This is my first letter to you as Chairman of Blue Star and at the outset I would liketo thank you for your continued support to both Ashok and myself over the years. The year2016-17 has witnessed some major changes in the Board composition starting with a smoothtransition from Ashok to me when I took over as Chairman over 6 months ago. SubsequentlyDinesh N Vaswani and Rajiv R Lulla from the promoter family joined the Board asNon-Executive Directors and the Company stands to gain from their extensive repertoire ofknowledge and experience as senior professionals in business and finance both in Indiaand overseas.
2016-17 Consolidated Financial Performance
2016-17 was a strong year for Blue Star in terms of all-round performance despitemajor hiccups during the year such as demonetisation which threatened to upend the Indianeconomy and poor investments in the manufacturing and construction sectors. The Companyreported a Total Operating Income of '4425 crores representing growth of 22% over theprevious year on a like-to-like basis whilst Operating Profit for the year grew 20% to'257 crores. So both revenue and profit grew hand-in-hand which is a good indicator ofrobust growth. Significantly Blue Star gained market share across all its businesses andthis was accompanied by improved customer satisfaction levels.
Blue Star's business performance and steady improvement in operating results has beenrecognised by the stock markets and is reflected in the impressive growth in our shareprice. Blue Star shares have generated a return of 79% in the last one year. Alsoconsequent to the merger last year shareholders of Blue Star Infotech who were allottedBlue Star shares have also experienced an annualised return of 84% over the last year.
Balance Sheet & Cash Flow
Our Balance Sheet position strengthened considerably on the back of improved operatingperformance and proceeds from the sale of Blue Star Infotech's business last year.Year-end net borrowings reduced to '120 crores from '317 crores last year which helped tosubstantially improve our year-end debt equity ratio to 0.16 from 0.50 last year. Strongoperating performance coupled with improving working capital efficiencies contributed toan increase in the Return on Capital Employed to 28.1% up from 23.9%. Blue Star'sfinancial position is stronger than before and looking ahead the Company's asset-lightfinancial model aims to deliver cash profit high enough to pay good dividends whileretaining sufficient profit to fund future business growth without resorting to excessivedebt.
Business Segments and Support Functions
While the Electro-Mechanical Projects business continued to be impacted due to theslowdown in commercial construction the Air Conditioning & Refrigeration Productsbusiness continued to perform very well driven by our strong brand equity enhanceddistribution reach and comprehensive portfolio of products. The room air conditionersbusiness grew much faster than the industry growth of 20% with Blue Star's market sharegrowing to 11.5% in this product category. Whilst the manufacturing facilities reportedrecord production the R&D team worked at incorporating state-of-the-art technologyacross the diverse product portfolio. The supply chain team delivered larger than expectedcost savings supported by a soft commodity market. Further the Company has strengthenedits portfolio with its entry into the Water Purifier business and the Export businesswhich are promising growth drivers for the future.
With the launch of 13 models of water purifiers last year including India's firstRO+UV+Hot+Cold model Blue Star has positioned itself as a premium player in thiscategory. Blue Star water purifiers are already available in 80 towns with over 135channel distributors and have met with a very encouraging response in the market.
With an enhanced presence in over 17 countries across the Middle East SAARC Africaand ASEAN regions the International business has shown great promise in its expansionplans and intends to cover five more geographical locations in 2017-18. The Company hastied up with several large influential distributors across the addressed markets to reachout to end-consumers and continues to participate in various international exhibitionsnetworking events as well as press conferences overseas.
We are working towards de-risking the high dependence on the domestic constructioncycle through strategic investments in overseas markets. The Company is now pursuing newopportunities in areas adjacent to our existing businesses such as MEP projects forfactories; air coolers and air purifiers; and kitchen and healthcare refrigeration inaddition to the earlier stated related diversification into water purification. We arealso incubating new lines of business to keep the Professional Electronics and IndustrialSystems businesses relevant and profitable.
Blue Star continues to be the largest after-sales air conditioning and commercialrefrigeration service provider in the country and has enhanced its reputed position inthe market place as a superior value-added service provider. In line with Blue Star's GoldStandard Service Programme service performance parameters have improved dramaticallyregistering an all-time high on our customer satisfaction index. The remote monitoringcentre at Thane does a remarkable job of monitoring hundreds of chillers and VRF systemsinstalled across the country along with failure prediction of components to enablepreventive maintenance. In addition to Air Conditioning & Refrigeration service theCompany offers broader services such as Enterprise Facility Management which have beenreceived well.
In 2016-17 the Corporate Finance team excelled at robust forex risk management and taxrefund collections. The Company counts on them to drive the transition to GST and aseamless migration of key business processes efficiently. Blue Star has taken corporategovernance to the next level by implementing an ERM framework a vigilance mechanism and astrong controller function.
Due to the concerted and creative efforts of the IT team we look forward to Blue Starbecoming a truly digital enterprise with physical products at the core equipped withdata-based innovative services and processes. Across divisions the Company has wonnumerous industry awards and recognitions in 2016-17 including the 'Best MEP Contractor2016' runner-up award from Construction Week India for the Bengaluru Metro project; theBrand Excellence Award in Consumer Durables from ABP News; and the 'Best Domestic RO+UVWater Purifier' award of Water Digest.
A new fair and transparent performance management system for employees has been put inplace with policies promoting better work-life balance as well as schemes for employeereward and recognition. The objective of 15% gender diversity across managerial levels andbusinesses by FY19 is being driven systematically through conscious and planned hiringwith women-centric initiatives across locations. A talent management programme is beingimplemented systematically to hone the future leaders of the Company.
Unpredictability and volatility have become a part of all our lives and we need toequip ourselves with agility and flexibility to deal with these difficult times. Insteadof scaling back or retreating as many companies are doing Blue Star is calmly andconfidently making plans to expand its businesses enter new markets and launch newproducts.
Blue Star's ability to adapt to changing times as well as its deep-rooted values andethics have helped it grow from strength to strength over the past seven decades whilstmany companies which were started in 1940s-60s ceased to exist along the way. The emphasison customer-centricity and employee engagement makes Blue Star the company of choice forall - customers employees and investors.
The Board continues to have high confidence in the twin leadership of Vir S Advani andB Thiagarajan to ably steer the Company's operations well in these times of complexity andturbulence. They are making concerted efforts to implement the aggressive but prudentStrategic Plan 'Blue Star@75 which will make the Company ready for the future lookingfor opportunities while looking out for challenges. I am confident that this managementduo will be able to take this Company to even greater heights one that we can allcontinue to be truly proud of.
Suneel M Advani
Chairman of the Board