Ladies and Gentlemen:

Welcome to the 53rd Annual General Meeting of your Company.

Corporate Performance

The Annual Report for 2000-01 gives a comprehensive picture of the Company's performance last year. While I do not intend to review it again, I can say with pride that it was a good year. There were significant improvements in revenues, profitability and resource utilization. The higher profits enabled the Board of Directors to declare a record dividend of 55% which, incidentally, will be paid out within this week.

Economic Scene

The health of the Indian economy has become a cause for concern. GDP growth last year was only 5.8%, with each month's economic indicators showing a declining trend. Even the services sector, led by software services which was booming until late last year, has been affected. In the current year, the economic picture continues to deteriorate and growth prospects look uncertain. Economists and financial experts are unable to provide a reliable forecast of either the degree or the duration of the slowdown.

Economic revival will need a number of positive developments - a good monsoon to boost agricultural output, implementation by the Government of overdue economic reforms, and global recovery. Until then, business is not investing, investors are sitting on the fence and consumers are not spending.

Current Year

After a year of good growth, Blue Star is now feeling the impact of the economic slowdown. The unaudited 1st quarter results announced today show Total Income of Rs 109.33 crores, marginally better than Rs 108.58 crores last year. Net Profit has declined from Rs 3.16 crores to Rs 2.03 crores.

Management has already initiated a number of corrective measures to cope with the slowdown:

• To enhance sales, additional emphasis is being placed on exports. Two of our collaborators in the United States have shown interest in sourcing some of their products from us because they recognize our engineering and manufacturing strengths and our ability to offer competitive prices. An encouraging start has been made with the first buyback arrangement.
• Our dealerisation programme for sales and installation of packaged airconditioning systems and small central airconditioning plants is picking up momentum. This year, we expect to considerably extend our sales reach to cover this under-exploited market segment.
• Last year, a number of innovative, new airconditioning products developed through our own R & D efforts played an important role in boosting our sales. This year, too, we plan to upgrade and expand our product range by introducing more cost-effective designs which offer enhanced features while maintaining margins in a highly competitive market.
• Our design and engineering capability has improved to such an extent in the last few years that we are actually working jointly with one of our US collaborators to supplement their product development efforts. This will bring in valuable revenues while we gain vital experience in international R & D practices.
• At a time when many customers are deferring new equipment purchases, there is a good opportunity to renovate and refurbish their old airconditioning systems. We are actively pursuing this after sales service opportunity.
• We have restructured our wide ranging airconditioning activities into 6 divisions which will more effectively address different market segments ranging from room airconditioners to very large airconditioning projects. This reorganization is also expected to rationalize manpower which will help to reduce costs and improve productivity.

Through these measures to boost sales and cut costs, we are hopeful of achieving reasonable financial performance this year in spite of the difficult business scenario.

Shareholder Expectations

During the past decade, with the entry of foreign institutional investors and the increasing presence of mutual funds, the profile of equity investors and their expectations from companies have undergone a major shift. Earlier, small investors subscribed to shares at low prices determined by bureaucrats in the office of the Controller of Capital Issues. They bought shares and usually held onto them.

Now FIIs and fund managers buy and sell shares on a short-term basis. They are not usually concerned about a Company's long-term prospects, but in the opportunity to make a quick profit. This is the way markets operate in the USA and UK and that has now become the established basis in India as well.

But investors need to address an important question: Is it valid to blindly transplant a Western model into Indian markets? I would point out some major factors in India which would lead investors in a different direction:

• Differences in Income Tax: In the USA, dividends are treated as ordinary income and taxed at the full income tax rate, but long-term capital gains are eligible for concessional tax treatment. Hence many companies and investors abroad pay little heed to dividends in the valuation of shares. On the other hand, in India, dividend income is tax-free in shareholders' hands and is, therefore, intrinsically more valuable than equivalent capital gains.
  
  
• Preoccupation with Short-Term Results: Quarterly results abroad have become an obsession with corporates, investors and stock analysts. Companies that miss quarterly earnings expectations are treated brutally by the stock market. Share prices can drop drastically even exposing them to take-over threats. This results in excessive preoccupation with quarterly earnings.
  
  In India, for various reasons, predatory take-over bids are a rarity. Managements have greater freedom to pursue long-term business strategies which are in the interests of genuine investors. Of course, the market does punish chronic poor performance with low share prices in the long run.
  
  
• Behaviour and Regulation of Stock Markets: In the USA, the Securities and Exchange Commission (SEC) is a watchful regulator of the stock markets to enforce healthy trading practices. But the behaviour of Indian stock exchanges is much more susceptible to shady activities and weak market regulation leaves much room for improvement. The recent stock market reforms by SEBI to curb unhealthy speculation are a welcome move to modernize the Indian bourses and bring their practices in line with international norms.
  
  It is a matter of time before trading volumes and share prices revive. Until then, investors would be well advised to deal in shares of companies with established track records and credible managements.

Blue Star's Value Proposition To Investors

Given the realities of the Indian capital markets, what Blue Star strives to achieve is steady growth in earnings which is translated into a growing stream of tax-free dividends for shareholders. Since ours is not a capital intensive business, profitability and cash flow are healthy enough to provide adequate funds to finance future growth while leaving enough surplus cash for a relatively high dividend payout. Future capital needs are comfortably met by retained profits supplemented with moderate borrowings, if required. We do not intend to dilute shareholders' equity and earnings by raising additional equity in the foreseeable future.

In short, Blue Star offers a fine investment opportunity to prudent long-term investors looking for good returns with moderate risk and no dilution. It is not a scrip for short-term speculators.

In Conclusion

Before I end, I must convey my sincere thanks to all our employees and business associates for their dedicated contribution to the Company's performance. To my colleagues on the Board, I convey my gratitude for their wise counsel and guidance. We deeply value the continued patronage of our many customers. And finally, let me thank you, our valued shareholders, personally and on behalf of the Board, for your unstinted support over the years.

Mumbai
July 30, 2001