Chetan Parikh Interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr

Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, CIO: Could youCEO, tell us somethingBlue Star about Design the various and lines Engineering of businesses that Ltd. you are in? �

Mr. Suneel Advani: Broadly speaking, Blue Star is involved in heating, ventilation, air conditioning and refrigeration.

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In the air conditioning segment, which is a signiﬁcant part of the business, we are present in the entire broad spectrum of the business from room air conditioners to large industrial central air conditioning systems.

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Let me begin at the bottom of the heap where you have the room air conditioners which are of two kinds: the traditional window air conditioners and split air conditioners, which have been introduced in the last seven or eight years. These form the room air conditioners segment, essentially because these units are used �for cooling rooms of various sizes. Room air conditioners at the low-end range from roughly one ton to three tons.�

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One rung above this is the air conditioning packaged units. These systems, in terms of tonnage and size, come in the 5 tons to 20 tons per machine packages.�� Unlike the room air conditioners, these packaged air conditioners are not visible in the space it is cooling. These are typically for oﬃces of 2000 to 10,000 square feet. Since these packaged air conditioners are not visible like the large central air conditioning systems, most people mistake them for central air conditioning systems.

The fundamental diﬀerence between the two is the fact that large central air conditioning systems use chillers and the packaged units don�t.

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www.capitalideasonline.com Page - 1 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, At the other endCEO, of the Blue spectrum, Star you Design have the largeand central Engineering air-conditioning Ltd. plants that use big chillers for cooling.� At the high end, the chillers will go from roughly 30 tons per machine upwards to 200 or even 500 tons per machine or you can take combinations of chillers of 50 tons — 5 numbers of 50 tons or 10 numbers of 80 tons.� The chillers configuration is ideal for air conditioning of a big building like a hotel, hospital or a shopping complex.� Although those using such buildings will just see the grills spewing cold whiff of air, there is a lot of technology and engineering sophistication that goes into its design to help bring in that cold air flow; the chiller is located in a plant room far removed from the site and cold air is carried through a maze of ducts all of which is hidden either inside walls or above the ceiling or below the floor.

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Besides presence in all three segments of the air conditioning business, we have a signiﬁcant presence in the refrigeration business as well. In the refrigeration systems, we have to built systems that would help reduce temperatures much lower than the air conditioners. A simple example of a refrigeration system is the water cooler. But refrigeration systems are built based on the purpose for which it is to be used and the ideal temperature the product requires. There are refrigeration systems for cold storages that store fruits, vegetables, milk, butter and such food items, where the cooling could be above zero.� Cold storages range goes all the way down to minus temperatures depending upon what you are cooling.� If you are freezing it, that will be below zero as is used for products like ice cream, ice, meat, chicken, etc. These refrigeration systems are not just like the coolers you see in the neighbourhood kirana store or the friendly meat store, though they too are refrigeration machines. These large refrigeration systems are used in cold storages or walk-in coolers, which are large store rooms lined with shelves to store products and the entire store room is maintained at a particular temperature.

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The refrigeration equipment is used in a big way in supermarkets.� We have very few

www.capitalideasonline.com Page - 2 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, supermarkets inCEO, India, Bluebut in theStar west, Design supermarkets and are Engineering a big convenience Ltd. for shoppers and you see rows after rows of this refrigerating equipment with display cases. You can see all the meat lined up there — it’s chilled to maintain its freshness, where you can see it, touch it and pick it up.

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So broadly speaking, this is the range of equipment in air conditioning and refrigeration.�

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Then, of course, there are heating systems too. In a way this is converse of cooling. Though very little is seen in India given our climatic conditions, we have implemented heating systems projects in a few places in the North. Particularly in Jammu & Kashmir we have installed big heating systems for whole buildings –� for the High Court, government oﬃces and hotels in Srinagar and Gulmarg. These systems use boilers to heat water and then you distribute that hot water through piping – so that’s heating.

There are smaller heating systems, which can be ﬁxed to your room air conditioners to keep the room warm during winters. These are popular in cities like Delhi. These heating devices are ﬁxed in the grill of the window air conditioners that heats up the air thrown in by the air conditioners fan.

