Eureka Forbes Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Broad-based volume growth, 16.8% revenue rise: Revenue growth (ex-discontinued) was volume-driven for the third successive quarter in water purifiers and vacuum cleaners, spanning all product categories, price segments, and channels.
• Margins expanded 111 bps despite a 110 bps ad-spend step-up: Adjusted EBITDA margin reached 9.8% as operating leverage and cost efficiencies funded a significant increase in advertising and promotion investment.
• Market share gains are unambiguous: The company gained share in both water purifiers and vacuum cleaners, with a very strong gain in the modern trade channel across chains, geographies, and segments.
• Service business is the next profitability unlock: AMC volumes and value grew, service KPIs improved to an all-time high NPS, and a first-ever genuine service campaign is underway to convert the parallel market, though management cautions this is a long journey.
• What to watch next quarter: The pace of rental-model scaling beyond the Chennai pilot, the commercial impact of the innovation pipeline on premium mix, and whether the margin trajectory can sustain while ad-spend investment continues.

Growth Drivers & Channel Performance

• Volume-led growth across the board: Revenue growth of 16.8% (ex-discontinued) was broad-based across water purifiers, vacuum cleaners, and air purifiers, and across all channels. Within water purifiers, growth came from both economy and value-added segments. In vacuum cleaners, the robotics range and upright cleaners drove growth.
• Modern trade and e-commerce led: These two channels registered the strongest growth, with modern trade seeing a very strong market share gain across different chains, geographies, and segments. The gain was both volume and value.
• Direct channel grew robustly: Growth was particularly driven by premium vacuum cleaners, especially robotics, which respond well to demonstrations. The company intends to grow all channels, including direct and online D2C.
• Rural and small-town runway emerging: Pure-play rural contribution is still small, but five quarters of power availability in small towns and rural areas is becoming meaningful, offering a runway for future growth. The company intends to build a much larger rural portfolio going forward.
• Seasonality managed through innovation: The water business sees seasonality with Q2 being a bigger quarter due to monsoons and consumer health concerns. The company’s attempt is to grow shoulder quarters through innovations and initiatives, and Q3 initiatives were significantly more than Q2.

Pota: "I also want to call out that we have the right set of plans and a very clear strategy aimed at driving sustained growth in the future."

Margins & Cost Efficiency

• EBITDA margin expanded 111 bps YoY to 9.8%: The improvement was delivered despite a 110 bps increase in advertising and promotion spend, funded by operating leverage and structured cost optimization programs.
• Multiple levers are ongoing, not one-time: Levers include COGS negotiation from volume growth, cost efficiencies in IT spends and freight and logistics (headroom vs benchmarks), product mix shift toward mid and premium segments, and service business mix.
• Employee costs and service charges largely flat: Efficiency initiatives in various cost lines gave headroom to invest more for growth, and more efficiencies can be extracted to drive both growth investments and profitability.
• Gross margin is not capped: Management sees the intrinsic ability to drive margin as reflected by the 111 bps improvement despite the ad-spend step-up, and stated that gross margin is not range-bound in a limiting sense.
• Cash flow and balance sheet strengthened: The company moved from ₹122 crores debt to a ₹60 crores surplus, with finance charges 60% lower YoY.

Khandelwal: "I think the intrinsic ability to drive margin is best reflected by the fact that we've had a 111 basis point improvement in EBITDA margin, despite a 110 basis point increase in advertisement sales promotion spend."

Product Innovation & Premiumization

• Multiple launches in Q3: The company launched the Aquaguard Slimtech Glass Range with contemporary design, Aquaguard Blaze Insta with instant hot water functionality, two new products with alkaline water functionality, a range of handheld and cordless vacuum cleaners (Forbes ZeroBend Z Series), a category-first Pet Grooming Kit (Forbes Buddy), and a new range of 360 Surround Air Purifiers.
• Alkaline water purifiers saw broad acceptance: The response in the general trade channel was encouraging, indicating consumer acceptance beyond just informed or involved consumers.
• Innovations concentrated in the premium space: Q3 innovations were more in the premium segment, and the company sees room to compress repurchase cycles of existing customers with differentiated premium products. Growth was seen across value-end, mid-priced, and premium segments.
• Innovation pipeline will play out progressively: Innovations will span the entire spectrum from value to premium over the next few quarters. The company will rationalize or cull products that do not belong.
• R&D strengthened in-house: The R&D team has been strengthened in the last year with capabilities around smart, IoT, design, and engineering, alongside partnerships with academic institutions like IITs. The company will invest in smart devices that provide customers informed insights on water consumption and hydration.

Service Business & AMC Conversion

• Service business saw robust value and volume growth: The number of AMCs sold grew, and web-based AMCs saw a significant increase versus both last year and last quarter. This is a big source of growth and profitability unlock, and the company is investing behind it for the first time through a genuine Eureka Forbes service campaign.
• Service KPIs improved to an all-time high NPS: The number of open complaints went down consistently, and time to respond, complaints closed in 1 hour, 4 hours, and 24 hours all improved significantly. The company is benchmarking against quick-commerce service levels, not consumer durables.
• Parallel-market conversion is a long journey: The company is driving awareness and ease of access to convert parallel-market AquaGuard users into the organized space. Q3 saw both volume and value growth in service, but management cautions that behavior change and channel-contour shifts require sustained effort quarter after quarter.
• New filters launched with authentication: Filters now carry grey packaging and a grey body with a QR code for customer authentication.

Pota: "Behaviour change, changing the channel contours will be a sustained effort progressively, quarter after quarter after quarter. And I think it would be facile to expect some meaningful change only in one quarter."

New Business Models & D2C Transformation

• Rental pilot in Chennai delivered learnings: Valuable insights are being distilled on pricing, product range, service expectations (speed, reliability), on-ground team execution, and digital experience/UI-UX.
• Rental expansion will be calibrated and measured: The company plans to scale up rental in FY25, starting with a few towns, but does not see this happening earlier than the second half of next year.
• Pet care entry with Forbes Buddy: The category-first Pet Grooming Kit saw an encouraging early response. The pet care market is growing rapidly, and the direct sales channel is effective for demonstrations and category creation. The company will evaluate expanding beyond the one-off product to a larger range based on early learnings.
• D2C reimagination underway: The company is reimagining itself as a D2C health and hygiene powerhouse using digital and data-enabled ways of working. Progressive work will be seen over the months to come. Capex for FY25 is expected at ₹40-45 crores, lower than previously thought, driven by a choice to move digital development in-house.

Pota: "What we are now doing is to reimagine the company in making it D2C, with a much more technology-enabled, digitally-enabled, data-enabled way of working. Which is why, in my opening remarks, I spoke about D2C health and hygiene powerhouse."

Guidance & Commitments

Key Metrics