Annual Report - Blue Star - 2009-2010

BLUE STAR LIMITED

ANNUAL REPORT 2009-2010

DIRECTOR'S REPORT

The Directors are pleased to present their 62nd Annual Report and the
Audited Accounts for the year ended March 31, 2010.



HIGHLIGHTS OF 2009-10:

* Total Income grew only marginally to Rs. 2556.11 crores.

* Profit After Tax increased by 17% to Rs. 211.49 crores from Rs. 180.29
crores in the previous year.

* Earnings per share reached Rs. 23.52 (face value of Rs. 2/-) compared to
Rs. 20.05 in the previous year.

* A dividend of Rs. 8.00 per share (Rs. 7.00 for last year) has been
recommended.

* Year-end borrowings reduced for the third year in succession to a low of
Rs. 8.93 crores from Rs. 27.28 crores in the previous year.

SUMMARISED FINANCIAL RESULTS:

(Rs. in crores)
April 2009 April 2008
- March 2010 - March 2009

Total income 2556.11 2524.38

Profit before interest, depreciation
and taxation 305.84 281.35

Financial Expenses 8.45 17.25

Depreciation 34.73 25.88

Add: Profit on sale of investments 13.96 -

Profit before tax 276.62 238.22

Provision for taxation 67.21 60.90

Add/(Less): Deferred Tax 2.08 2.97

Profit after tax 211.49 180.29

Add: Balance brought forward 165.86 119.22

Total available for appropriation 377.34 299.51

Less: General Reserve 80.00 60.00

Proposed Dividend 71.95 62.95

Corporate Dividend Tax 11.95 10.70

Balance carried forward 213.44 165.86

DIVIDEND:

The Directors have proposed a dividend of Rs.8.00 per equity share. The
dividend will absorb Rs.83.90 crores including Corporate Dividend Tax.

OPERATING PERFORMANCE:

The economic slowdown impacted the Company's revenue growth during the
year. While the Electro Mechanical Projects and Packaged Airconditioning
segment showed marginal growth, Cooling Products and Professional
Electronics and Industrial Systems recorded a small decline. However, on
the profit front, Cooling Products and Professional Electronics and
Industrial Systems segments recorded positive growth which offset the small
reduction in the Electro Mechanical Projects and Packaged Airconditioning
segment.This, together with an exceptional item of sale of investments,
increased the Profit After Tax by 17% during the year.

FINANCIAL PERFORMANCE:

Effective cost control measures coupled with lower cost of finance helped
the Company to cope with flat revenues. Financial expenses including
interest cost reduced by over 50%. However, slow cash collections and
increased Sundry Debtors reduced the net cash flow from operations.
Nevertheless, good inventory management and suppliers' credit kept overall
borrowings under control - a marked reduction to Rs. 8.93 crores from
Rs.27.28 crores in the previous year.

The Company made additional investments in fixed assets amounting to
Rs.47.47 crores during the year which was financed entirely out of internal
resources.

The Earnings per share increased by 17% to Rs. 23.52 per equity share of
Rs. 2/- each.

EXPORT & FOREIGN EXCHANGE EARNINGS:

Export income declined sharply during the year, with product exports
declining by 51% and commission income by 7%. There were no project exports
during the year.

Foreign exchange outflow during the year was Rs. 475.49 crores as compared
to Rs. 510.45 crores during the previous year.

DIRECTORS' RESPONSIBILITY STATEMENT:

The Directors would like to inform the members that the Audited Accounts
for the financial year ended March 31, 2010 are in full conformity with the
requirement of the Companies Act, 1956. These financial results have been
audited by the statutory auditors M/s S R Batliboi & Associates. The
Directors further confirm that:

1) In the preparation of the Annual Accounts, the applicable accounting
standards have been followed.

2) The accounting policies are consistently applied and reasonable, prudent
judgment and estimates are made so as to give a true and fair view of the
state of affairs of the Company at the end of the financial year and of the
profits of the Company for that period.

3) The Directors have taken proper and sufficient care for the maintenance
of adequate accounting records in accordance with the provisions of the Act
for safeguarding the assets of the Company and for providing and detecting
fraud and other irregularities.

4) The Directors have prepared the Annual Accounts on a going concern
basis.

DIRECTORS:

It is proposed to appoint Mr Vir S Advani as a Wholetime Director of the
Company with effect from July 1, 2010. Mr Suresh N Talwar and Mr Gurdeep
Singh will retire from the Board by rotation and being eligible, offer
themselves for re-election.

EMPLOYEES:

Due to the business slowdown, employee strength was prudently contained. As
on March 31, 2010, total employee strength stood at 2603, slightly lower
than 2620 in the previous year. The Company provided modest performance
linked increases in salaries which helped to maintain employee morale.

The employee relations scenario continued to be harmonious and congenial
and the Company signed a short term settlement with the Union during the
year.

Safety awareness among the employees and business partners was enhanced
during the year. Over 4000 employees and technicians/workers of business
partners were covered under the corporate safety training programme. Safety
systems and processes were developed for project sites and factories and
implemented to ensure a safer work place.

DISCLOSURE OF PARTICULARS:

Information as per Section 217(1)(e) and 217(2A) of the Companies Act,
1956, read with the rules made thereunder relating to conservation of
energy, technology absorption, foreign exchange earnings and outgo and
particulars of employees respectively, are given in Annexures A and B
forming part of this report. A Management Discussion and Analysis Report,
as required under Clause 49 of the Listing Agreement is published
separately in this Annual Report.