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Another area of our operation is ventilation. These are ideal air temperature management solutions for large areas which are too big to air condition and yet it gets extremely hot, 45� in the summer � like industrial shop ﬂoors or exhibition halls. To improve productivity, you ventilate the entire plant� using big blowers with forced draft ventilation. Herein, you force air movement through the factory and with that air movement you get cooling.

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That in essence is our business.

www.capitalideasonline.com Page - 3 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, � CEO, Blue Star Design and Engineering Ltd. CIO: What about the professional electronics and industrial equipment divisions?

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Mr. Suneel Advani: At Blue Star, this is a separate division and is a business, which is unconnected with air conditioning.� We have been in this business of professional electronics and industrial equipments for the last 50 years. To be precise, we diversiﬁed into this business in 1954 to tide over the diﬃcult recession in the Indian economy that had set in around 1953. So the founders of the company decided to diversify a bit and spread their risk a bit.� Our strength then was our ability to in dealing with foreigners and foreign equipment manufacturers. To cash in on this strength, they set up this business to import, distribute, install and maintain high-tech equipment. Those days these equipments were used only in research labs and education. Today, high tech equipment has more widespread applications in so many factories and laboratories.� So that range is made up of diverse types of electronics and industrial equipment. The only thing that connects them is that they are all big-ticket items � expensive, low-volume and high-value products and systems. Another common feature in these equipments are they are all high technology and so they require engineers.

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The essence of Blue Star is that we are an engineering company — we are all engineers.� So this division also, professional electronics and industrial equipment, requires engineers to select the right equipment for the application, to install it and to maintain it� and to train the customers’ employees to operate them.� So it covers the range of equipment right from testing machines for mechanical engineering factories — they test hardness and malleability and ductility and various engineering parameters on materials.� There is a medical electronics department that sells equipments like CT scanners, MRI scanners and wide range of diagnostic and medical equipment.

www.capitalideasonline.com Page - 4 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, � CEO, Blue Star Design and Engineering Ltd. There is an analytical instrument department that deals in electronic scientiﬁc instruments for chemical analysis of various types of chemicals.�� It will make out their composition or how much iron content is there in this chemical and things like that — which is mainly used in research institutions and quality control.

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There is a data communications department.� In the area of data communication which sells equipment for data communication, modems and so on — we sell encryption equipment. Do you know, we provide the basic heart of ATMs — ATMs from which you draw your cash — the heart of that electronics control system is provided by data communications department, including the encryption and so on.

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And there is a test and measurement instrument department, which handles electronic instrumentation for electronic manufacturing factories for testing various electronic parameters.

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So as you can see they are all esoteric pieces of equipment — most people don’t hear about them — they are known to engineers, to R&D people, to manufacturing people in specialized areas.� But the beauty of this business is that we have been in it now for 50 years and every one of those 50 years, we have made a handsome proﬁt.� It’s a good proﬁtable business.

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Besides electronics, we have a whole lot of industrial equipment like pumps and industrial valves and equipment for coal mines and various mining applications, for drilling, oﬀshore drilling and specialized equipment for those applications which again the public do not hear about — they are very esoteric and they are speciﬁc to those industries.� That’s on the

www.capitalideasonline.com Page - 5 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, industrial equipmentCEO, side.� Blue Star Design and Engineering Ltd. �

CIO: How would you deﬁne your competition and what is your edge and what do you attribute your market leadership in central air-conditioning plants to?

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Mr. Suneel Advani: Our competitors are mainly Voltas. Plus, there is a Dubai-based company, ETA, which is in this space and then there are an assortment of smaller companies.� We are the biggest, Voltas is second followed by ETA.� Between us three, we have, I�d say, 60%-65% of the market.� There are many smaller players like Suvidha of Delhi and Batliboi.

