MANAGEMENT DISCUSSION AND ANALYSIS

INTRODUCTION

Blue Star is India's leading air conditioning and commercial refrigeration company with over seven decades of experience in providing expert cooling solutions. It fulfills the cooling requirements of a large number of corporate, commercial as well as residential customers. It also offers expertise in allied contracting activities such as electrical, plumbing and fire-fighting services, in order to offer turnkey solutions, apart from execution of specialized industrial projects. Blue Star's other businesses include marketing and maintenance of imported professional electronic equipment and services, as well as industrial products and systems, which is handled by Blue Star Engineering & Electronics, a wholly owned subsidiary of the Company.

BUSINESS SEGMENTS

In accordance with the nature of products and markets addressed, business drivers, and competitive positioning, the lines of business of Blue Star can be segmented as follows:

ELECTRO-MECHANICAL PROJECTS AND PACKAGED AIR CONDITIONING SYSTEMS

This business segment covers the design, manufacturing, installation, commissioning and maintenance of central air conditioning plants, packaged/ducted systems and variable refrigerant flow (VRF) systems, as well as contracting services in electrification, plumbing and fire-fighting. After-sales services such as revamp, retrofit and upgrades also form part of this segment.

UNITARY PRODUCTS

Blue Star offers a wide variety of stylish, contemporary and energy-efficient room air conditioners for both residential as well as commercial applications. It also manufactures and markets a combrhensive range of commercial refrigeration products and cold chain equipment. These formed part of Cooling Products Segment, which has been renamed as Unitary Products Segment due to the proposed extension of the product range to include water purifiers and air purifiers.

PROFESSIONAL ELECTRONICS AND INDUSTRIAL SYSTEMS

For over six decades, Blue Star has been the exclusive distributor in India for many internationally renowned manufacturers of professional electronic equipment and services, as well as industrial products and systems. This business is managed by the Company's wholly owned subsidiary, Blue Star Engineering & Electronics.

INDUSTRY STRUCTURE AND DEVELOPMENTS AIR CONDITIONING

In 2015-16, the estimated total market size for air conditioning in India was around Rs.16000 crores. Of this, the market for central air conditioning, including central plants, packaged/ducted systems, VRF systems and other ancillary equipment, was about Rs.5900 crores, while the market for room air conditioners comprised the balance Rs.10100 crores.

During the year, the commercial segment gained some momentum in select metros, whilst the overall market remained muted, with investments in the industrial and infrastructure segment not witnessing any improvement. Though the market sentiments were positive, active prospects for finalisation of projects were low, and hence purchase was limited. Segments such as healthcare, malls, metro and power witnessed enhanced demand, while corporates continued to remain cautious on fresh investments. The integrated mechanical, electrical, plumbing and fire-fighting (MEP) projects gained more traction, especially in segments such as hospitality, healthcare and malls.

On the other hand, the room air conditioners market grew significantly, driven by the residential business. The rise in disposable incomes of the growing middle-class consumers, enhanced demand from Tier 3/4/5 markets, festive season purchases as well as a favourable early onset of summer in several parts of the country contributed to growth during the review period. Rupee debrciation was offset by lower commodity prices which ensured that prices were stable.

COMMERCIAL REFRIGERATION

The commercial refrigeration segment includes a wide range of products such as deep freezers, water coolers, bottled water dispensers, cold rooms, bottle coolers and ice cubers. Rapid changes in consumption patterns of the new and aware consumer, fuelled by modern trade, along with the growing food, dairy and pharmaceutical industries contributed to the growth in this segment.

ELECTRO-MECHANICAL PROJECTS AND PACKAGED AIR CONDITIONING SYSTEMS

The Electro-Mechanical Projects and Packaged Air Conditioning Systems business continued to be the largest segment, accounting for 51% of the Company's Total Segment Revenue.

In the electro-mechanical projects business, most of the private, medium and large-sized projects remained subdued, while there was a sharp increase in investments in Government-related projects of the Centre as well as the States. Business sentiments remained tepid as non-availability of capital funds continued to adversely affect expansions and investments. Several legacy projects were closed during the year, including short closure of a few, as there was no visibility of fund flow for revival of these otherwise dormant jobs.

In the central plant equipment segment, the market showed signs of improvement during the year, especially in Tier 2, 3 and 4 markets, but cash flow continued to be a concern with brssure on margins. Segments such as quick specialty restaurants, healthcare and hospitality showed enhanced demand, while commercial spaces, IT/ITeS and developer segments continued to be adversely affected. There was a modest upswing in commercial space consumption in National Capital Region, Bengaluru and Mumbai, though limited to a few developers and corporates of repute. Prospects from industrial segments showed some improvement, especially in Telengana, Gujarat, National Capital Region and some parts of Maharashtra. Hospitals, hotels and large mixed-use development projects increasingly brfer multi-service (mechanical, electrical, plumbing and fire-fighting) service providers. The value proposition of the Electro-Mechanical Projects Business has been identified as 'Superior project delivery through intelligent engineering, modern execution practices, and committed teams' which underpins a strong differentiator for the Company. Orders of Rs.815 crores were booked in the integrated MEP (Mechanical, Electrical, Plumbing) domain during the review period, marking a 63% growth over last year.