For and on behalf of the Board

Ashok M Advani
Place: Mumbai Executive Chairman
Date : May 12, 2010

Information pursuant to Companies (Disclosure of particulars in the Report
of the Board of Directors), Rules 1988.

CONSERVATION OF ENERGY:

a) Energy conservation measures taken:

The Company is committed to produce eco-friendly energy efficient products.
The platform for developing new products is energy efficiency. The Company
has already implemented the energy labeling programme for room
airconditioners, which was made mandatory with effect from January 2010.
The Company has also developed high energy efficient chillers to meet the
changing market demand.

Energy consumption in the Company's manufacturing facilities is not a major
cost factor. While energy conservation at the manufacturing facilities is
an ongoing process, during the year under review, several initiatives were
undertaken to reduce energy consumption. Some of these include installation
of energy savers on hydraulic pack, automation of belt conveyor and slat

conveyor using sensors, arresting air leakages to reduce the load on air
compressors, upgradation of powder coating plants, cascading in the pre-
treatment process to reduce water consumption, redistributing electrical
load for equipment efficiency across three phases and replacing
conventional lighting systems with CFL/LED type lighting, amongst others.
These efforts helped reduce energy consumption during the year.

The Company has a certified. Energy Conservation Audit team, which also
helps customers in identifying and addressing their energy conservation
plans.

b) Additional investments and proposals, if any, being implemented for
reduction of consumption of energy:

While no major additional investments are envisaged, efforts to conserve
energy will continue and new investment proposals will be considered based
on the recommendations of the Energy Management team.

c) Impact of measures taken:

There was a reduction in electrical and fuel consumption, improved power
factor and saving in cost of production.

RESEARCH AND DEVELOPMENT:

a) Specific areas in which R&D carried out by the Company:

In order to meet the growing demand for latest technology products and to
compete in the market place, the Company decided to strengthen the R&D
activities. The Company set up a laboratory for testing room
airconditioners and a new test facility for air cooled and water cooled
chillers as per international standards. Investments have also been made to
upgrade existing laboratories to meet the increasing demand.

With the need for integration of various technologies, specific cells
address software, electrical and electronics controls, CFD analysis and
laboratory measurement requirements. The strength of the R&D department has
been increased substantially.

There are Government proposals for phasing out HCFC refrigerants and
extending the labeling programme to other products in the coming years. The
present labeling requirements for room airconditioners will also be revised
for better efficiency. The Company has formed a team to address these
requirements.

During the year, a new range of room airconditioners complying to the star
labeling programme was developed. The Company also extended the range of
high efficiency chillers and added roof top units for export markets.

A range of precision control packaged units, using DC fan technology was
introduced to meet the high energy efficiency requirements. The Company
also developed scroll chillers and packaged units with eco-friendly
refrigerants.

b) Benefits derived as a result of the above R&D:

The development of new products has helped to remain at par with the
technologies offered by some other companies and in retaining and improving
market share.

c) Future plan of action:

The Company will continue to invest in infrastructure, additional manpower
as well as restructuring and upgrading the R&D function. The Company
intends to get a few selected products certified from international
agencies and also prepare to meet the legislative requirements on the
energy labeling and HCFC phase-out programmes. The Company also proposes to
introduce new technologies for heat exchangers.

d) Expenditure on R&D:

(Rs. in lakhs)
2009-10 2008-09

a) Capital 280.87 9.46

b) Recurring 688.93 191.86

Total 969.80 201.32

Total R&D expenditure as a percentage of
total turnover 0.39% 0.08%

TECHNOLOGY ABSORPTION, ADAPTATION AND INNOVATION:

a) Efforts made towards technology absorption, adaptation and innovation:

Efforts continued in strengthening the R&D facilities in order to provide a
comprehensive range of products complying with the legislative requirements
and to suit market needs. This also enabled widening the export
opportunities, import substitution and adaptation of imported technology to
suit the Indian market. Training was imparted to technical staff as an
ongoing process.

b) Benefits derived as a result of the above efforts:

Availability of energy efficient and environment friendly airconditioning
systems and equipment, wider range of products, improved quality and
product designs and cost reduction were amongst the benefits derived.

c) Information regarding imported technology:

No technology was imported during the past five financial years.

MAJOR ITEMS OF FOREIGN EXCHANGE EARNINGS AND OUTGO:

a) Activities relating to exports, initiatives taken to increase exports,
development of new export markets for products and services and export
plans:

Discussed in detail in the Management Discussion and Analysis Report.

b) Total foreign exchange used and earned:

(Rs. in lakhs)
2009-10 2008-09

Total foreign exchange used 47549.44 51045.80
Total foreign exchange earned 12942.29 23397.57

For and on behalf of the Board

Ashok M Advani
Place: Mumbai Executive Chairman
Date : May 12, 2010

MANAGEMENT DISCUSSION AND ANALYSIS

INTRODUCTION:

Blue Star is India's leading central airconditioning and commercial
refrigeration company, fulfilling the cooling requirements of a large
number of corporate and commercial customers. It also offers expertise in
allied contracting activities such as electrical, plumbing and fire
fighting services. Blue Star's other businesses include marketing and
maintenance of imported professional electronic and industrial systems and
execution of industrial projects.

Blue Star's business model of providing end-to-end solutions as a
manufacturer, contractor and after-sales service provider coupled with
differentiated products and expert solutions have contributed to sustained
growth and leadership.