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On the question of leadership, I reckon it is because we are much more focused than any other player in this market.� Voltas is our main competitor across the range of air conditioning and refrigeration product lines. They are much bigger than us in the room air- conditioner end of the business and we lead in ﬁve tons and above ranges, which is packaged air conditioners and central air conditioning plants — we are bigger than anyone else, including Voltas.� So we are relatively a smaller player in the room air conditioners which we oﬀer mainly to complete the range and we leverage the brand equity that we have in the cooling business by being present in the low end, the small machines — but that is a much smaller part of our business — for Voltas it’s a major part of their business.�

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So we are much more focused on the ﬁve tons and upwards — what is considered to be the central air conditioning business.� So with that focus, I believe we have developed much better skills and capabilities � Voltas is spread a little thin over a much wider range of activities in the air-conditioner business.�

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www.capitalideasonline.com Page - 6 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, Apart from thatCEO, we have Blue 60 years Star of experienceDesign andnow in Engineering this field.� So our Ltd. reference list is difficult for newcomers to break in because people like Blue Star and Voltas automatically get virtually every inquiry that there is for a central air conditioning plant.� Anyone who wants a central air conditioning plant — top of mind recall is definitely Blue Star and Voltas.� So that helps a lot — having such a long history and a whole host of very visible and high-profile installations — Rashtrapati Bhavan, Supreme Court, World Bank, Oberoi Hotels, Indian Express, Air India Building, and so on and the list goes endlessly as you can imagine.�

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We are in every possible sector of the economy, whether it is a synthetic fiber plant or it is a Hindustan Photo Films or which requires very specialized, highly engineered systems or it could be purely comfort air conditioning. There is a need for central air conditioning.� See, air conditioning can also be broken up into two types — industrial and comfort.� Comfort is like this office or a hotel. Whereas industrial is like a synthetic fiber plant where there is a process requirement to very tight specifications.� In recent years, the central air conditioning systems business has concentrated more in the comfort air conditioning side of the business as the general industrial investment climate has been slack. Now when I say comfort, I also mean Infosys, Wipro,� Satyam, HCL, though all those are offices.� But they have got huge numbers of people and every office of theirs needs air conditioning.� It’s a critical part of every IT and BPO facility and it has to be air-conditioned.� Not so much for the equipment, but for the comfort of the occupants.� Otherwise you don’t attract people to join you if you have a un-air-conditioned office today.� Air conditioning has passed from being a luxury to having become a necessity.� So the IT sector, shopping malls and multiplexes, retail sector, healthcare, education sector — these are the new growth areas of central air conditioning. And being the biggest in the field, we are also the biggest in IT, we are the biggest in air conditioning of almost all these segments — segment by segment we are the leaders in most of them.�

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www.capitalideasonline.com Page - 7 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, CIO: What is yourCEO, opinion Blue on the Star entry Design of these low-costand Engineering foreign manufacturers? Ltd. �

Mr. Suneel Advani: In the room air conditioner business?

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CIO: Are they are not in the central air conditioning space?

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Mr. Suneel Advani: No, they are not. LG has entered the packaged unit sector a year ago, but in the central air conditioning they are not there.� The foreign companies are there in central air-conditioning only to the extent that they sell equipment to contractors.� In central air conditioning, you have the manufacturer of chillers and other equipment or you are a contractor.� At Blue Star or Voltas, we do both.� We manufacture, install, erect and maintain.� Foreign companies do not have that sort of a business model. So companies like Carrier just manufacture the equipment and sell it to people like us and other contractors who install it.

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CIO: What could be the overall growth rate that you expect in the main line of business?� What are the key demand drivers that you see?

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Mr. Suneel Advani: I have seen in the last twelve months a signiﬁcant shift in the nature of demand for central air conditioning.� It has now moved from a luxury to a necessity.� In virtually every new facility of any size that is being constructed in the country, air conditioning is now more or less a standard. To illustrate this point, could anyone have imagined ﬁve years ago that schools and colleges would be air conditioned.� All new schools and colleges and many existing ones are being fully air conditioned.� There is an IIT in Gawhati coming up and we are air conditioning it.� Air conditioning of built spaces is

www.capitalideasonline.com Page - 8 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, becoming a standard,CEO, it’sBlue no more Star a featureDesign anymore.� and Engineering That’s the biggest Ltd. shift that has taken place.� The sectors as I told you where there is high demand are those in the services industry, including retail, shopping mall, multiplexes, healthcare, oﬃces, educational institutions and entertainment. These are the growth sectors.�

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Availability of power always continues to be a factor that affects demand.�� But increasingly we find that even if power is available only a few hours a day, people still want the place air-conditioned. But at the same time the cost of power is important and we are becoming known for energy efficiency.� Our main platform is energy efficiency — to reduce the running cost of the machine.� And we have found in survey after survey, even recent ones that continue to be the number one concern of air conditioning owners is the cost of power in running air conditioners.

