Eureka Forbes Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Lifetime-high profitability, demand caution: Adjusted EBITDA margin hit a lifetime high of 11.5%, up 166 bps YoY, even as management flagged that persistently high food inflation is dampening consumer sentiment near-term.
• Product growth outruns service: Revenue grew 9.4% (10.8% adjusted), driven by high-teens product growth and double-digit service growth, but the product mix shift mechanically compressed reported service revenue as a share of total.
• Premium innovation is gaining traction: ASPs rose in water purifiers and vacuum cleaners, and the company is beginning to see market share gains in water purifiers versus last year, especially through the premium segment.
• Phase 2 bets on a service turnaround: Management’s conviction is that the same trajectory that took products from no growth to high-teens growth will repeat in service as the full impact of transformation becomes evident.
• What to watch next quarter: Whether the seasonal Q2 gross margin dip reverses from Q3 as guided, whether polymer price increases sustain, and any sign of the rental pilot scaling beyond its current state.

Revenue Drivers & Mix

• Product-led growth: High-teens product revenue growth came from double-digit volume growth in water purifiers and ASP improvement, with premium innovations (Slimtech RO, Slimtech Glass, Blaze Insta) driving both share and realizations.
• Service revenue compressed by accounting: Service AMCs are sold for 1-3 years but revenue is amortized over an average tenure of 18-20 months, while costs are recognized immediately, so reported service revenue understates actual consumer spending, which grew double-digit.
• First-time users dominate economy segment: More than 75% of customers buying economy products are first-time users, driving penetration in a category with only ~6% penetration in India.
• Tier-2 and Tier-3 towns grew faster than Tier-1 and metros, with both economy and premium products (including robotics) seeing strong traction in smaller towns.
• Filter business showing encouraging growth, enabled by QR-coded differentiated filters and an advertising campaign emphasizing genuine service.

Pota: "a year and half ago when we met many of you and we would talk about our performance we have shared with you that we were not seeing volume growth or any growth for a matter on products for long time. As you have seen in the last 12 months to 18 months we went from having strong volume growth to now high-teens overall products revenue growth. We believe and it is our conviction that the same trajectory will repeat in service as well as the full impact of transformation becomes evident."

Margins & Cost Structure

• Lifetime-high profitability: Adjusted EBITDA margin reached 11.5%, with PBT and PAT also at lifetime highs, delivered despite a deliberate 21% YoY step-up in advertising and sales promotion spend.
• Gross margins range-bound: Gross margins have stayed stable over the last five quarters despite volume growth, because the portfolio straddles both economy and premium segments.
• Seasonal Q2 dip expected to repeat: Q2 gross margins decline seasonally because AMC revenues are higher in that quarter but costs come upfront while revenue is amortized; management expects the same pattern this year, with recovery from Q3 onwards.
• Polymer prices a watchpoint: Polymer prices rose in June; management is in wait-and-watch mode to assess whether the increase sustains.
• Service profitability structurally higher than product profitability, but the priority remains driving superior customer experience and expanding the AMC base rather than optimizing the mix.
• Ad spend to stay elevated: Directionally, FY25 advertising and sales promotion spends will step up over FY24 levels; specific FY24 numbers will be disclosed in the Annual Report.

Service Transformation & Digital

• Phase 2 focus is service revenue: After Phase 1 delivered product growth, Phase 2 will concentrate on driving up service revenue through a tiered AMC offering (from INR 599 base to platinum), an advertising campaign around genuine service, and QR-coded filters.
• Early service metrics improving: Service NPS hit a lifetime high in Q1, with a significant number of complaints closed within one hour of the customer’s desired time.
• App relaunch delivered results: A significant UI/UX improvement in Q1 lifted the app rating from below 2 to 4.2, and the installed base of app users is growing.
• D2C push via new website: A new product commerce website was rolled out about a week before the call to drive direct-to-consumer revenues.
• AMC bundling remains low: The proportion of product sales accompanied by an upfront bundled AMC is very, very low, even for premium products, leaving a large untapped base for service revenue.

Product & Category Dynamics

• RO segment growing faster than UV: Deteriorating and inconsistent source water quality is pushing customers toward RO or RO+UV combinations as a safer choice.
• Vacuum cleaner mix shifting premium: The category is evolving toward convenient cleaning formats (robotics, upright) that carry nearly 4x the ASP of conventional cleaning products.
• Aquaguard Enhance NXT launched with a two-year filter life, double the normal one-year filter life, strengthening the premium innovation pipeline.
• Monsoon seasonality matters for water: Monsoon months are the bigger period for the water category; air purifiers have pronounced seasonality but remain small for the company.

Competition & Market Structure

• Market share gain in water purifiers versus the same time last year, with the impact of premium innovations beginning to show, though management cautioned it is early days.
• Management welcomes more competition, arguing the category needs more innovation and excitement to drive growth and get consumers to re-evaluate and enter the category.

Pota: "I think this category needs more competition, it needs more innovation it needs more excitement to drive growth and to get consumers to re-evaluate this category to enter it."

Capital Allocation & Returns

• FY25 capex guided at INR 45-50 crores, focused on digitization, innovations, and R&D.
• High ROCE to be preserved: The business does not require significant capex; existing capacities are adequate for volume growth without major manufacturing investments.
• Value creation model articulated in three parts: remain the significant leader in a larger TAM, drive operating leverage and efficiency, and translate both into cash.
• Rental model still in pilot: Rental remains an area of opportunity where the company believes it has the right to win, but it has not yet been scaled; a prioritization decision on timing is pending.

Guidance & Commitments

Key Metrics