BUSINESS SEGMENTS:

Blue Star primarily focuses on the corporate and commercial markets. These
include institutional, industrial and government organizations as well as
commercial establishments such as malls, multiplexes, hotels, hospitals,
showrooms, restaurants and boutiques. In accordance with the nature of
products and markets, business drivers, and competitive positioning, the
lines of business of Blue Star can be segmented as follows:

ELECTRO MECHANICAL PROJECTS AND PACKAGED AIRCONDITIONING SYSTEMS:

This business segment covers the design, manufacturing, installation,
commissioning and maintenance of central airconditioning plants,
packaged/ducted systems and VRF systems, as well as contracting services in
electrification, plumbing and fire fighting. After-sales services such as
revamp, retrofit and upgrades as well as energy management and green
building services are also included in this segment.

COOLING PRODUCTS:

Blue Star offers a wide variety of contemporary and differentiated room
airconditioners. It also manufactures and markets a comprehensive range of
commercial refrigeration products and cold chain equipment.

PROFESSIONAL ELECTRONICS AND INDUSTRIAL SYSTEMS:

For over five 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. The Company is also in the business of specialized industrial
projects for the steel industry.

FINANCIAL HIGHLIGHTS:

In spite of a subdued economic environment, Blue Star performed reasonably
well, mainly due to effective cost control and favourable input costs.
Total Income was Rs.2556.11 crores for the year ended March 31, 2010,
compared to Rs. 2524.38 crores in FY09. Profit Before Tax (excluding
exceptional items) grew 10% to Rs. 262.66 crores. Net Profit at Rs. 211.49
crores registered an increase of 17% over last year. Earnings per share for
FY10 (Face value of Rs. 2.00) stood at Rs. 23.52 vis-a-vis Rs.20.05 in the
previous year. Return on Capital Employed (ROCE) declined to 55.3% from
60.3%, while Return on Shareholders' Funds was 43.0% compared to last
year's figure of 49.1%.

INDUSTRY STRUCTURE AND DEVELOPMENTS:

AIRCONDITIONING:

In 2009-10, the estimated total market size for airconditioning in India
was around Rs. 10750 crores. Of this, the market for central
airconditioning, including central plants, packaged/ ducted systems and VRF
systems was about Rs. 5250 crores, while the market for room
airconditioners comprised the balance Rs. 5500 crores.

During the year, the economic slowdown continued to affect certain segments
such as retail and builders. Project expansion plans in the IT/ITES segment
were also delayed mainly due to the impact of the US recession on this
segment. However, the airconditioning marketwitnessed significant growth in
segments such as healthcare, hospitality, data centres and education. In
addition, infrastructure segments such as airports, power plants, steel and
metro rail were unaffected by the economic downturn and project plans were
largely on track.

COMMERCIAL REFRIGERATION:

The commercial refrigeration segment includes a wide range of products such
as cold storages, water coolers, bottled water dispensers, deep freezers,
milk coolers, bottle coolers and ice cubers.

The Indian food and grocery vertical is one of the fastest growing
segments. This largely comprises fruits and vegetables, dairy and milk
products and aqua and marine products. The distribution and storage of
perishable commodities require the application of various temperatures and
humidity levels from the farm to the final consumption point.

India is the largest producer of fruits and second largest producer of
vegetables in the world. The wastages due to inadequacy in the cold chain
has been felt by the policy makers as well as the private sector, in the
context of food security concerns experienced across the globe. In the
present scenario, the cold chain infrastructure is characterised by long
and fragmented supply lines leading to high wastage. The major constraints
on the development of the cold chain industry are high capital cost and
electricity bills coupled with low rental revenues and inadequate
availability of concessional finance.

The Ministry of Agriculture in co-ordination with CII has constituted a
Task Force, comprising experts from all stakeholders and a realistic target
for developing a cold chain has been mapped out. The Task Force has
proposed the creation of a 'National Green Grid' to develop a seamless cold
chain network to balance demand and supply issues with remunerative price
to farmers and to deliver quality produce in the hands of consumers.

In addition, the Government of India has announced several incentives like
capital subsidy, project import status for private investments and schemes
like Rashtriya Krishi Vikas Yojana for various state initiatives. It is
expected that in the coming years, a significant amount of private and
public investments will flow into this segment.

SEGMENT-WISE ANALYSIS:

The revenue and results break-up in terms of business segments were as
follows:

ELECTRO MECHANICAL PROJECTS AND PACKAGED AIRCONDITIONING SYSTEMS:

The electro mechanical projects and packaged airconditioning business
continued to be the largest segment accounting for 71 % of the Company's
Total Revenue. While the demand from the ITATES, retail and builder segment
was muted, the Company received several orders from the healthcare,
hospitality, education and infrastructure segment including airports, power
plants and metro rail.

In the central plant equipment segment, the Company offers a range of screw
and scroll chillers in both air cooled and water cooled versions as well as
air distribution products such as air handling units and fan coil units.
The year under review saw significant demand for the Company's eco-
friendly, next-generation and ASHRAE / ECBC-compliant range of screw
chillers incorporating R134a refrigerant. Encouraged with the response, the
Company plans to set up a Euroventcertified test lab, a first-of-its-kind
in India, to test these chillers locally.

During the review period, the Company won a prestigious Rs. 172 crores
integrated MEP order for the proposed Delhi Airport Metro Express Line.
This line is envisaged to be a 23 km long underground/ at grade/ elevated
high speed rail corridor which will connect New Delhi International Airport
to various metro stations. The rail corridor is being developed with state-
of-the-art technology and will be comparable to the world's best airport
link expresses such as the ones in Heathrow and Hong Kong. Blue Star's
scope covers design, supply, fabrication, erection, testing, inspection and
commissioning of HVAC, Electrical, Fire Fighting, Plumbing, Station
Management System, Access System and Track Side Auxiliary System for the
entire project. The project is expected to be completed before the 2010
Commonwealth Games.