Some significant orders received in the electro-mechanical projects business during the year included Delhi Metro, Gurugram and Noida; Power Grid Corporation, Karaikal and Tumkur; Sugam Vanijya Holdings, Chennai; Omkar Realtors, Mumbai; Cancer Hospital, Lucknow; Apollo Tyres, Chennai and Vadodara; RBS Dev Centre, Bengaluru; Tata Steel, Jamshedpur; Manipal Hospital, Bengaluru; Lakeshore Hospital, Kochi; Mars International, Pune; Indiabulls, Jodhpur; Lodha Developers, Mumbai; Pradhama Hospitals, Visakhapatnam; and Cummins India, Pune.

In the Industrial Projects business, there was a continued downturn in the steel sector as lack of new investments affected order inflow. Despite this, the focus on system integration offerings and strategic positioning of advanced solutions in the existing markets enabled growth in revenues, during the year under review.

In the central plant equipment segment, the Company introduced centrifugal chillers in a range of 300 TR - 4000 TR, in addition to the wide range of screw and scroll chillers. During the review period, the Company maintained its leadership position in scroll chillers, while the screw chiller segment recorded considerable growth. Blue Star's ducted systems range comprises packaged air conditioners, ducted split air conditioners and variable refrigerant flow (VRF) systems. While the market for ducted systems declined marginally, the Company retained its market leadership position in the segment. During the year, the Company announced the launch of Blue Star VRF IV Plus, the country's first 'Made in India', 100% inverter VRF system which is well suited for the varying climatic conditions across the country. Blue Star's 4th generation VRF IV Plus has several unique advantages, over and above the requisite features, including 100% inverter combrssors which is the latest global technology, 100% cooling capacity delivered even at 43°C, non-stop cooling even at a peak ambient temperature of 56°C, highest energy efficiency, and is designed to operate across a wide voltage range. The VRF IV Plus is manufactured at the Company's modern state-of-the-art Dadra plant. With this launch, Blue Star has proved that an Indian manufacturer, equipped with the right technology as well as robust research and development capabilities, can develop a product which is best-in-class and can challenge any product globally. Blue Star VRF IV Plus has been well received by customers, and several orders received for this product during the year further strengthened its foothold in the fast-growing VRF market. Segments such as industrial, marriage/banquet halls, showrooms and offices witnessed enhanced demand during the review period. Some of the notable orders won during the year were from Ashoka University, Haryana; Hewlett Packard, Bengaluru; Estancia IT Park, Chennai; Sutherland, Secunderabad; Kalyan Jewellers; Ginger, Nagpur; HCL, Pune; Delhi Public School, Gandhidham; ThyssenKrupp, Pune and South City Projects, Kolkata.

UNITARY PRODUCTS

This business segment comprises room air conditioners and commercial refrigeration products and systems, apart from new planned product lines such as water purifiers, air coolers and air purifiers.

The consumers in the room air conditioners segment are becoming more brand-conscious, brferring specialist air conditioning players. This has worked to the advantage of Blue Star since it is perceived to be a brmium and aspirational brand, and its rich pedigree and high quality product array is in conjunction with this image. During the year, the room air conditioners business of the Company continued to grow faster than the market, thereby increasing its market share to 10.3% in terms of value. It launched a new range of contemporary and stylish room air conditioners for the residential segment, which comprises the largest range of inverter split air conditioners. They are available in a large number of retail channels across the country, including several Tier 3 and 4 towns. The emphasis during the year was on higher energy-efficient products such as inverter split air conditioners, 5-star rated split air conditioners as well as those with eco-friendly refrigerants. Blue Star's share in the inverter and 5-star air conditioners range is higher than that of the industry, signifying that the Company enjoys a brference amongst discerning consumers who purchase brmium products. During the year, Blue Star also added several new customers in its national accounts business. Continued efforts in corporate and light commercial segments yielded results by way of large orders received from reputed institutions. Improved operational efficiency across all functions as well as enhanced manufacturing and supply chain management resulted in healthy margins in the room air conditioners business.

In the commercial refrigeration products business, the Company introduced new models of deep freezers in glass-top as well as hard-top variants. Sales of chest freezers and coolers grew well, with enhanced demand from the ice cream, dairy and frozen food segments. Significant orders were booked from Amul, Havmor, Creambell, Hatsun, McCain, Dairy Classic, Dinshaw's and Lazza during the year. The market continued to witness an increased demand for display freezers across businesses due to the expansion of frozen products and ice cream businesses, thereby driving growth for glass-top freezers. Introduction of eco-friendly cyclopentane panels at the start of the year, containing no ozone depleting substances, met with an encouraging response. It has enabled the Company to differentiate its cold room business on an eco-friendly platform, and this trend is likely to continue in the future.

Sales of bottled water dispensers grew well during the year as the Company enhanced engagement with retailers. Storage water coolers also performed well with a surge in the demand from the Government as well as educational and manufacturing segments. Blue Star storage water coolers with in-built water purifiers which was launched by the Company last year, met with good resonance from the market.

