Ladies & Gentlemen,

It is a pleasure to welcome you to the 66th Annual General Meeting of your Company.

Corporate Performance

The Annual Report for 2013-2014 explains the steady improvement in the Company's financial performance last year. This, along with a positive outlook, enabled the Board to recommend a higher dividend of Rs 4 per share.

The Board also met this morning to review and approve the results for Q1 of the current year. Total Income grew by 10% to Rs 845.48 crores, while Net Profit at Rs 31.01crores showed an increase of 36%. These encouraging figures are in line with expectations.

The Role of Manufacturing in Blue Star

In my speech last year, I had talked of manufacturing in India which was going through a slowdown partly due to the slackening economy but largely due to restrictive laws and economic mismanagement. I said that in the past, after the first round of economic reforms in the '90s, Indian companies had demonstrated their ability to transform themselves into globally competitive manufacturers when given the opportunity and the challenge.

I had concluded my speech by indulging in some wishful thinking and said, "Imagine what could happen if these man-made impediments were removed through bold decisions to reform the restrictive financial, administrative and labour regulations." As we all know, the Lok Sabha election results granted my wish and those of millions of like-minded Indians.

The new NDA Government has come to power with a mandate for change. This has enthused many businessmen, economists and investors who have built up high hopes with expectations of rapid reforms and accelerating economic growth. While this may be an understandable aspiration, it is unrealistic to expect an overnight transformation. The reality is that the new Government has inherited a massive set of problems including unsustainable subsidies, chronic inflation, legal barriers, bureaucratic inefficiencies, and powerful vested interests who will resist change. These will take time to sort out. Though the process of change has begun, the Finance Minister has acknowledged that the GDP growth rate may take three years to revive to its full potential of 7%-8% per annum. Clearly, we will all need to be patient and work hard while we wait for "achhe din."

One of the heartening developments for Blue Star is the intention of the Government to encourage and revive the manufacturing sector. This is a challenging goal which requires a number of legal and administrative changes including simplifying laws for land acquisition, expediting environmental and other clearances, upgrading basic infrastructure like roads and power, and amending outdated labour laws. Even though this may take time, the long term outlook for manufacturing in India is positive and fits in with a key strategic goal of Blue Star to grow aggressively in the airconditioning and refrigeration products segment.

Let us quickly review where Blue Star is placed in this scenario:

During the socialistic era of industrial licensing, Blue Star was a modestly sized manufacturer of water coolers, bottle coolers, deep freezers, room and packaged airconditioners. Our scale of operations was limited because of capacity restrictions on what and how much we were licensed to manufacture. Frankly, our technology and 2 factories were small and relatively simple.

Once industrial licensing was scrapped in 1991, we were free to expand our manufacturing base. We grabbed the opportunity enthusiastically. The '90s were the time for technical collaborations since that was a quick way to grow. Our first successful initiative was the Dadra plant constructed in the mid-'90s along with a tie-up with Rheem Corporation of USA for ducted systems. That was a great learning experience and in a few years we established ourselves as market leaders in packaged airconditioning systems in India against tough international competitors. We also began exporting ducted systems for the Middle-East market.

The room airconditioner market also grew substantially with the arrival of big multinationals who introduced modern designs and quality products. As the market expanded, prices began to come down due to competition, economies of scale and lower taxes. Room airconditioners became affordable home appliances for middle income families.

Though Blue Star was a small player, we took a bold decision and put up a modern plant in Himachal Pradesh to manufacture room airconditioners, which went into production in 2005. We differentiated ourselves by establishing an exclusive dealer network that provided customers the expertise and confidence they were seeking. And we offered a full range of contemporary and attractive designs that meet the latest stringent energy labeling norms.

Since then, the success of our room airconditioner strategy has been impressive. Here are some revealing statistics: In 2005-06, our total sales were 56000 units, barely 2.8% of the market. In the 8 years to 2013-14, our sales grew to 241000 units at 20% per annum compared to 8% per annum for the market. As a result, our market share has steadily climbed to 7.1% in volume terms.

Since the turn of the century, Blue Star has also progressively developed a range of scroll chillers upto 85 TR, screw chillers upto 450 TR, and oil-free variable speed centrifugal chillers upto 450 TR. All these chillers have been certified by AHRI, an internationally recognised certifying organisation. Similarly, we have developed VRF airconditioners using digital scroll technology. We see a bright future in the VRF business.

I have recounted this brief history of Blue Star's growth as a manufacturer of AC&R products to convey a better understanding of our business. Over the years, we have been expanding manufacturing capacity as the need arose. We have also invested substantially in upgrading design and process technology as the product range has broadened and become more complex.

Let me give you a sense of our growing investment in new technology. 10 years ago, our total R&D expenditure was barely Rs 1 crore or about 0.2% of sales. By last year, it had climbed exponentially to Rs 32 crores, or about 1.1% of sales. This may sound impressive but it is a small fraction of what international companies spend. Nevertheless, our R&D effort has been fruitful and we have come a long way with official recognition for the last 3 years by the Department of Scientific & Industrial Research. Looking ahead, we intend to keep growing investment in upgrading our technological capability. It is the key to maintaining a strong position in our core AC&R products business.

Before I conclude, I would like to convey my sincere thanks to all our stakeholders - customers, shareholders, directors, employees, and business associates who have enabled Blue Star to continue on its challenging and mutually rewarding corporate journey. I remain confident that by retaining our focus on the Company's progress, we will all share the gains.

ASHOK M. ADVANI

July 28, 2014
Mumbai