The Company strengthened its foothold in the healthcare segment during the
year with several prestigious orders including orders from Bangalore
Medical College; ESIC hospitals at Jaipur, Bengaluru, Manesar and Mumbai;
Narayana Hrudayalaya, Hyderabad and Jaipur; Apollo Hospitals, Karaikudi;
Rockland Hospital, Manesar; Sadar Hospital, Ranchi and numerous other
hospitals.

The Company also booked some notable orders from power sector majors such
as NTPC, Vindhyachal, Rihand and Nabinagar; Reliance Infrastructure,
Raghunathpur; Essar, Mahan and Salaya; and Adani, Tiroda, amongst others.
From the steel sector, the Company received notable orders from IISCO,
Bokaro and Rourkela, and Jindal, Angul.

The Company continued to aggressively pursue business from the Government
of India and won prestigious orders from CPWD and several other
Government/PPP agencies. It also executed a project for the recently
inaugurated state-of-the-art Tamil Nadu State Legislative Assembly Complex.
The Company was responsible for providing turnkey airconditioning and
electrical services for Circle 1 & 2, which houses the Chief Minister's
office.

Other prestigious business booked by the Company during the year include
orders from Wipro Data Centre, Greater Noida; Hewlett Packard, Mumbai; CA
India Technologies, Hyderabad; Synthesis Business Park, Kolkata; Infosys,
Mysore and Pune; National Centre for Biological Sciences, Hyderabad;
Indiabulls Real Estate Company, Mumbai; Sheth Developers, Mumbai; Vrindavan
Techvillage Ph-II, Bengaluru; Boomerang IT Campus, Mumbai; C-DAC Innovation
Park, Pune; Sirifort Training Centre, Delhi; Jaypee Greens Hotels & Resort,
Greater Noida; Shangri-La Hotel, Mumbai; IBM-Airtel Data Centre,
Bhubaneswar; Kohinoor City, Mumbai; DLF Magnolias, Gurgaon; RBS Corporate
Office, New Delhi; Inorbit Mall, Bengaluru; HBN Commercial Centre,
Bathinda; Mariott, Bengaluru and many more.

Blue Star's ducted systems range comprises packaged airconditioners as well
as ducted split airconditioners. The Company also offers VRF systems;
precision control packaged airconditioners for applications where accurate
control of temperature is critical; as well as telepacs for telecom
applications. Thus, Blue Star provides the widest range, and meets every
conceivable customer requirement.

In the ducted systems segment, traditional segments such as manufacturing,
educational institutions, offices and Government took the lead in an
otherwise subdued market. There was a sharp decline in the IT/ITES and
retail segments due to deferment of fresh investment plans. While business
from big metros declined, share of business from Tier II / III towns
increased steadily, thereby contributing to a larger share of the overall
pie.

Blue Star's precision control packaged airconditioners continued to perform
well with fast growing demand from data centres, banking and telecom
segments. The Company also sustained its leadership position in the telecom
segment with its customised array of telepac airconditioners, especially
designed for the telecom industry. During the year, the Company introduced
a new range of emergency free cooling telepacs and battery coolers which
were designed as operating cost saving solutions through joint innovation
programmes with customers. The Company also performed well in the high
technology VRF airconditioning systems business, during the year.

The newly formed electrical projects business performed impressively by
cross-selling its services to existing HVAC customers as well as acquiring
stand-alone orders. Some of the prestigious orders won during the year
include TCS, Secunderabad; Shangri-La Hotel, Mumbai; Inorbit Mall,
Bengaluru; Nokia Siemens, Bengaluru; Paradise Mall, Delhi; Wipro Data
Centre, Delhi; Brigade Sheraton, Bengaluru; Park Hyatt, Chennai; Gulmarg
Hotel, Srinagar and Main Mall, Pune. The Company also entered the Extra
High Voltage (EHV) 132 kV business domain for the first time with two
prestigious orders of substations and transmission lines at Discencherla
and Chintal, Andhra Pradesh from Aptransco. These substations are expected
to be operational by October 2010 and will supply power to the rural
Nalgonda and the urban Ranga Reddy Districts of Andhra Pradesh.

Blue Star has also been offering plumbing and fire fighting services in
order to offer a single window, turnkey Mechanical, Electrical & Plumbing
(MEP) solution to customers. The Company won several orders for plumbing
and fire fighting services during the year, most of which were bundled with
airconditioning and electrical contracting orders.

COOLING PRODUCTS:

This business segment includes room airconditioners apart from commercial
refrigeration products and systems.

During the year,the Company launched a new range of energy labeled (star-
rated) room airconditioners. These airconditioners are available in a wide
range of 2, 3 & 5 star ratings and in multiple capacities. The Bureau of
Energy Efficiency (Ministry of Power, Govt. of India) has made energy
labeling mandatory with effect from January 7, 2010.

With the legislation finally getting implemented, Blue Star has spruced up
its product portfolio and has launched a comprehensive range of star-rated
window and wall mounted split airconditioners to meet a wide range of
requirements. The energy savings is expected to be a minimum 12% for 2-star
and goes up to 25% in the case of 5-star. The Company has also improved the
range of commercial split airconditioners by introducing flat paneled mega
split airconditioners apart from energy efficient scroll compressor-fitted
cassette and vertical split airconditioners.

Owing to the onset of early summer in the West and South, there was
enhanced demand for room airconditioners from the residential segment.
Focus on educational institutes yielded good business from schools,
professional colleges, universities and coaching centres. The National
Accounts Cell won several orders from key customers, especially banks, ATM
infrastructure providers, financial service providers and telecom players.