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There are many ways in which we are reducing the power consumption and improving the eﬃciency of the machine.� So it seems to be a good platform to work with in this country and for the next several years that will be our main platform.�

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There are many other sophisticated aspects of air conditioning, which haven’t yet found much traction or demand in this country.� Things like indoor air quality. Now see this conference room.� The vast majority — 99 conference rooms out of 100 that you will visit in India, you will find a split unit on the wall or a window unit.� It cools.� Because in the common mind, an air conditioner is a machine that cools.� You see these machines in my conference room are different.� Why?� Because these machines permit me to bring in fresh air.� If this room is fully occupied for eight hours for a conference, half way through or after four or five hours, there is stale air in this room.� People are yawning, people are getting headaches, and human efficiency will fall.� You can see it physically.� This lets in fresh

www.capitalideasonline.com Page - 9 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, air.� But lettingCEO, in fresh Blue air means Star you Design have to haveand extra Engineering tonnage and therefore Ltd. extra power consumption. Because if you let in fresh air, it’s warmer than this; so the machine has to cools more warm air.� That means more cost.� So it’s not a concept that has yet caught on.� In the Western countries it’s very standard.�

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Noise levels in a working air conditioner is another area of concern. In a country as noisy as ours, the noise of a air conditioner is no big deal.� In Japan, you won’t hear it.� It’s that important to them.� Also, as I said, you design your machines to cater to the segment to which you sell.� We don’t primarily target the residential sector.� We target commercial, institutional, corporate and industrial.� Now when I sell to those sectors, that’s not a bedroom sector.� In a bedroom or a room like this, it’s otherwise very quiet and you can hear the noise of the air conditioner.� In a showroom or a restaurant, you can’t hear it anyway.� So the customers are not going to pay you for a lower noise machine.� It doesn’t matter to them.

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Whereas for� Voltas, as they are primarily in the room air-conditioner business and they cater to residences and bedrooms, it gets very important in their product.�

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CIO: If you were to put some sort of a number on to the growth rate that you are looking in the next four to ﬁve years in the central air-conditioning is concerned and also if you were to look at Blue Star overall, what sort of number could one expect?

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Mr. Suneel Advani: It is my impression today, looking at the last 6 to 12 months, that the whole air-conditioning sector will grow at more than 20% year on year consistently for the next few years. I would say three to ﬁve years. Surprise of surprises is that the central air

www.capitalideasonline.com Page - 10 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, conditioning segmentCEO, should,Blue inStar my opinion,Design grow and at around Engineering 30%.� I have Ltd. suddenly seen in the last one year a dramatic change in mindsets.� Every new building that I am seeing being set up — not a residential building with apartments — but every other commercial kind of building or an educational institution or a mall or whatever, everything is being air� conditioned.� It’s like a revelation to us what�s happened in the last 6 to 12 months.� And so that covers the whole gamut right from packaged units of up to 5 tons and up.� In the below 5 tons, which is room air-conditioners, the penetration in this country is 1% — penetration of TV is around 25%, refrigerators maybe 40%.� So there is a huge market out there.� So I think the room air conditioning market will grow — there will not be a consistent growth year after year, but the CAGR over ﬁve years, I think, will be in the 20 to 30% range.�� So my own conviction is that the golden era of air conditioning in India has arrived.

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CIO: Could you tell us something about the organization structure of Blue Star and also the marketing structure that you have?

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Mr. Suneel Advani: We have an unconventional organization structure. I will answer that later — I’ll show you on the chart. What was the other question?

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CIO: The marketing organization.

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Mr. Suneel Advani: Okay.� As I mentioned earlier, the professional electronics and industrial equipment divisions are separate. Besides that, we have got a channel business group which handles all the products that we sell through dealers and business partners, like our room air- conditioners, refrigeration products like water coolers and deep freezers and also packaged

www.capitalideasonline.com Page - 11 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, air conditioners.CEO, We are Blue slowly Star introducing Design the smaller and Engineeringchillers used in the Ltd. central air conditioning as well through the channel group.