In the cold chain business, traditional segments like pharmaceuticals and ice cream contributed significantly, with several leading players investing in cold rooms for their warehouses as well as distribution points across the country. The Company's customer list includes prominent pharmaceutical majors like Sun Pharma, Gland Pharma, Mylan, Dr Reddy's, GlaxoSmithKline, and Sanofi, as well as ice cream majors such as Amul, Creambell and Mother Dairy. The quick service restaurants segment witnessed mixed results, with some multi-national chains undergoing restructuring of their business models for India. Blue Star continues to enjoy a brferred partner status with most of these food chains. Despite a challenging scenario, the Company has gained a major share of business from fast food chains such as Jubiliant, Burger King, Carls Jr, TGIF, Hardcastle, Sbarro, Lite Bite, Nando's and Au Bon Pain.

During the year, Blue Star forayed into allied products such as air coolers and air purifiers to leverage its equity in the residential segment. It launched 5 models of air purifiers including models with HEPA filter with ioniser technology and plasma technology, for spaces varying from 200 sq ft to 400 sq ft. The market for air purifiers is nascent at about Rs.750 crores but given the rising concern of air quality in the country, this category is expected to grow three-fold over the next 5 years. With regard to air coolers, Blue Star introduced 3 models catering to price conscious customers in non-humid areas of North and Central India for spaces ranging from 100 sq ft to 300 sq ft. The current market size for air coolers is about Rs.2600 crores, with the organised segment at about Rs.1600 crores, and this market is set to nearly double over the next 5 years. The Company intends to ride on its existing channel network for distributing these newly-launched products.

Blue Star has also announced that it is planning to enter the water purifiers business. The Company will initially offer residential water purifiers, and will gradually enhance its range to cover commercial water purification systems as well. Blue Star has been evaluating entering new product categories, in order to leverage its brand equity and distribution strength. It has been in the water cooler business for nearly seven decades, and is also amongst the largest suppliers of normal, hot and cold bottled water dispensers in the country. Since Blue Star has a strong connect with water, it believes that launching water purifiers would help it leverage this association. The market for pure drinking water has been on the rise. The residential water purifiers market in the country is pegged at about Rs.4200 crores, increasing at a CAGR of 22%. About 8 million units are sold every year, with gravity-based water purifiers comprising about 5 million, and the balance are electric namely RO, UV and its variants. However, in terms of value, due to their higher price points, electric purifiers contribute to about 70% of the market. The business is also very service-intensive, with a regular need for replacement of consumables. Considering that Blue Star is India's largest AC&R service provider, it believes that it can offer differentiated service in this business too, and create new benchmarks in the industry. Blue Star plans to launch a combrhensive range of residential water purifiers towards the latter part of 2016.

PROFESSIONAL ELECTRONICS AND INDUSTRIAL SYSTEMS

For over six decades, the Professional Electronics and Industrial Systems business has been the exclusive distributor in India for many internationally renowned manufacturers of hi-tech professional electronic equipment and services, as well as for industrial products and systems. Over the years, the Company has moved up the value chain significantly by changing its business model from being merely a distributor to that of a system integrator and value-added re-seller. This business is handled by Blue Star Engineering & Electronics Ltd, which is a wholly owned subsidiary of the Company. The business has carved out profitable niches for itself in most of the specialized markets it operates in, such as Industrial Products and Systems, Material Testing Equipment and Systems (Destructive/Non-Destructive), Data Communication Products & Services, Testing and Measuring Instruments and Healthcare Systems.

During the review period, bookings and margins of the Industrial Products business were under brssure due to the dollar apbrciation.The growth in industrial projects was sluggish due to significant delay in power projects and postponed industry investments. The Data Communication segment gained traction with significant sales of video surveillance equipment to the Armed Forces and city surveillance. The sales of data and transaction security products for banks and financial institutions grew significantly during the year. The Test and Measuring Instruments business, which mainly deals with radio frequency, microwave as well as avionics test and measuring equipment received important orders from the Defense, Space and Aerospace sectors. This business is moving towards indigenous products and solutions, especially due to the Government's thrust on 'Make in India'. Oscillographic recorders and phase noise measuring systems received good business from the Defense and Space segments. The product line of Radio Frequency over Fiber (ROF) converters which was launched last year, continues to gain traction among customers in defense and PSUs, with new and promising business opportunities. The Healthcare Systems segment registered good growth, with notable orders booked for CT scanners, patient monitors and colour dopplers, apart from orders from the pharmaceutical segment for Raman spectroscopy, particle sizing systems and bone densitometers.

MANUFACTURING FACILITIES

Blue Star has five modern, state-of-the-art manufacturing facilities at Wada, Dadra, Himachal Pradesh and Ahmedabad. During the year, the Company embarked on a manufacturing footprint re-design programme with the help of KPMG. Consequent to that exercise, the Thane and Bharuch plants were closed. To meet the requirements of the fast growing room air conditioners and commercial refrigeration business, and keeping in mind the future capacity over the next 10 years, Blue Star intends to set up two modern, state-of-the-art factories at Samba in Jammu and Sri City in Andhra Pradesh, with an investment of Rs.215 crores over the next 3-4 years to increase its overall production capacity by about a million units in the final phase. The facility at Samba would enable the Company to avail of the excise duty exemption for a period of 10 years from the commencement of production. Apart from planning to avail State GST benefits for intrastate sales, the Sri City Plant would lead to considerable savings in logistics costs since a significant proportion of air conditioner sales of the Company is from the South. It would also de-risk the products business by sbrading its manufacturing footprint in two different States. The significant enhancement in Blue Star's manufacturing capacity will help cater to the burgeoning demand in the domestic as well as export markets.The land at Samba has been procured, which is being followed by plant construction, to enable it to commence operations by FY18. Land procurement is expected to begin shortly for Sri City, with the plant construction planned in a phased manner, to start operations by FY19.