In the commercial refrigeration products segment, sales of chest freezers
grew well with enhanced demand from ice cream manufacturers and unorganised
grocery stores. The Company tied up with key accounts in ice cream and

dairy segments such as Amul, Havmor, Shital, Dinshaws, Vadilal, Ramani,
Lazza, Dairy Classic, Hatsun Agro, Vijaya Dairy and Milma Dairy, amongst
others, supplying significant quantities of freezers to them. Bottled water
dispenser sales recorded high growth driven by demand from small offices,
shops and residential customers. Storage water coolers registered modest
growth driven by the manufacturing sector, educational institutes, offices
and Government establishments.

In the cold chain segment, Blue Star offers a wide range of equipment
across the chain from the farm to the fork. During the year, Rajasthan
State Agriculture Marketing Board placed an Rs. 8 crores order on Blue Star
for storage of fruits and vegetables at three locations. The scope involves
civil, structural, electrical and refrigeration. In addition, Gujarat Agro
placed an order valued at Rs. 9 crores for potato storage. The Company also
booked a prestigious order valued at Rs. 8.5 crores from the Ministry of
Health and Family Welfare for vaccine storage across the country. This
project is funded by World Bank.

The Cold Chain Task Force, constituted by CII and Department of Agriculture
and Co-operation, where Blue Star is also an active participant, is working
on creating an economically sustainable cold chain model through Government
subsidy in the areas of integrated packhouses, ripening chambers, bulk cold
storages, controlled atmosphere chambers and transport refrigeration. The
cold chain is expected to handle 15% of fruits and vegetables in a time
span of 3-4 years and 40% in the time span of 5-6 years. This would mean an
investment of Rs. 22000 crores to handle 15% of the fruits and vegetables
production and Rs. 55000 crores to handle 40% of the fruits and vegetables
production in India at the current leveI. These investments would throw up
an enormous opportunity for Blue Star to aggressively pursue various cold
chain components like farm-end packhouses, multi commodity cold storages,
centres for perishable cargo and distribution centres for logistics,
amongst others.

PROFESSIONAL ELECTRONICS AND INDUSTRIAL SYSTEMS:

Over the years, the Company has changed its business model from being only
a distributor of leading global manufacturers to that of a system
integrator and value added reseller, thereby moving up the value chain. The
Company has the expertise to build a complete system around the products
offered, thereby offering a comprehensive single window, turnkey solution.

In 2009-10, the Segment continued to contribute significantly to the
overall performance of the Company. It is comprised of several strategic
business units namely Industrial Projects, Industrial Products and Systems,
Material Testing Equipment and Systems (Destructive / Non Destructive),
Data Communication Products & Services, Test and Measuring Instruments,
Analytical Instruments and Medical Diagnostic Equipment.

During the year, the Industrial Projects business performed exceedingly
well. The Company won a Rs. 45 crores order from SAIL-IISCO Steel Plant,
Burnpur for compressed air station. The plant is undergoing an expansion of
2.5 MTPA with a new blast furnace. The centralised compressed air station
will provide required dry compressed air for various industrial services as
well as instruments. Blue Star's scope includes all civil, structural work
and technological structures; compressor building; handling and hoisting
equipment including electricals; illumination; C&I; water system;
compressed air pipelines; fire protection and detection systems; roads and
drainage. The Company also won prestigious orders from other steel majors
such as Vizag Steel Plant, Rourkela Steel Plant, Tata Blue Scope and
Tinplate, during the review period.

The destructive and non-destructive testing machines business had a
relatively slow year. However, during the last quarter, there was enhanced
demand, especially from automobiles, pipes and allied industries.

MANUFACTURING FACILITIES:

Blue Star has five modern, state-of-the-art manufacturing facilities at
Thane, Bharuch, Dadra, Himachal and recently, Wada.

Thane, which is the oldest manufacturing facility in Blue Star, primarily
manufactures a range of screw and scroll chillers. It also manufactures
special chillers for the process industry. During the year, the main
emphasis was on quality and consistency through robust manufacturing
processes. Process improvements coupled with TPM initiatives helped in
reducing the throughput time thereby resulting in lower lead times. It also
helped in ramping up of production capacity by about 25% in both screw as
well as scroll chillers. The screw chiller testing facility is being
modernized with the help of DMT Germany which will help in getting the
chillers certified from ARI/Eurovent. While the lab upgradation has been
completed, the certification will be carried out during the first quarter
of FY11.

The Dadra plant is regarded as one of the best manufacturing facilities in
the country for high quality airconditioning products for domestic as well
as export markets. The product range includes packaged/ducted split
airconditioners, VRF systems, precision control packaged airconditioners
and telepacs for the telecom sector. Despite slackened demand, the plant
was able to maintain profitability by stringent control on operating
expenses coupled with prudent inventory management and enhanced
productivity. There was focus on energy management, enhancing safety
practices, value engineering and TPM, during the review period. Six sigma
and quality circle initiatives are actively practiced at the plant.

Over the last few years, the Bharuch plant has been focusing on the
refrigeration products and cold chain business and has invested in
developing modern manufacturing facilities for polyurethane sandwich panels
which has resulted in significant growth in capacity of panel production.
During the review period, layout changes were carried out in the deep
freezer assembly, resulting in enhanced deep freezer volumes. The
implementation of TPM for manufacturing excellence resulted in higher
productivity. The safety initiatives during the year enabled the plant in
receiving the safety award for 'Exhibiting excellent safety measures in
factory premises' by Gujarat Gas Ltd, for the second consecutive year.