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Then we have got the central air-conditioning group, which does direct selling. This group would concentrate more the larger projects as we are attracting a lot of business from big projects. With the small chillers business being developed through the dealer network, we are conﬁdent of getting a wider geographic reach. This should help us get a bigger share of that market.

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Besides tapping the potential of dealer network in garnering a larger share of market, we also would be addressing another concern area.� We have a concept of a blind area where there are so many new businesses being formed every day in various parts of the country and the whole demographic shift where today 54 percent or so of the population is below 25 years of age — the new generation is coming in to the work stream and Blue Star is not known to them.� So it’s a constant eﬀort to put the Blue Star name and logo in front of new generations of people in the workforce and new entrepreneurs, new businessmen.� So dealerisation is one good ways to do that.

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The other good way to do that is that increasingly businessmen, commercial establishments, which are our target segment, call upon interior designers and architects who help them do their interiors.� So it’s a very targeted marketing strategy for us to develop relationships with interior designers and architects or what we call IDEAC � an acronym for interior designer, architects and consultants. So that’s a constant eﬀort because then again you have got a lot of new graduates entering that ﬁeld every year.� So we have to stay in front of them; we have to make ourselves known; we have to make our products range known and so on.� So through IDEAC, who do the design work for the establishment; and dealers, who do

www.capitalideasonline.com Page - 12 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, the execution —CEO, these Blueare our Star two channels Design to give and to theEngineering end user and become Ltd. known to him.

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So, in the central air-conditioning, we do it directly with our own sales force, our own employees and we have our own engineering department that does the system design and we have our own erection department made up of engineers who supervise the execution work at site where the detailed work is done by sub-contractors but is supervised by our engineers.� So that is the way in which we intersect with the market.

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CIO: Could you tell us something about the three manufacturing factories that you have at Dadra, Thane and Baruch and the proposed new manufacturing plant at Himachal Pradesh?

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Mr. Suneel Advani: The Thane plant manufacturers equipment for central air-conditioning business.� The Dadra plant manufactures equipment for the packaged air conditioner division and currently also for the room air conditioner division.� But it is the room air conditioner business, which we plan to shift out of Dadra to the new unit in Himachal Pradesh. And the Baruch plant manufactures refrigeration equipment.

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CIO: Could you tell us more on the new facility that you are planning to set up in Himachal Pradesh?

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Mr. Suneel Advani: The new unit at Himachal Pradesh is to be set up at an approximate investment of Rs.30 crores. With our packaged air conditioning business booming, we would like to utilize the Dadra unit exclusively for packaged air conditioning business and shift the room air conditioner business to the new facility. Moreover, government policies and tax

www.capitalideasonline.com Page - 13 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, advantages in CEO,Himachal Blue Pradesh Star also Design promoted usand to set Engineering up the new unit. Ltd.Most importantly, North is a very big market for cooling equipment.

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CIO: Are you planning any capacity expansion at the existing units that you have and what could be the overall capex that one can be looking at current year and in the next 2-3 years?

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Mr. Suneel Advani: Overall total?

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CIO: Yes.� Capital expenditure.

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Mr. Suneel Advani: Well, Rs.30 crores goes into this new factory.� Then the rest of it being mainly IT and investments for our service division and investments in demo equipment and such like, maybe another Rs.5 to 7 crores.�

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CIO: And capacity expansion?

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Mr. Suneel Advani: No. Once we set up this new plant and the existing three plants we’ll be OK for the next few years.�

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CIO: In the annual report it�s mentioned about focus on cost reduction.� Could you share some speciﬁc examples of initiatives that you have taken for cost reduction?

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www.capitalideasonline.com Page - 14 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, Mr. Suneel Advani:CEO, Cost Blue reduction Star that Design we are doing and is primarilyEngineering at the factories.� Ltd. The operating expenses in the field operations and the offices and so on, I must tell you is under very tight control.� We have that culture and our people are very good at that.� They are very tightfisted and very careful about expenditure.� The only area of sales and general expenses where we can exercise some control over today’s level is travel and communication, both of which are the lifeline for growth.� People have to travel in order to sell and deliver and meet customers and so on. Everything else is under very tight control.� So all the focus is our manufacturing process and practices.�

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Number one strategy is deﬁnitely to scale up.� We need volumes.� The cost of procurement goes down dramatically with volumes.� For example the heart of any air conditioner is the compressor.� Roughly 40% of the ﬁnal cost of the machine will be the compressor.� If you buy 10,000 compressors, you will get price X; if you buy 100,000 compressors, it’s a huge drop in unit cost.� So scale is the number one strategy. Therefore we chase growth, both in the domestic and export markets.� Last year our export of products was around� Rs.15 crores.� We are hoping this year to double that.

