Eureka Forbes Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Revenue declined 8% YoY in a subdued demand environment, while EBITDA margin expanded 300 bps YoY, marking a decisive shift from the low-to-mid-single-digit trajectory of the past.
• Project Udaan launched as the new transformation strategy, targeting a D2C health and hygiene leadership position with a digital-first model, a refreshed leadership team, and portfolio rationalization already underway.
• The direct sales channel and service network are positioned as core differentiators, with management targeting conversion of a large unorganized service market and cross-category selling into cleaning and air.
• Management declined to provide any quantified guidance on revenue, margin, market share, or category breakups, citing competitive advantage and early-stage transformation.
• What to watch next quarter: Whether the "green shoots" management sees translate into a demand recovery around the festive season, and whether the margin trajectory holds as the company steps up capex and A&P investment.

Project Udaan & Transformation

• Strategy unveiled: Project Udaan aims to transform Eureka Forbes into a vibrant D2C health and hygiene leader delivering sustained, profitable growth through a strong product portfolio, best-in-class innovation, obsessive customer service, and a digital-first model.
• Portfolio exits completed: The company exited Health Conditioners, Coronaguard, the securities division, and the B2B Forbes cleaning service portfolio, recording an exceptional charge of INR 9.1 crores in Q4. These were product lines of a scale that did not contribute meaningfully.
• Leadership rebuilt: Over the last 8-9 months, management has built a new leadership team combining internal experience and external hires across functions and levels.
• Digital work in progress: Technology and digital initiatives have been kicked off, much of which is still "beneath the waterline" and will surface in the periods ahead. Sequential and year-on-year margin improvement is already manifesting as early evidence.
• Cost efficiency program: Management is assessing and quantifying opportunities across other expense lines, including legal charges at 3% of revenue and IT expenses at 2%, with work underway to drive further efficiencies over time.

Pota: "A lot of that will get manifested in the months to come, in the periods to come. The work that you are already seeing manifest and show up is, in the sequential improvement and the year-on-year improvement in margins. And the point that I made in my opening remarks is, we have now broken out from the mid-single digits to low-single digits margin trajectory."

Demand & Revenue Performance

• Top line softness: Q4 net revenue declined 8% YoY, reflecting a subdued consumer demand environment and the impact of transformation including portfolio rationalization.
• Macro headwinds acknowledged: Management described a fairly challenged macro environment depressing sentiment and consumer spend, but stated the leadership team intends to take charge and not ascribe results solely to external factors.
• Green shoots, not appreciable: Management expects the demand environment to begin improving with the coming festive season and is seeing a few green shoots, but noted they are not appreciable yet.
• Historical growth challenges: Over the last 4-5 years, structural challenges including demonetization, GST, and COVID were compounded by underinvestment in innovation, allowing the product portfolio to become outdated and creating a growth challenge in the recent past.

Pota: "We expect that with the coming festive season, that demand environment should begin to improve. We are seeing a few green shoots, but I would say not appreciably so."

Channel Strategy & Distribution

• Four-channel structure: The company operates through direct sales (company employee network plus direct franchise partners), retail (general trade and modern trade), e-commerce, and a service network of hundreds of business partners and thousands of technicians.
• Direct sales as differentiator: The direct channel enables a 45-minute to one-hour customer dialogue, making it well-suited for category creation, consumer education, and premium propositions. With digitization, this channel will evolve into a new avatar, including the passing of digital leads.
• Distribution headroom: The category is available in only a small percentage of the small domestic appliances universe, leaving abundant headroom to grow distribution in retail, expand direct sales footprint into more markets, and ride e-commerce channel growth in both metros and small towns.
• Service as a revenue stream: As the company sells products, including lower-priced ones aimed at expanding penetration, it forges a longer relationship with customers and gains access to service revenue over a 7-10 year lifetime. This base also enables replacement selling and cross-category opportunities in cleaning and air.
• Unorganized market opportunity: A large unorganized service market exists outside Eureka Forbes' purview, servicing customers at lower cost with lower quality. Many customers buying parallel services believe they are buying genuine Eureka Forbes service. The company intends to drive conversion through consumer education, legal remedies against counterfeits and spurious filters, and a D2C approach to go directly to customers.
• Channel profitability undisclosed: Management declined to provide channel-wise profitability, citing common costs across advertising, sales promotion, and corporate functions that make individual channel profitability a constraint to calculate.

Pota: "A lot of customers, who buy these parallel services are not even aware that, they are buying the unorganized sector service. They think, they are buying Eureka Forbes service. So it is our task to therefore create that awareness, to tell customers that this is the only genuine, authenticated Eureka Forbes service provider."

Product Portfolio & Categories

• Water purifiers: The core category, where Eureka Forbes is market leader "very easily." The dual task is growing penetration and driving premiumization. New launches in Q4 included Aquaguard Superio, Blaze, and Eden.
• Vacuum cleaners: A significant part of revenues and an even larger part of volumes due to lower ASPs compared to water purifiers. The company has dominant market share across conventional, hand-held, wet/dry, and robotic vacuum cleaners, with a growing presence in the upright space. The latest range of robotic vacuum cleaners launched in Q4.
• Air purifiers: Remain very small and not material. This category requires incubation, nurturing, patience, customer education, and category creation work. Management plans a stronger portfolio and work plan for air going forward.
• Category revenue breakup declined: Management declined to share specific numbers on the revenue breakup between vacuum cleaners and water filters, or how much is traded revenues.

Margins & Costs

• EBITDA margin expanded 300 bps YoY in Q4, with a sequential improvement of 61 bps, driven by cost initiatives and a relatively soft commodity environment.
• Margin trajectory shift: Q3 and Q4 margins reflect a decisive break from the low-to-mid-single-digit trajectory of the past. Management feels confident of being in the low-single digits margin space or more in the terms ahead.
• Depreciation increased due to the full-year impact of amortization of intangible assets recognized at the time of the merger.
• Deferred tax liability was recognized at the time of the merger due to business combination accounting and goes hand-in-hand with intangible assets and goodwill on the asset side. Goodwill is not amortized but must undergo annual impairment testing.
• A&P investment to continue: Management will invest in growing the category, communicating premium propositions, creating customer awareness about genuine service, and refreshing the Aquaguard brand for younger consumers, while extracting efficiencies across the spend line, especially in promotions.

Balance Sheet & Capital Allocation

• Debt reduced 72% annually on the back of focused transformation initiatives in digital collection and improved inventory management.
• Capex step-up planned: Management aims to significantly increase capex in FY24 to support the growth and retargeting agenda.
• ESOP quantification pending: Work is in progress on quantifying the ESOP impact on employee cost for FY24 and FY25; the company has just received necessary approvals.

Guidance & Commitments

Key Metrics