The Himachal plant manufactures window and split airconditioners. During
the year, a new range of upgraded products was introduced to meet the now
mandatory energy labeling programme initiated by BEE (Bureau of Energy
Efficiency). The manufacturing processes, reliability lab and online run-
test setup was upgraded in line with the stringent BEE regulations. All the
star-rated models have been tested at an independent Intertek Lab. The new
initiatives including ISO, six sigma and TPM are being pursued
enthusiastically at the plant, resulting in higher operational efficiency.

This was the second full year of operation of Blue Star's latest state-of-
the-art manufacturing facility at Wada. The plant manufactures the entire
range of air handling units and specialized airconditioners for the telecom
industry. The plant is equipped with modern manufacturing facilities with
complete vertical integration. An Export Oriented Unit (EOU) is also housed
within the main plant. The EOU is capable of manufacturing air handling
units, storage water coolers and packaged airconditioning equipment. During
the year, there was proactive participation at all levels for various
initiatives such as TPM, SGA and Kaizen. The plant has also been certified
for deployment of quality management systems (ISO 9001: Version 2008) by
Underwriters Labs, USA. Vendor assessment audits for the factory conducted
by multinationals such as Danfoss and Nokia Siemens resulted in immediate
approvals.

RESEARCH & DEVELOPMENT:

Blue Star invested Rs. 9.7 crores on research and development during the
year. The Company has invested in modern product development facilities as
well as sophisticated test laboratories.

The year under review saw the development and launch of several new
products as well as entire product lines. These included a new range of
star-rated room airconditioners under the mandatory BEE energy labeling
programme. The existing air handling units range was also redesigned and a
new range was developed incorporating heat pipes and heat recovery wheels.
A few models of ducted/packaged airconditioners with a 15% improvement in
energy efficiency for green building applications were also developed.
Further, a new range of VRF systems was also introduced in capacities from
6 HP to 12 HP Specific models were developed for the exports market
including roof top and top discharge split units and heat recovery units
for fresh air applications.

The team has also initiated work on some technology projects including
phasing out of non eco-friendly refrigerants and replacing them with ozone
friendlyones; identifying an alternative to copper in heat exchangers; and
integrating components such as drives and DC motors in products to improve
energy efficiency.

EXPORTS:

On the product export front, the Company offers products such as chillers,
air handling units, fan coil units and roof top units apart from
traditional cooling products like water coolers, ducted systems and room
airconditioners. These products, which compete with global brands, enjoy a
good reputation in the Middle East market.

The product export business saw a drop in revenues during the year due to
the slack demand. The global economic slowdown adversely affected Dubai and
several other Middle East nations, with the real estate business severely
impacted. However, towards the end of the year, there was a slow recovery
in some segments. The export business registered an overall increase in
profitability due to a shift in product mix towards engineered and niche
products which enjoy higher margins. During the year, the Company signed
two MOUs - with Triangle Co., Syria and Alenaire Airconditioning Phil.
Inc., Philippines as business partners. This appointment is expected to
strengthen Blue Star's presence in West Asian and South East Asian regions.

As far as international projects are concerned, the Company has joint
ventures in Qatar as well as in Malaysia. During the year, the Company
continued to be selective in pursuing only projects with reasonable
margins.

AIRCONOITIOIG AID REFRIGERATION SERVICE:

Blue Star continues to retain its eminent position in the market place as a
superior value added service provider. The total tonnage maintained under
various categories of after-sales solutions make the Company the largest
after-sales service provider in the country. While the customary warranty
and annual maintenance services continues to be the mainstay, the Company's
focus into the service parts and accessories arena has resulted in
increased responsiveness and easy availability of genuine parts. In
addition, a variety of value added services in the areas of energy, air and
water management as well as Green Building certification and consultancy
have been widely accepted. The Company has begun to provide Total Facility
Management solutions and has built the required infrastructure to meet the
requirements of large sized industries, IT/ITES campuses and commercial /
public utilities.

As a result of Blue Star's Energy Audit recommendations - carried out by a
strong 30-member team of BEE accredited Energy Auditors and Managers, many
customers are opting for revamp or retrofit solutions and upgrading to more
energy efficient systems. Green Building consultancy services are offered
for both new construction and existing buildings. The team comprises 3 US
Green Building Council (USGBC) certified Leadership in Energy and
Environmental Design (LEED) Accredited Professionals. In addition, its NEBB
certified personnel make Blue Star the only company in India to offer TAB
(testing, adjusting and balancing of air and hydronic systems) services to
HVAC customers.

The Company continued to focus on enhancing the quality of service
delivery, during the year. Towards this end, several developmental
programmes were implemented including certification and training of dealers
and business associates; monitoring of service delivery quality through a
Service Quality Assurance Group; and the handling of high-end technical
problems through a Service Specialists' Group. The Commissioning Services
Group which was constituted to handle commissioning services in line with
international practices resulted in higher customer satisfaction and lower
warranty expenses.

SUPPLY CHAIN MANAGEMENT:

With a significant amount being spent on outside goods, the Company has an
agile and adaptable supply chain incorporating modern procurement practices
such as long term contracts, e-procurement, time-based competition, hedging
and managing risk. During the year, the Company reduced the primary
transportation spend by better indent management and volume consolidation.
With GST expected to come in effect from April 2011, the Company is already
working out a new network design based on the hub and spoke model for
distribution, which will help it quickly migrate to the GST environment.

CHANNEL DEVELOPMENT:

The Company has a Channel Management Centre, which is the overall custodian
of Blue Star channel partners and a single point contact for all channel
development and channel conflict resolution initiatives. Blue Star has 215
systems dealers who exclusively deal in the Company's systems businesses
comprising packaged airconditioning and cold rooms and 720 dealers to sell
room airconditioners and refrigeration products.