The fully-integrated factories at Samba and Sri City will enhance the manufacturing capacity of the Company to position Blue Star as the largest Indian manufacturer in the AC&R industry.The Company is keen to introduce the best of automation in these new facilities, actualising the country's vision of' Make in India'. The new factories are planned to be world-class manufacturing hubs with superior aesthetics and ergonomics, deploying state-of-the-art technology. These modern and contemporary plants will ensure that the products manufactured are not only globally competitive but also set new benchmarks in manufacturing technology in the country. The Company aims to transform into a digital enterprise by progressively building on smart manufacturing with Wi-Fi enabled products, inverter technology, vertical integration and environment-friendly products. Further, it intends to develop these plants as environmentally responsible and ecologically sustainable. These factories will primarily manufacture room air conditioners, deep freezers and water coolers.

The Dadra Plant, equipped with a state-of-the-art testing facility, is regarded as one of the best manufacturing facilities in the country for high-quality air conditioning products.The facility manufactures packaged/ducted split air conditioners and VRF systems. During the review period, it added the latest helium leak detectors to improve quality and productivity as well as reduce water consumption for testing.

The Wada Plant, which is the largest manufacturing facility of the Company, is fully equipped to produce the complete range of chillers, inclusive of air cooled and water cooled screw as well as scroll chillers. The first-of-its-kind set-up for cold room panel manufacturing, with eco-friendly foaming process, using cyclopentane was added at the start of the review period.

Cyclopentane blown foam contains no ozone depleting substances and has a negligible impact on global warming. The technology, supported by the Ozone Cell, Ministry of Environment and Forests, is in line with Blue Star's commitment to phase out chlorofluorocarbons (CFCs) and hydrochl or of lurocarbons (HFCs) substances. In addition, this facility also produces mortuaries, and low as well as negative temperature condensing units. The Wada Plant is also a contract manufacturer of sophisticated condensing units and roof-top units for a few multi-nationals for Europe, Australia and Middle East markets, and this business is on the upswing. The facility endeavours to increase value addition through in-house manufacturing.

The two Himachal Plants manufacture room air conditioners as well as storage water coolers. Due to the significant demand for room air conditioners, the factories registered a record production during the review period. Blue Star produced a substantial quantity of micro channel heat exchangers which were used for captive consumption. The factories have also added a range of machines with R32 refrigerant which has a low global warming potential, zero ozone depleting potential as well as relatively low inflammability.

The Ahmadabad Plant manufactures commercial refrigeration products and systems. Driven by the ice cream, frozen food and dairy segments, both Wada and Ahmedabad Plants catered to an increased demand for commercial refrigeration products, during the review period.

During the year, in consultation with top industry consultants, the Plants undertook a manufacturing excellence programme comprising four pillars of lean manufacturing, quality improvement, technology upgradation and culture building. This has led to substantial improvement in productivity. The factories have also embarked on a six sigma drive which is aimed at problem solving for manufacturing, quality, vendor supplies and logistics.

RESEARCH & DEVELOPMENT

With the adoption of the latest technology, Blue Star's R&D capabilities are well-aligned to meet the market and regulatory requirements related to room air conditioners, commercial refrigeration products and systems as well as that of international business. This holds continuous and immense benefits for product positioning and cost competitiveness. Whilst wall-mounted inverter air conditioners were developed in the 3-star as well as 5-star categories to meet the voluntary labeling programme of Bureau of Energy Efficiency (BEE), cassette units were upgraded to meet the mandatory energy labelling standards. 5-star wall mounted air conditioners with R32 refrigerant were also launched.

Blue Star undertook a lab certification programme to upgrade the R&D facilities wherein two psychometric labs for room air conditioners and ducted systems as well as the calorimetric lab for refrigeration systems received accreditation from National Accreditation Board for Testing and Calibration Laboratories (NABL). The R&D facility has enhanced its capabilities in reliability and electronics which form the foundation for digital and smart products. Blue Star has developed in-house capabilities to test and certify the safety compliance of its products, which is an essential requisite for exports. A new customized range of room air conditioners and ducted systems was also developed to meet the specific requirements of Middle East markets. The R&D function continues to have an approved status from DSIR (Department of Scientific and Industrial Research), with re-certification as per new standards.

GREEN INITIATIVES

All Blue Star products rate high in energy efficiency standards. The Company's adoption of eco-friendly refrigerants is ahead of the industry curve. Blue Star's officials are part of several national and international forums which are involved in the study of the technological feasibility and performance of new eco-friendly refrigerants with low global warming potential; related safety issues, environmental impact assessments and intellectual property rights; commercial vilability; as well as energy efficiency in high ambient temperature conditions.

INTERNATIONAL BUSINESS

In line with the corporate objective of building a larger international footprint for Blue Star over the next few years, new opportunities are being identified for AC&R products, MEP projects and after-sales service in global markets. In order to give

it the required focus and thrust, a separate business vertical named the International Business Group, responsible for all business activities of the Company outside India, was formed at the beginning of the financial year. The International Business Group comprises Global Projects and Global Product Sales.