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CIO: It was Rs.39 crores?

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Mr. Suneel Advani: That included projects.� Only products was roughly Rs.15 crores and this year we are conﬁdent of doubling that to about Rs.30 crores.� On the project site, which is not growing at that pace, we may do another Rs.15 crores.� So maybe total exports may be in the region of Rs.40 to Rs.50 crores.�

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Higher exports is another way to scale up volumes. We are launching a Blue Star brand in the

www.capitalideasonline.com Page - 15 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, Middle East, butCEO, also simultaneously Blue Star weDesign are doing and contract Engineering manufacturing Ltd. for foreign brands. �

CIO: For foreign brands to be shipped abroad.

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Mr. Suneel Advani: Yes.

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CIO: Could you tell us something about the R&D initiatives of the Company?

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Mr. Suneel Advani: That’s our pride and joy and a jewel in our crown.� I believe that we are one of only about ﬁve companies globally, I would say, who has such a wide product range in the cooling equipment business.� And here I am not excluding any of the major global players.� But we have a vast product range and huge accumulated technical knowledge on product design.� So, in earlier years we had the collaborations, we had technology transfers — by and large only about 5% of our product design and execution is now based on foreign technology input on very specialized equipment.� Otherwise the rest of it is all homegrown.� I am very proud to say that we have a terriﬁc bunch of products, all very contemporary, very modern in every aspect including aesthetics and that is why we are making more and more impact in foreign markets under the contract manufacture.� We have about 30 design engineers in our R&D and a vast array of products.� I can give you a listing of products that goes into many many pages.� In fact, what we did was to leverage that product design capability we have set up a new subsidiary called Blue Star Design and Engineering to sell mechanical engineering services for product design to foreign companies.

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CIO: Could you tell us something more about that?

www.capitalideasonline.com Page - 16 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, � CEO, Blue Star Design and Engineering Ltd. Mr Vir Advani:� Yes, I think just to add on to that, basically we are focused on helping companies in their product development lifecycle from the conceptualization to production stages. We employ sophsiticated computer-aided design and computer-aided engineering tools. These It enabled technologies are of recent origin having started sometime in the mid- nineties in the form of 3-D product design. Today, a lot of developments have happened and extends to simulation of the product design process rather than what has been done traditionally which is testing and rework.� So as the product development lifecycle has become more automated and has become more distributed because today you have global manufacturing as well, we felt that there is a demand for product design as an independent service.� And the value proposition to customers beyond just cost which is obviously an India advantage is Blue Star’s advantage in being an existing manufacturer.� So being able to understand the product development process right from scratch through manufacture is something that diﬀerentiates us in the market.

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And as we grow, we started with the HVAC segment, but are now targeting the automotive segment which is the largest user of such services and in addition to that the consumer appliances, industry machinery, heavy engineering industries.� So it is an oﬀshore model just like the IT businesses, except that we are focused on providing a whole diﬀerent range of services.� And our vision for the Company is to build it into what we call an end-to-end product design company, where eventually in the next few years we will hopefully see products designed from scratch by our company being manufactured and marketed globally for other companies.

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CIO: Would you eventually be spinning this company out as a stand-alone sort of a company like you did with Blue Star Infotech?

www.capitalideasonline.com Page - 17 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, � CEO, Blue Star Design and Engineering Ltd. Mr Vir Advani: We have set it up as a 100% subsidiary to help attract talent. Like Blue Star Infotech, we could take a similar route, but it depends on how we manage to scale it up. But certainly there are several independent companies in India today that are doing this and so it is our goal also eventually to capitalize on some of that.� So that’s in the future probably three or four years from now.

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CIO: What�s been the trend in raw material cost and how do you see the margins on the central air-conditioning business emerging over time.� The numbers that one saw for the latest quarter, the margins in the cooling products business had actually gone down.� So could you comment on the trend in margins?