On the channel development front, the Company implemented several
developmental and motivational programmes for its channel partners,
including trips abroad for high performing dealers. An important initiative
was in the area of site safety. A comprehensive 'Safety Policy and Manual
for Business Partners' was created and distributed to all channel partners
apart from imparting several training programmes on safety. The Company put
up 4 more Product Display Areas (PDAs) in association with its leading
dealers during the year, taking the total number of PDAs in the country to
44. The PDAs aim to provide customers with a pleasant, standardised
shopping experience, apart from the comprehensive product information that
Blue Star dealers are known for.

FINANCIAL PERFORMANCE:

The analysis of the financial year performance for the year ended March 31,
2010 in comparison to the previous year is as under:

1. INCOME:

Total Income (net of excise duty) and before profit from sale of
investments (exceptional item) for the year at Rs. 2556.11 crores increased
marginally by 1.3% over Rs. 2524.38 crores in the previous year.

2. COST OF SALES, WORK BIDS ADD SERVICES:

The cost of sales, work bills and services during the year was Rs. 1882.08
crores and was 74.5% of the revenue from sales, work bills and commission
as compared to 74.9% in the previous year. Despite an increase in the cost
of materials due to higher commodity prices for part of the year, the cost
of sales for the year was contained due to significant savings as a result
of value engineering, aided by the appreciation of the rupee in the latter
part of the year.

3. EMPLOYEE REMUNERATION AD BENEFITS:

Employee cost increased by 1% from Rs. 182.25 crores to Rs. 184.87
crores. The employee cost was 7.2% of the Total Income at the same level as
previous year.

4. OPERATING AND GENERAL EXPENSE:

Operating and General expenses amounted to Rs. 183.32 crores, reflecting a
reduction of 2% over the previous year. As a percentage of Total Income,
the Operating and General expenses for the year were at 7.1% compared to
7.4% in the previous year.

S. FINANCIAL EXPENSES:

Financial cost at Rs. 8.45 crores for the year was significantly lower than
Rs. 17.25 crores incurred in the previous year, primarily due to better
cash management and reduction in bank interest rates during the year.
Interest cost for the year was 0.33% of the Total Income as compared to
0.68% in the previous year.

6. DEPRECIATION:

Depreciation charge for the year was significantly higher at Rs. 34.73
crores compared to Rs. 25.88 crores in the previous year, mainly due to
capitalisation of SAP ERP and additional facilities at the manufacturing
plant at Wada.

7. TAXATION:

Provision for taxation for the year was Rs. 65.13 crores which is 23.5% of
the Profit before tax, as compared to 24.3% in the previous year. The
decrease was mainly due to higher tax depreciation on account of
significantly higher additions of fixed assets during the year and the
increase in the quantum of profits of the Himachal factory which are
eligible for tax holiday.

8. EXCEPTIONAL ITEM:

During the year, the Company realized a profit of Rs. 13.96 crores on the
sale of its shareholding in Rolastar Pvt Ltd and Ravistar India Pvt Ltd.

9. NET PROFIT:

Net profit after tax for the year was Rs. 211.49 crores as compared to Rs.
180.29 crores in the previous year, representing an increase of 17%. Profit
before Tax and Exceptional items for the year at Rs. 262.66 crores,
recorded a growth of 10.2% over the Profit before Tax of Rs. 238.33 crores
in the previous year. Including the Exceptional item, the Profit before Tax
for the year was Rs. 276.62 crores as compared to Rs. 238.22 crores in the
previous year.

10. CAPITAL EXPENDITURE:

During the year, the Company incurred capital expenditure of Rs. 47.47
crores as compared to Rs. 80.06 crores in the previous year. This includes
capital expenditure incurred for the SAP ERP package implemented in the
financial year and. additional investments in the manufacturing facility at
Wada.

11. ADJUSTMENTS AGAINST GENERAL RESERVE IN ACCORDANCE WITH THE SCHEME OF
ARRANGEMENT PERTAINING TO THE ACQUISITION CAF THE ELECTRICAL CONTRACTING
BUSINESS OF NASEER ELECTRICAL PRIVATE LIMITED:

The Company had in January 2008 acquired the electrical contracting
business of Naseer Electricals Private Limited (NEPL) under a Business
Purchase Agreement on a slump sale basis for Rs. 48.10 crores, including a
sum of Rs. 5 crores held in Escrow account till the conditions stipulated
in the said Agreement were fulfilled. In accordance with a Scheme of
Arrangement approved by the shareholders and sanctioned by the Hon'ble High
Court at Bombay in April 2008, the goodwill arising on the acquisition had
been adjusted against the General Reserve of the Company. Consequent upon
final settlement with NEPL, a sum of Rs. 2.22 crores was received back by
the Company from the amount held in the Escrow account and the same has
been credited to the General Reserve of the Company.

Further, in accordance with the said Scheme of Arrangement, fees and bonus
of Rs.5.26 crores paid during the year to the consultants in terms of the
said Agreement has been adjusted against the General Reserve of the
Company.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company remains committed to ensure the prevalence of an effective
internal control environment that provides reliable financial and
operational information, ensures compliance of corporate policies and
applicable statutory regulations and safeguards company assets.

The in-house Internal Audit Department is ISO 9001:2000 certified and
carries out internal audits covering all significant areas of the Company's
operations in accordance with the annual Internal Audit plan approved by
the Audit Committee. The Internal Audit Department is supported and
supplemented by external firms which carry out internal audits at the
regions and factories. The Audit Committee of the Board periodically meets
the Internal Auditors and reviews the internal audit recommendations,
auditee responses and monitors the remedial action taken.

