture customised products for special applications which are not suited to mass production.

Coming more specifically to Blue Star, I would like to clarify that we have been successfully following this strategy for several years in our core businesses of central airconditioning, commercial refrigeration and professional electronics where we have a strong market position. Customers for bigger airconditioning systems and plants are more concerned about factors such as technical performance, service and energy efficiency. They are less price sensitive than individuals who buy low-end airconditioners and similar standard products which are like commodities, with similar looks and features where the main differentiator is price. In our focus area of central airconditioning, each installation is different so the system must be engineered for that particular application. This, in turn, requires flexible manufacturing facilities that can fabricate a wide variety of equipment in relatively small quantities. The Projects Division then installs the equipment along with ancilliary work at site. And finally, the after-sales Service Division maintains and supports the plant after it has been put into use. Thus, in our business, engineering, product development, manufacturing, contracting and after-sales service all work in an integrated manner to provide value added solutions on a turnkey basis.

The capability to customize and supply different products depending on the differing needs of each market is what has enabled the Company to export products to the big Middle East and European markets. Each of these markets has its own special product specifications and customer preferences which we have learnt to cater to. The increasing success of this export strategy is evident from the value of our exports. In 2003-04, the Company's exports quadrupled to Rs 37.84 crores albeit from a small base. And the first quarter of this year has seen a continuation of healthy growth almost doubling last year's corresponding figure.

Meanwhile, the Indian central airconditioning market is also expanding rapidly at more than 30% this year. Major investments are going into the commercial and services sectors including software services, business process outsourcing, shopping malls, healthcare, hotels, restaurants and multiplexes. As market leader, Blue Star is well positioned to offer optimum turnkey solutions to meet these requirements. Customers are comfortable dealing with us because we provide single point accountability to meet their total requirements.

Conclusion

I must convey my sincere thanks to all our employees and business partners for their enthusiasm, commitment and dedicated contribution to the Company's performance. I also thank my colleagues on the Board for their wise counsel and guidance. All of us in Blue Star deeply value the patronage of our many customers - both old and new. And finally, let me thank you, our valued shareholders, personally and on behalf of the Board, for your unstinted support over the years.

ASHOK M. ADVANI

Mumbai
Monday, July 26, 2004