The Global Projects business manages the joint ventures of the Company in Qatar, Malaysia as well as Oman, the latter being added during the year. These joint ventures undertake MEP projects and render Operations & Maintenance (O&M) services for residential, commercial and infrastructure buildings in their respective markets. The Global Projects business also handles all international projects enquiries received by the Company from other geographies. During the year, Blue Star acquired a 51% stake in Oman Electro Mechanical Contracting Co LLC (OEMC), a 100% step subsidiary of W J Towell & Co LLC, to form a joint venture entity called Blue Star Oman Electro-Mechanical Company LLC (Blue Star Oman).

The Global Product Sales business deals in the export of air conditioning and commercial refrigeration products and systems. The portfolio of products includes unitary products, refrigeration products and applied systems. Unitary products include window air conditioners, split air conditioners, inverter split air conditioners, cassette air conditioners and vertical split units; as well as refrigeration products including water coolers, deep freezers, bottled water dispensers, visi coolers and ice cube machines. The range of applied systems offered by the Company include tank chillers, air handling units, fan coil units, inverter VRF systems, ducted air conditioners, modular cold rooms, as well as positive and negative temperature refrigeration units. Till FY15, Blue Star's export focus had largely been on unitary products and refrigeration products. During the review period, the export portfolio has been expanded with applied systems. During the year, the Global Product Sales business received good order inflow for a range of unitary products from various distributors as well as OEM customers. Room air conditioners with the eco-friendly refrigerant R410A and high energy efficiency, in line with the new UAE regulation, met with an encouraging response in the market place. The newly-launched Blue Star VRF IV Plus was introduced in select countries as it suits the needs of commercial, residential and retail segments where diversity and performance at high ambient temperatures are critical parameters.

From a geographical perspective, the Global Product Sales business covers the Middle East, SAARC, Africa, and ASEAN regions. The Company is currently brsent through distributors in the following countries: Kuwait, Bahrain, UAE, Oman and Qatar in the Middle East; Bangladesh, Sri Lanka, Maldives, Nepal and Bhutan in the SAARC region; and Kenya, Nigeria and South Africa in the African continent. During the year, Blue Star entered the ASEAN market through Vietnam.

With the Company embarking on an aggressive channel expansion plan for the international markets, there was renewed focus on product-wise as well business-wise distribution. During the year, Blue Star tied up with several top, influential distributors including Jumbo Engineering LLC in Dubai to cater to the demand for cold room refrigeration units and mortuary chambers in the UAE market; DOMASCO in Qatar for unitary products; OMASCO in Oman for distribution of applied systems in Oman; Bin Hindi Group Bahrain to promote unitary products in Bahrain; A&R Integrated Solutions Company in Sudan for unitary products, DX commercial units, VRF systems, chilled water systems, modular cold rooms as well as refrigeration products; Compact Cool in South Africa for water coolers and process chillers; and A Technology (Vietnam) Corporation in Vietnam for unitary products, DX commercial units, VRF systems and chilled water systems.

During the year, Blue Star participated extensively in international exhibitions such as Big 5 in Dubai, Big Show in Oman and Middle East VRF Conference in Dubai as well as in significant trade shows in other countries, which has helped in increased networking opportunities and enhanced brand visibility. The Company has also published print ads in key trade magazines in the UAE. In FY17, the Company intends to augment its marketing budgets for international exhibitions, brss conferences and print ads.

Going forward, the Company intends to strengthen its channel distribution across the Middle East and make deep inroads into the African continent in the coming year. In FY18, Blue Star plans to enter Cambodia, Vietnam, Laos, Myanmar and Indonesia in the ASEAN region. The Company plans to step up its brsence in Bangladesh, Nigeria and Egypt through application of a CKD/SKD model, in liaison with local manufacturers. The products planned to be introduced in the upcoming year include VRF systems as well as bottled water dispensers with ESMA certification, split air conditioners with revised energy standards for Qatar and Bahrain markets, T3 inverter split air conditioners with R410A refrigerant, SS430 grade water coolers for retail markets, G mark-qualified air conditioners and bottle water dispensers, amongst others.

AIR CONDITIONING AND REFRIGERATION SERVICE

Blue Star continues to be the largest after-sales air conditioning and commercial refrigeration service provider in the country, and has sustained its reputed position in the market place as a superior value-added service provider. All its services are ISO 9001-2008 certified. Blue Star has embarked on a Gold Standard Service Programme which is aimed towards superior after-sales service, enhanced visibility, better customer centricity, analytics for in-depth customer insights, use of smart applications, modernization of all tools and tackles, and remote monitoring, besides others. Refrigerated vans have been deployed in major locations for cold storage customers. The Company has introduced a new call desk equipped with the latest software which operates on a 24/7 basis.

With China's economic crisis and sliding of commodity prices, the Company focused on a robust cost reduction programme with local and foreign vendors which comprised reverse auction, cost drill-down and consolidation, apart from direct negotiations. A detailed vendor performance rating system was put in place. During the year, a meet of important vendors was held to discuss the Company's focus areas and long term plans as well as to recognise top performers. The shared sourcing cell worked on several procurement projects related to capex and indirect procurement.

