Eureka Forbes Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Volume growth returns after a long drought: Both Electric Water Purifiers and vacuum cleaners posted volume growth, an inflection point for a category that historically grew only through price increases.
• Record profitability on cost discipline: Adjusted pre-ESOP EBITDA margin hit a company-high 9.8%, up from a historical 4–5% range, driven by digitization-led efficiencies and a softer commodity environment.
• The balance sheet has been rapidly repaired: Net debt fell 85% YoY to just INR 32 crores, freeing up capacity for capex, innovation, and digital transformation.
• The grey market is the single largest untapped opportunity: Management estimates the parallel service market is larger than Eureka Forbes' own official service channel, and a structured program to convert it is now underway.
• What to watch next quarter: Whether the volume growth inflection sustains, the pace of innovation launches from the promised aggressive calendar, and early traction in converting grey-market service demand.

Volume Inflection & Demand Recovery

• Revenue decline narrowed: Net revenues fell 3.8% YoY to INR 505.3 crores, an improvement over the 8%+ declines of the prior two quarters; flat when adjusted for discontinued businesses.
• Volume, not price, drove the quarter: Growth came from volume in both water purifiers and vacuum cleaners, a shift management called an important inflection point after a long period of category growth coming only from pricing.
• Affordability unlocked first-time buyers: A campaign offering an AquaGuard at INR 6,499 drove significant growth in the value segment; more than 80% of buyers of this economy device were first-time category users. No price drop was taken in Q1.
• Volume growth was broad-based: Encouraging volume growth came across population strata: metros, Tier 1 towns, and Tier 2/3 towns.
• The category had become unaffordable: Management's strategy to grow penetration by improving affordability and accessibility is showing its first evidence in this volume growth.

Pratik Pota: "One large part of that is that the total cost of ownership between product cost and service cost has been kept prohibitively high. Therefore, as market leaders, we are now playing this role of making the category a lot more accessible, a lot more affordable, and therefore growing the category and growing the volumes."

Margin Transformation & Cost Structure

• Record EBITDA margin: Adjusted pre-ESOP EBITDA margin expanded to 9.8%, the highest ever quarterly, stepping up from a historical 4–5% range to 9%+ in the last two quarters.
• Cost levers are structural, not cyclical: Overall expenses before ESOP charge were flat sequentially and down 6.6% YoY. Digitization is the key enabler: the complaint channel mix has inverted from 70% call center to over two-thirds digital, reducing service costs while improving customer experience.
• Insourcing is replacing outsourcing: While building newer people capabilities (reflected in the employee cost line), the company has reduced dependence on outside firms and consultants by bringing work in-house.
• Employee cost now range-bound: Employee cost increased due to increments and new hiring, but management expects it to be range-bound from Q1 onwards, as the current level already factors in capability investments.
• ESOP cost is a new, recurring non-cash line: An industry-first inclusive ESOP program allotted stock options to every single manager; the quarterly non-cash ESOP cost impact is expected to be approximately INR 10 crores going forward.
• EBITDA, not gross margin, is the steering metric: Management explicitly stated it will navigate the business on overall EBITDA profitability, believing adequate flex exists across all P&L lines without pegging to a gross margin target.

Gaurav Khandelwal: "We are at a stage where if you look at a quarter 1 cost, that pretty much represents in some ways where we would want to be. It factors in the investments that have been made in capabilities. So from here onwards, one can expect that the cost is going to be range bound from where we are now."

The Grey Market Opportunity

• The parallel market is bigger than the official one: Management stated the share of customer service done by the grey market is larger than the share serviced by the official Eureka Forbes channel, though it declined to give a precise estimate given the nature of the grey market.
• Who operates in the grey market: The parallel market largely comprises local service operators with a few technicians, sometimes just one entrepreneur. In some cases, these are old Eureka Forbes partners terminated years ago who continue to operate.
• A structured conversion program is underway: The three-pronged approach covers: (1) legal action with authorities to identify and go after grey market operators, manufacturers, and distributors of fake filters; (2) creating customer awareness so consumers can discriminate genuine AquaGuard filters; (3) differentiating filters to provide visible and functional advantage.
• Demand-side unlock is equally important: Management noted that most consumers do not even know where to buy an AMC or a water filter, a gap it intends to close by making filters and service much more accessible to customers not on contract.

Gaurav Khandelwal: "I think the unlock to this opportunity is not just from a supply side, where it is on grey market operators, but equally from a demand side. Because come to think of it, if most of us are asked, where can you buy an AMC or a water filter, we may not even know, you know, but that would not be the case in many other categories."

Channel & Portfolio Strategy

• Channel mix is now equitable: Direct sales is no longer the dominant channel; the contribution of direct, retail, and e-commerce channels is now equitable and symmetric.
• Channels play differentiated roles: Direct sales remains focused on premiumization, replacement selling, and category creation. Retail distribution expansion is best led by the economy offering: once an economy product enters an outlet, the entire portfolio can be cross-sold.
• Water strategy is two-track: Grow penetration by identifying and unlocking category barriers, while simultaneously driving premiumization through innovations, differentiated value-added offerings, and new form factors.
• Cleaning strategy mirrors water: Grow category penetration (vacuum cleaner penetration is even lower than water purifiers) while doubling down on the premium segments of uprights and robotics, which have grown significantly post-pandemic.
• Innovation is gaining immediate traction: Two stainless-steel water purifier launches in the last 3–4 months have had a significant impact on both growth and market share, and an aggressive innovation calendar will roll out in the coming months.
• Immediate category focus is fixed: For the next two years, the company intends to remain focused on existing categories: water, water purifiers and adjacencies (water softeners, etc.), cleaning, and air. Management said it is "hard to conjecture now" beyond that horizon.

Pratik Pota: "The fact that, we have this mosaic of channels allows us to play our portfolio differentially by channel, and will also therefore drive growth, drive penetration, as also drive premiumization."

Service Annuity & Lifetime Value

• Today's volume is tomorrow's annuity: Management emphasized that encouraging volume growth now gives runway to strengthen the service annuity stream months and years ahead, as a product sale opens up lifetime value through service revenues, cross-selling, and upselling.
• Service cost reduction is digitization-led: The reduction in the service charge line on the P&L is largely attributable to digitization progress. This line combines complaint call charges paid to service business partners, call center cost, installation and managed services cost, and trade margins paid to business partners.
• Service universe expansion is a stated priority: The company will reach customers who do not avail AMCs through more affordable AMCs, affordable service, filter sales, and awareness creation.
• Product vs. service split is undisclosed: Management declined to share the split of product and service revenue or the number of customers on contract, calling it "important competitive information."

Transformation Progress & Legal Action

• Year one was about rebuilding foundations: The first year of the transformation focused on rebuilding the team, strengthening foundations, and correcting culture issues, which management says is still work in progress. A new leadership team has been built at CXO and CXO-1 levels.
• Structure changes are showing early results: Changes that brought the company closer to customers and partners are yielding early evidence in on-ground execution.
• R&D capabilities have been strengthened: Capabilities have been built in electronics, design and engineering, in the cleaning category, in water and water adjacencies, and a category-specific marketing structure has been rolled out.
• Sureka Forbes is a fraudulent entity: A criminal case has been filed against Sureka Forbes for cheating customers and misrepresenting itself. The matter is sub judice, and the company will pursue it to prevent further harm.

Pratik Pota: "The first couple of quarters, and indeed more of the last one year of the transformation journey, was spent in rebuilding the team, strengthening the foundations, correcting some of the culture issues, and I would say that that's still WIP in many ways."

Guidance & Commitments

Key Metrics