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Mr. Suneel Advani: Well, the competitive situation in India is such that despite the highest growth rate that the Indian economy has seen on a sustained basis, margins have been falling for all industries across the spectrum, across product lines and our industry is no exception. Rising raw material costs — like steel prices increases � has had its impact on margins.� Now again they have begun to slide down a bit.� So those kind of cost increases we are ﬁnding increasingly diﬃcult to pass on to the customer because of the competitive situation.� And in fact in some of the other product lines we have seen unit margins falling.� So that’s why I say scale and volume of production is critical.� Margins are not going to rise a lot for those product lines, for the smaller machines.� The answer is to reduce your cost of procurement through volumes.� And that’s where we are headed.� We have very good growth rates this year for our room air conditioners also in the region of 25% growth.� So all that helps reduce the procurement cost.

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The happy story is that in the central air-conditioning business, as I mentioned, that we have

www.capitalideasonline.com Page - 18 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, seen this inflectionCEO, point Blue that weStar have Design passed over and the Engineeringlast 6 to 12 months Ltd. and the growth rates in excess of 30% for that industry.� We can afford to be more selective now in booking new projects.� Last year our order inflow on central air-conditioning projects was in the region of 50% to 55%. I am willing to accept a lower growth rate of 30% to 35% that have better margins and better commercial terms of contract.� So that’s what we are focusing on now and we has seen since October of ’03 — between then and now — the new orders that we have acquired, the new customers we have got, our margins have improved by about 2% to 2.5%. In a booming market you can afford to be more selective.� So this year, you are seeing an improvement in margins over the last year but a lot of that billing is what we had booked last year at lower margins.� So now the job that we have booked after last October with better margins are coming into the billing stream.� So increasingly you will see over the next few months that the margins will improve on the central air-conditioning projects.� At the low end, for room air conditioners in fact they have declined somewhat.� And in the midrange — the packaged air conditioners they have been fairly steady.�

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One important thing I said was cost of procurement on the back of volumes; the other is we are concentrating on productivity improvement in various ways — through the use of IT, through a lot of mechanized work at the job site, through increases in velocity of completion of projects and increases in the velocity of that money to the system.� So resource eﬃciencies of this kind can give you much better margins.� The sale price may not go up but these are areas that we still have scope to improve upon.

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CIO: Would you be open to selling Blue Star Infotech at an appropriate price? Or is it a strategic investment that you will not divest?

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Mr. Suneel Advani: See, we are a 60-year-old company.� When this company was founded,

www.capitalideasonline.com Page - 19 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, the founder alwaysCEO, enunciated Blue Star his philosophy Design as and wanting Engineering to build an institution Ltd. that would endure in the long term.� And we have imbibed the same approach to things.� Maybe it’s not everyone’s approach to life and to business.� There are many people who set up businesses only to sell them out to the highest bidder and that’s ﬁne, legitimate and everyone can do what they want.� Our thinking is diﬀerent.� If you have seen our latest annual report for Blue Star Infotech, the theme is there on the cover.� The theme is: built to last.� So, we are not in this for the short term.� We, at a personal level are not driven primarily by the personal wealth kind of objective which drives many people.� We take greater pride in building something of value for the long term, something that will endure and be a very respected organization; and those are our values; that is our culture; that’s our upbringing; and that’s our history and legacy.�

Though I must admit that I get oﬀers to buy out Blue Star Infotech quite regularly.� If not every month, maybe every other month.� But I have never looked at any of them seriously or even investigated. I haven’t even gone into the numbers because I am not really interested.� And it’s academic.� It’s nice to know that people want to acquire the company.� You know it’s a boost to the ego.� But that’s all it is.��

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And also from a strategic viewpoint, these three entities: Blue Star Limited, the parent; Blue Star Infotech, the outsourcing partner and off shoring partner; and now Blue Star Design and Engineering — these are the three legs, which are very mutually synergistic.� The parent company brings sixty years of management experience, culture, values, financial stability, respect in the marketplace and so on to these offspring.�

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Blue Star Infotech brings to the other two a youthfulness, and a sort of a freshness, a sense of youth of being in a very contemporary modern business, so that the old 60-year-old parent can’t get too complacent and get too stuck in the past.� So they are always pushing the

www.capitalideasonline.com Page - 20 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, parent.� CEO, Blue Star Design and Engineering Ltd. �

And Blue Star Design and Engineering rides on both these entities which is the mechanical engineering strength of the parent company and the oﬀ shoring capability, the delivery systems and practices as its inheritance to promote its business.� So the three together are a very powerful story for a customer.