With the successful implementation of SAP, the Company has in place a
highly integrated ERP system which has resulted in more effective and
efficient reporting and further strengthening of internal controls.

RISKS AND CONCERNS:

The Company has in place an effective Risk Management framework under which
all internal and external risks across the various businesses and functions
are periodically identified, assessed and acted upon by designated risk
owners to minimise and mitigate their impact. These risks and the risk
management process are also periodically reviewed by the senior management
and the Board to ensure their effectiveness.

The Company continues to satisfactorily address the various financial risks
relating to exchange rates, interest rates and credit risks as well as
operating risks arising out of high input costs, changes in technology,
changes in the global scenario, customer preferences, increasing size and
complexity of contracts and competitive pressures.

The strong fundamentals of the Company and its sound financial base have
placed it in a strong position to face the vagaries of the market. The
uncertain global economic scenario could affect the Indian economy. This
could impact the growth of the Company to some extent. The Company will
continue to remain vigilant and will proactively take steps to mitigate the
adverse impact, if any, arising out of these concerns.

HUMAN RESOURCES:

During the review period, the Company reduced its total head count
marginally from 2620 as on March 31, 2009 to 2603 on March 31, 2010. The
focus of the function was to control costs and yet maintain a high degree
of productivity. The Company released modest increases in salaries which
helped maintain productivity and employee morale during the year. The
Company saw harmonious industrial relations and the Company signed a short
term settlement with the Union during the course of the year.

A Central Technical Training Organisation (CTTO) was formed a few years
back to handle all the technical trainings for the Company's AC&R
businesses. In all, the CTTO delivered about 8400 man days of training for
employees as well as channel partners during the year.

ENVIRONMENT, HEALTH & SAFETY

During the year, the Environment, Health and Safety (EHS) function further
enhanced safety awareness among the employees and business partners. Over
4000 employees and technicians/workers of business partners were covered
under safety training. Safety systems and processes were developed for
project sites / factories and the same were implemented, creating a safe
work place for all stakeholders. Safety audits were conducted engaging
external agencies like Central Labour Institute, Mumbai as well as internal
safety professionals to measure safety compliance. Based on the findings,
necessary corrective and preventive measures were undertaken on a priority
basis. There was a 42% drop in the reported accidents in the organization
during the year compared to the previous year. The EHS function was further
strengthened by employing more safety professionals.

INFORMATION TECHNOLOGY:

The year witnessed the culmination of the largest ever IT project
implementation in the Company with the big-bang 'Go-Live' solution of SAP
ECC 6.0. Through the year, the solution achieved stability and is now
seamlessly operating across all business divisions and all locations. The
MIS reporting has also gained steam and almost all reports are now
generated from the SAP platform. A dedicated team of over 70 professionals
from the Company and its partners are involved in supporting the SAP
solution. The solution has helped the Company achieve uniformity in its
business processes across its divisions; automating and streamlining
operational processes; increasing productivity in operations with a role-
based solution and centralized information; extending collaboration to all
value chain partners; and improving operational performance with strategic
business insight.

BRAND EQUITY:

The Company has made substantial investments in building brand equity over
the last few years. During the year under review, as a measure of economy,
there was a moderate reduction in advertising. During the latter part of
the year, the Company launched a new TV commercial on room airconditioners
with the value proposition of 'Get office-like cooling at home' which has
met with a good response.

Apart from the mass media, the Company also made affordable investments in
field marketing. These include participation in trade exhibitions,
sponsorships of events by CII and others, IDEAC (Interior Designers,
Architects and Consultants) relationship management, customer events and
public relations through the Press. These field activities are critical and
have gone along way in complementing mass media campaigns and strengthening
brand equity.

CORPORATE SOCIAL RESPONSIBILITY:

Blue Star's Corporate Social Responsibility (CSR) philosophy is built on
three pillars namely Environment protection, Energy conservation and
Community development around our facilities.

The Company is highly committed to the cause of protecting the environment.
Energy efficiency of its products remains a corner-stone of its research
and development efforts. Air, water and energy management services as well
as LEED consultancy for Green Buildings have been part of its business and
practices. The Company has also been contributing in the technical domain
through the use of eco-friendly refrigerants in its products.

Energy Conservation goes beyond using efficient products. A huge amount of
energy is wasted nationally due to sheer ignorance and lack of awareness.
The Company is helping deserving institutions such as hospitals and
colleges to save power by conducting free walk-through energy audits. In
its efforts towards community development around the Company's facilities,
the Company continues to sponsor the vocational training courses offered by
an NGO, Kherwadi Social Welfare Association (KSWA), in Wada. This centre
has been set up to support a vocational training initiative for school and
college dropouts to make them employable contributing members of their
families and communities. Regular visits by the Company's employees have
aided in technical support to KSWA for conducting the courses.

In addition to the above CSR efforts, the Company continued to sponsor
various philanthropic causes through its charitable Trust, Blue Star
Foundation, which has been supporting activities in the areas of education
and healthcare, apart from relief measures in national calamities.

CORPORATE OUTLOOK:

In spite of the weak economic environment that led to a slow start last
year, Blue Star's profits continued to grow due to effective cost control
and favourable input costs, with the year ending on an encouraging note.
The worst of the slowdown seems to be behind us and considering the healthy
carry forward order book coupled with Blue Star's expertise, leadership and
credentials, the Company is confident of better business prospects in the
year ahead.