The Channel Management Centre, which is the overall custodian of Blue Star channel partners and a single point contact for all channel administration, development and conflict resolution initiatives, added around 420 channel partners during the year. Currently, Blue Star has 2250 channel partners for room air conditioners, packaged air conditioning, chillers, cold rooms and refrigeration products and systems, and reaches out to customers in over 650 towns. Blue Star has also expanded the retail distribution reach of room air conditioners to about 630 retailers and distributors across the country. The Company has strengthened its brsence in Tier 2 and 3 markets by 20% over last year.

Blue Star's channel partners form the extended arm of the Company, and many of these dealers are associated with Blue Star over a decade. Several Blue Star dealers are ex-employees of the Company and therefore, well-aligned to its value proposition. They are strong advocates for the Company, which proves to be of a competitive advantage for Blue Star. Dealer satisfaction surveys are conducted periodically, and their issues are addressed across various forums.

Key dealer policies across operating divisions were revised for enhanced alignment with the changing business environment. Numerous developmental and motivational programmes, including foreign incentive trips and felicitation of star performers with annual awards, were undertaken during the year. The Star League comprises a brmium club of Blue Star's top-performing, exclusive sales and service dealers who are honoured with the Company's Star League Gold, Silver and Classic Memberships, based on their business performance. Grand annual award events are organised at striking, get-away destinations for Star League dealers to recognise their achievements and valuable contributions to the Company.

CORPORATE RESTRUCTURING

Over the last couple of years, the Blue Star Group has gone through multiple rounds of strategic restructuring initiatives. The primary driver behind these restructuring initiatives was to enable Blue Star to generate additional resources, in order to support the next phase of growth of its core air conditioning business and related diversification opportunities. In addition, the restructuring was also undertaken to consolidate asset ownership, simplify the holding structure, address non-performing assets, monetise non-core assets and consequently, strengthen the Balance Sheet position of the Company.

Accordingly, in FY15, the Professional Electronics and Industrial Systems (PE&IS) business was transferred to Blue Star Engineering & Electronics, a wholly owned subsidiary of the Company. Simultaneously, Blue Star Design and Engineering Ltd, another wholly owned subsidiary was merged with Blue Star Engineering & Electronics. Housing the PE&IS business in an independent legal entity is expected to provide strategic visibility and growth impetus to this business. Implementation of this round of restructuring has been completed and given effect to, partly in FY15 and also in the year under review.

During FY16, Blue Star Infotech Ltd (BSIL), an associate investee company sold its IT business to monetise and generate substantial value for its shareholders. Having sold off the operating IT business, BSIL was left with a substantial cash corpus and a healthy lease rental-bearing commercial office property. Separately, the Boards and Shareholders of BSIL and Blue Star approved a scheme for merging BSIL and its residual Indian subsidiary, Blue Star Infotech Business Intelligence & Analytics Private Ltd (BSIBIA) with Blue Star to align Group resources. In April 2016, the Honourable High Court of Bombay approved the scheme for amalgamating BSIL and BSIBIA with Blue Star, with April 1, 2015 as the appointed date. As a result of this amalgamation, the FY16 financial statements of Blue Star include nine months of BSIL's IT operations as well as the sale proceeds of the IT business.

The execution and implementation of these multiple and rather complex rounds of restructuring have come to an end in May 2016.

Since the financials for both FY15 and FY16 embed accounting impact of disparate restructuring elements, the financial results for FY16 are not comparable with FY15 across many aspects on a plain reading. However, since the restructuring was driven by the primary strategic objective to consolidate and simplify asset and business investment ownership, the consolidated financial results for both the years brsent a better comparability for understanding and analysing operating performance of the Company in FY16.

FINANCIAL PERFORMANCE ANALYSIS:

The analysis of the financial year performance for the year ended March 31,2016, in comparison to the brvious year, on a consolidated basis is as under:

1. INCOME

Total Operating Income (net of excise duty) for the year ended March 31, 2016 was Rs.3770.11 crores as compared to Rs.3181.94 crores in the brvious year, an increase of 18.5%.

2. COST OF SALES, WORK BILLS AND SERVICES

The cost of sales, work bills and services during the year was Rs.2607.39 crores as compared to Rs.2214.34 crores in the brvious year. This cost was 69.2% of Total revenue from Operations (net) as compared to 69.6% in the brvious year.

3. EMPLOYEE REMUNERATION AND BENEFITS

Employee cost for the year at Rs.346.26 crores increased by 29.5% as compared to Rs.267.46 crores in the brvious year. The employee cost was 9.2% of the Total Income as compared to 8.4% in the brvious year.

4. OPERATING AND GENERAL EXPENSES

Operating and General expenses increased to Rs.600.30 crores from Rs.532.87 crores in the brvious year. As a percentage of Total Income, the Operating and General expenses for the year were at 15.9% as compared to 16.7% in the brvious year.

5. FINANCIAL EXPENSES

Financial cost for the year was lower at Rs.42.74 crores as compared to Rs.48.53 crores in the brvious year. The financial cost for the year reduced to 1.1% of the Total Income as compared to 1.5% in the brvious year.

6. DEbrCIATION

Debrciation charge for the year increased to Rs.60.48 crores as compared to Rs.43.15 crores in the brvious year, primarily due to BSIL's debrciation charge of Rs.8.4 Crore.