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CIO: What would you describe as strengths, weaknesses opportunities and threats for Blue Star?

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Mr. Suneel Advani: Let me begin with Opportunities. I see India emerging over the next ﬁve years, as a very serious alternative to China as the manufacturing base for engineered products and system.� Not mass production like China specializes in, but anything designed and engineered — smaller volumes but more complex engineered systems in which I think India is doing a far better job than China.� We are gaining that recognition.� We have that capability.� As a people, we are like that also and our own manufacturing base is evolving.� So I see huge export opportunities for our manufacturing base in the next three to ﬁve years.� And we intend to capitalize on that.� I see huge opportunities for a company like Blue Star in the contracting of projects business abroad in the Middle East and Far East.� There is a boom in the Middle East again. We have been in and out of the Middle East now for many years.� I have a lot of respect for Voltas’s international projects business and they have shown us how it can be done.� And Larsen and Toubro,� are also a determined lot. I think we can do it; it’s a huge opportunity for us.� So the whole export sector in general is a huge opportunity for Blue Star.

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www.capitalideasonline.com Page - 21 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, Let me not forgotCEO, to mention, Blue inStar a country Design where and Rs.30,000 Engineering crores worth ofLtd. produce is wasted every year through rotting away � for the second-largest producer of fruits and vegetables in the world, second-largest producer of milk in the world, there is no cold chain in this country. It’s a huge opportunity. Cold storages, refrigerated transportation systems, supermarket equipment, freezers, coolers of various kinds to preserve food in a country which have been chronically short of food forever.� It’s a huge opportunity.� It will happen in another three to ﬁve years and we are leaders in that area.� It’s very small right now but we will be right there when it happens.

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As far as threats are concerned, I am not seeing any serious threats right now.� As the organization, we are ﬁnancially very stable, we have very good people, we are market leaders. We are on a good wicket right now.� Touchwood.� I am not seeing any serious threats.

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Strengths; well, it is our engineering skills, our product development capability, our project management skills for our air conditioning projects business and the trust and faith which Indian customers have in Blue Star.� All the surveys we do and the surveys that refer to us also again and again talk about high degree of respect that Blue Star commands amongst investors, amongst customers, amongst business partners.� So that’s a huge plus.� It’s also a great strength of our whole corporate value system.� We deﬁned sometime ago our values and beliefs, we want all our employees to imbibe them, practice those.� We run workshops within the company to propagate a single set of value propositions and get everyone to imbibe and practice them. They should show up in your behavior — not remain on some nice placard on the wall, but should be a way of life.� Like I breathe, I should not have to think that now I am performing item 8 or 9 on the value chart.� It should be part of my behavior

www.capitalideasonline.com Page - 22 Chetan Parikh interviewed Mr. Suneel M Advani, President and Vice Chairman, Blue Star Ltd., and Mr. Vir S Advani, automatically. CEO,I believe Blue that most Star of ourDesign people areand like Engineering that.� The newcomers, Ltd. we have to keep training them.� So that’s a very powerful thing we have.� These are the strengths.

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On weaknesses, normally we tend to make longer list than we do of strengths.� There is a lot of self-ﬂagellation that we end up doing as it coaxes you and spurs you to better yourself.� Weaknesses are many.� We are not major players in the room air-conditioner market, which is a highly visible end of the market where recognition of your brand in the market is very vital.� We have done a lot in the last ﬁve years to build our brand recognition and brand equity.� But in our industry, nothing gets your name and your logo out there better than a room air-conditioner or a split air conditioner.� And we are not big enough in that market.

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We are not big enough in the export market either products or projects.� We have been too domestic market focused so far.� It’s an opportunity, but it’s a weakness today.� That we should have been out there much more than we have been.�

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You have caught me in a very optimistic mood.� Right now we are in a sort of an upbeat mood.� We can’t think of too many negatives right now.� Things are going quite well for the company.� We are having a good year.

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CIO: Mr. Advani, thank you so much for your time.��