Eureka Forbes Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Landmark quarter on all three markers: Revenue grew 4.8% on continuing business, adjusted EBITDA margin expanded for the fourth straight quarter to 10.5%, and the company turned net debt-free.
• Growth is self-made, not category-led: Management believes categories have bottomed out but lack strong tailwinds; volume growth in both water purifiers and vacuum cleaners reflects internal interventions under Project Udaan, not a demand recovery.
• Service unlocks a second growth engine: The launch of a tiered AMC starting at ₹699 targets the vast unorganized service market, while today's product volume growth seeds tomorrow's service revenue.
• Margins have room to run, but growth comes first: Management sees current 10.5% EBITDA as not the peak and aims for the middle of durable-company and water-purifier margins, but will not pursue high margins at the expense of adequate growth.
• What to watch next quarter: Whether volume growth sustains without category tailwinds, early traction on the tiered AMC adoption, and the pace of investment in the air purifier build-out ahead of next year's planned major push.

Revenue Growth & Category Dynamics

• Volume-led growth in a soft market: The 4.8% revenue growth was driven by volume growth in both electric water purifiers and vacuum cleaners, marking the second successive quarter of volume expansion in each category despite a continued soft demand environment.
• Market share gains reflect internal interventions: Share gains were recorded both sequentially and year-on-year in water purifiers and vacuum cleaners, which management attributes to Project Udaan initiatives: value SKU pricing, category-creating communication, and distribution expansion.
• Water purifier growth was broad-based: Strong double-digit volume growth came not just from the economy range but across all price points, supported by product interventions like stainless steel tanks and affordable purifiers, advertising, and distribution expansion.
• Vacuum cleaners shift toward convenience: Growth in vacuum cleaners showed a pattern of movement toward convenient cleaning segments: robotic, upright, and handheld cordless models, with the premium robotics portfolio seeing particularly strong growth.
• Channel performance was cross-platform: Strong growth was seen across e-commerce, retail, and direct sales productivity; growth was fairly cross-channel and across the board.
• Seasonality was better than history: Q2 tends to be the strongest quarter sequentially, but the sequential improvement was higher than historically seen in previous years, reflecting the impact of growth interventions.

Pratik Pota: "We don't quite see the categories being in strong momentum yet. They likely have bottomed out, but we don't see the strong tailwinds to the category. Our numbers were more a reflection of our own interventions..."

Service Business Transformation

• Tiered AMC targets the unorganized market: The tiered AMC was launched starting from ₹699 to expand the organized service offering by addressing two barriers: a large parallel grey market, and customer price sensitivity, especially for lower-priced economy products. The segmented offers let customers with differing service needs choose an appropriate price point.
• Lower price does not mean lower margin: Different price points come with different propositions and associated cost structures; a lower price point does not necessarily mean a lower margin because the offerings change. Each price point is structured to have a certain minimum threshold margin.
• The unorganized service market is the real prize: The parallel market in products is not very large, with 75-80% of the product market organized. In service, however, the largest share of the market is unorganized, not just for Eureka Forbes but for the larger category. The sheer number of people not in the AMC fold is far bigger than those who are.
• Two tailwinds for service revenue: First, the tiered AMC expands the official service pie, which will play out gradually as behavior changes and current service contracts expire. Second, strong volume growth in water purifiers means new units sold today become a potential service offer a year from now.
• Digital platform enables service at scale: All service technicians have been onboarded nationally onto one central digital platform; customers can now schedule service appointments and choose their technician of choice. Early digital interventions are leading to meaningful improvements in customer satisfaction, reflected in significant NPS improvement and improved turnaround time.
• Rental model pilots address ownership barrier: A rental model pilot began in Chennai to address the high cost of ownership, which management identifies as a big barrier to category adoption given the near-universal need but very low penetration. Initial response is encouraging but the model is still being finetuned before scaling.

Pratik Pota: "the sheer number of people who are not in the AMC fold is far bigger than those who are with us. And therein lies the opportunity which through a combination of lowering the entry barrier, awareness and access all of these three coming together along with grey market operations is intended to help unlock this value."

Margins & Cost Structure

• Fourth consecutive quarter of margin expansion: Adjusted EBITDA margin expanded to 10.5%, driven by operating leverage. Gross margins were impacted by product and channel mix, coming in at 57.4% versus 58.5% last year.
• Cost program delivers structural improvement: Expenses as a percentage of revenue, excluding ESOP, were lower by 1,150 bps year-on-year and 370 bps sequentially, with the cost program remaining an area of focus.
• Gross margins expected to stay range-bound: Management expects gross margins to remain around current levels of 57.4%, with no structural shift anticipated.
• ESOP charges to persist: ESOP charges are expected to remain at approximately ₹10 crores per quarter for the foreseeable few quarters, then start tapering off beyond FY25.
• Service charge is semi-variable: Part of the service charge is attributable to service revenue, and part is non-revenue linked. On a sequential basis it remained flat; year-on-year there is a slight increase.
• Ad spend investment continues: The campaign had a very good impact on volume growth for the second successive quarter, so ad spend remains an area of focus. Directionally, the company intends to keep investing in ad spends and sales promotion expenses.

Gaurav Khandelwal: "We would not want to be in a situation where we end up with high margins but not adequate growth."

Balance Sheet & Capital Allocation

• Net debt eliminated: The company turned net debt-free, with a net surplus of ₹9 crores compared to ₹199 crores of net debt in September 2022, driven by improved profitability and working capital improvements over the last year.
• CAPEX accelerated in H1: Almost an amount of CAPEX was spent in H1 that would typically be spent in a full year. A step up from CAPEX levels of the previous year is expected to play out during the course of this year.
• Service capacity being built ahead of demand: The company is anticipating growth in service volumes and is executing actions to support that growth, both in terms of higher capacity in the service technician network and higher capacity to manufacture and supply filters, which are made in-house.

Product & Innovation Pipeline

• Slim UV Bar launched: A new water purifier described as an innovation marrying form and technology, positioned as a first step in reclaiming the company's role as innovators and pioneers.
• Glass bar range targets modular kitchens: A new innovation targeting consumers with sleek, contemporary, modular kitchens, featuring instant water dispensing through a UV LED lamp and a display of input and output TDS.
• Air purifier: building for next year's major play: The air purifier business is currently very small. Two new products were launched in Q3, but this year is being spent building capabilities, consumer insighting, and the playbook for a much larger play starting next year. Management has no doubt air purifiers will be a big opportunity in the years to come, and it will not just be a seasonal play.
• Digital capabilities built organically: The company has built organic capabilities with small teams in product management, engineering, UI/UX, and data science/analytics. Work on improving the product commerce experience on digital platforms is in progress and will play out over the next few periods.

Pratik Pota: "I think we are spending this year much more in building our capabilities, building the consumer insighting, building the playbook to allow us to drive a much larger play on air purifier starting next year. We have no doubt that air and air purifiers will be a big opportunity for us in the years to come."

Guidance & Commitments

Key Metrics