7. EXCEPTIONAL ITEMS

Exceptional items for the year were a loss of Rs.1.30 crores as compared to Rs.41.44 crores in FY15.The Exceptional items in FY16 include cost update on major contracts of Rs.27.24 crores (FY15 - Rs.58.25 crores); surplus on sale of the IT business of Rs.46.09 crores; cost of bonus expenses for earlier years, pursuant to retrospective amendment in statute of Rs.1.46 crores; and cost of Voluntary Retirement Scheme and other expenses on closure of plant of Rs.18.69 crores.

& PRIOR PERIOD INCOME

During the year, the Company reassessed its effective control and interest in Blue Star Qatar WLL, and accordingly Rs.6.92 crores was recognised as prior period income.

9. TAXATION

Tax expenses for FY16 were Rs.26.94 crores as compared to negative charge (due to creation of deferred tax assets) of Rs.7.89 crores in FY15. BSIL tax includes capital gains tax of Rs.22.83 crores on the sale of IT business.

0. NET PROFIT

Net Profit for the year increased by 100.0% to Rs.108.38 crores as compared to Rs.54.18 crores in the brvious year. Net Profit was 2.9% of the Total Income as compared to 1.7% in the brvious year.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has established an internal control system, commensurate with the size, scale and complexity of its operations. In order to enhance the standards of controls and governance, the Company has adopted COSO 2013 framework to ensure that robust internal financial controls exist in relation to operations, financial reporting and compliance. In addition, the internal audit function reviews and reports to the Audit Committee around compliance with internal controls, the efficiency and effectiveness of operations as well as key process risks. During the year, the internal controls were tested and found effective, as part of management's control testing initiative.

RISKS AND CONCERNS RISKS

The primary operating risks which could impact the Company, relate to volatile exchange rates, interest rates, credit risks, procurement concentration risk, volatile commodity prices risks, changes in tax and other legislations as well as risks arising out of high input costs, especially in the case of fixed price contracts, health and site safety, and changes in technology which impact the Company's product offerings. In addition, a general slowdown in the global and local economy tends to aggravate risks faced by the Company. Blue Star lays great emphasis on risk management, and has put in place a robust system for risk identification, risk assessment and mitigation with strong internal-controls, at both business groups and at the corporate level. Significant risks across the entity are reviewed periodically by the Risk Committee. Further, the mitigation action plans are integrated with the internal audit plans and embedded in the strategic business plan of each business group.

CONCERNS

On a macro-economic level, there is an increase in investments in Government-related projects of the centre as well as the states. However, private sector investments remained subdued. While the complete revival of the commercial real estate segment is likely to take some more time, the macro-economic indicators are positive to fuel growth.

HUMAN RESOURCES

During the review period, the Company reduced its total permanent head count marginally to 2567 as on March 31,2016, as compared to 2599 as on March 31, 2015 (The headcounts are consolidated for Blue Star and Blue Star Engineering & Electronics). Around 200 campus recruits from reputed professional colleges were centrally appointed, and were allocated to respective functions based on business needs. People development continued to be the focus, with nearly 33,000 man days of training delivered during the year, which included technical, functional and behavioural training. To develop future leaders from within the organisation, select senior managers underwent talent development programmes to build on managerial effectiveness and leadership skills.

During the year, the Environment, Health and Safety (EHS) function conducted targeted safety training programmes on various aspects of safety for over 25,000 personnel across all operational sites, offices and factories. Over 1700 safety audits were conducted across divisions. Employee health and wellness comprising food and food equipment, hygiene of food handlers, indoor air quality, drinking water and illumination levels of office spaces was mapped across Blue Star's main offices as well as guest houses, and corrective steps undertaken as required. Renowned health experts were invited to address employees on various lifestyle diseases at major locations across the country.

INFORMATION TECHNOLOGY

The Company embarked on a digital transformation programme, leveraging technologies such as mobility, internet of things and cloud computing, primarily aimed at solutions for channel enablement, customer satisfaction as well as enhancement of products and services. Several mobile applications and software products were launched for customers, employees, dealers and consultants. To meet the requirements of its growing customer base and future growth plans, Blue Star upgraded its IT infrastructure and systems, and set up a disaster recovery system to mitigate risks related to core systems. An analytics solution was deployed to manage demand forecasting and replenishment planning, whilst a product catalogue application enabled customers and business partners to view Blue Star's entire range of products on a smart phone. A mobile sales force automation application, with a focus on enhancing sales activities and improving responsiveness, was also launched during the year. The Company migrated to a next-generation customer call handling system which is integrated to its core customer service management platform. Several SAP initiatives resulted in optimisation of internal processes as well as introduction of additional controls.

BRAND EQUITY

In terms of advertising and brand communication, the Company enhanced its advertising spends, given its continued thrust on the residential segment. Blue Star continued with its differentiated value proposition of 'Nobody Cools Better' for the residential audience which highlights the unmatched superior expertise, experience and deep understanding of the science of cooling that Blue Star offers to its customers. The striking advantage of Blue Star's Inverter AC is brcision cooling, which was widely publicised with a set of TV commercials, supported by ads in mainline dailies, cinema and hoardings. The Company continues to invest in its digital marketing efforts in social media as well as the internet, considering that most Blue Star buyers belong to the highest socio-economic category (SEC A), who are active on the internet.

Apart from mass media, the Company also made affordable investments in field marketing. These include participation in trade exhibitions, sponsorships of CII and other important events, IDEAC (Interior Designers, Architects and Consultants) relationship management, customer events and public relations through the Press. Several brss conferences announcing the launch of the new room air conditioners range were held in Tier 1, 2 and 3 cities, which garnered huge publicity across media.

During the review period, the Company was recognised among the 'Best Corporate Brands' by the Economic Times. Blue Star's persistence with its strategy of integrated marketing communication comprising mass media, field promotions, digital platform, Press, events and social media, apart from one-to-one marketing, has helped the Company fortify its brand equity amongst customers and consumers.

CORPORATE SOCIAL RESPONSIBILITY

The Company has established a department for Corporate Social Responsibility (CSR), which is headed by a professionally-qualified senior manager, with the requisite domain knowledge, for planning and execution of the scheduled activities with proper due diligence, so as to ensure honest and intended application of amounts spent.

The Company was required to spend a sum of Rs.134 lakhs by March 31, 2016 towards activities, as stipulated under Schedule VII of the Companies Act, 2013. The Company has spent a total of Rs.118.56 lakhs towards Blue Star's CSR initiatives during the year, which includes vocational training in the area of AC&R, pursuant to the Government's 'Skill India' mission; community development activities around its manufacturing facilities; donation of Blue Star equipment to deserving not-for-profit organisations; building toilets in Zila Parishad (ZP) Schools as part of the Government's 'Swachh Bharat Initiative'; contribution to the Tamil Nadu flood relief activities as well as CSR staffing expenses.

Vocational training initiatives by the Company executed through meaningful partnerships in industry-specific programmes with NGOs, industry bodies and other like-minded corporate bodies across the country have helped in skilling school drop-outs in the vocation of AC&R. These vocational training initiatives are also being extended to MEP services. The Dadra factory hired apbrntices under National Employability Through Apbrnticeship Program (NETAP) - a Public Private Partnership of TeamLease Skills University; CII; All India Council for Technical Education; and National Skills Development Corporation under the HRD Ministry. This initiative lends the much needed thrust for on-the-job training, and boosts job creation by aligning skills of the workforce to the industry's needs.

During the year, toilets were built for deserving ZP schools, grappling with insufficient sanitation facilities, around Blue Star's factories at Wada and Dadra, providing for this basic need to over 900 students. Blue Star is also responsible for the upkeep of these toilets, as maintenance of toilets is a matter of concern in the country. The Company also organised sensitisation sessions on sanitation and hygiene practices for the students, parents and teachers through NGOs such as Navjeevan Lokvikas Sanstha at Wada. Infrastructure facilities of Government schools were also improvised at Dadra and Himachal, as part of a public-private partnership model. Air conditioners and water coolers have been donated to not-for-profit organisations such as the ZP School at Himachal, St Joseph's College in Tamil Nadu, Bombay Leprosy Project in Mumbai, Akshar Trust at Vadodara, Apollo's Community Health Project at Chittoor and several others. Blue Star made a contribution to CII Foundation during the year towards relief efforts and rehabilitation measures during the Tamil Nadu rain and floods disaster.

In addition, Blue Star also made donations totalling Rs.15 lakhs to Blue Star Foundation, India Cares Foundation as well as Multiple Sclerosis Society of India. The Company actively participates in the Affirmative Action Agenda of CII and contributed for Development of Dalit Entrebrneurs by promoting supplier diversity, imparting management techniques and mentoring.

Blue Star Foundation (BSF), a public charitable trust established by Blue Star Limited, has been actively supporting philanthropic causes for over three decades now. BSF's charter covers education of less privileged children, health/medical support to marginalised communities and poverty alleviation. These include Kalinga Institute of Social Sciences in Odisha for holistic educational opportunities for tribals; Jyot Bahu-Uddeshiy Samajik Sanstha, Thane for school drop-outs to rejoin mainstream education; The Anchorage, Mumbai offering opportunities for education and vocational training for the mentally challenged; Ashray Akruti, Hyderabad towards a special school for children with varying degrees of hearing impairment; Seva Sadan Society in Mumbai towards supporting girls in difficult circumstances; Indian Association of Blood Cancer & Allied Diseases, Kolkata for medical relief of cancer-affected patients; and several others.

The Mohan T Advani Centennial Scholarships by Blue Star Foundation render financial assistance to few undergraduate engineering students studying in Government recognised, un-aided colleges, during the year. These scholarships are for students in the Mechanical (Production)/Electrical/Electronics engineering disciplines. The initiative aims at holistic support for these students, inclusive of mentorships and internships to brpare them for future work life.

CORPORATE OUTLOOK

With the heat wave conditions brvailing across the country, room air conditioners and refrigeration products sales are off to a good start. The wide product range, including state-of-the-art inverter split air conditioners; enhanced distribution reach; and brmium brand equity will further strengthen the performance of the products business. The electro-mechanical projects business has shown modest signs of improvement in some markets and application segments, though the overall market has yet to pick up. Blue Star's new 100% inverter VRF air conditioner is gaining wide acceptance across national and international markets. With additional product lines such as water purifiers, air coolers and air purifiers being added to the Company's portfolio, Blue Star expects to sustain its growth momentum in FY17.