Eureka Forbes Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Fifth straight quarter of double-digit growth: Revenue rose 11% (11.3% ex-discontinued) despite soft demand, driven by mid-teens product growth and premium innovations.
• Service revenue lag is structural, not accidental: Service grew well below product as the company is still in Stage 2 of its transformation, working through legacy behaviors across consumers, channel partners and technicians.
• Gross margin compressed YoY but improved sequentially: At 57.5%, gross margin fell 142 bps YoY from extended consumer offers and channel mix, but recovered 125 bps from the seasonally weak Q2.
• Innovation pipeline has flipped from laggard to leader: Premium launches like Blaze Insta Hot and the IoT-enabled Aquaguard Ritz Pro are now the biggest growth engines, and management claims leadership in water purifier innovation.
• What to watch next quarter: Whether service revenue green shoots translate into measurable acceleration, the trajectory of gross margin as consumer offers normalize, and any volume-to-value conversion in the tiered AMC strategy.

Product Growth: Innovation & Premiumisation

• Premium innovations driving the engine: Products launched over the last 9 months, notably Blaze Insta Hot and Designo NXT Under-The-Counter, have grown to become market leaders in their segments and are the single biggest contributors to growth.
• Clear upgrade cycle underway: Consumers are migrating from the mid-price segment to premium, with the trend over-indexing in Q3 and continuing from the prior quarter. The buyback offer, which was open to other brands and extended beyond the festive period, accelerated this by letting the direct sales force identify old devices inside homes and offer replacements at attractive prices.
• IoT launch marks an industry first: The Aquaguard Ritz Pro with IoT, launched late in Q3, delivers preventive alerts, water quality and consumption monitoring, and device health checks via the EFL app. Management frames this as evidence of moving from innovation laggard to leader.
• Vacuum cleaners pivot to robotics: The category is shifting toward convenient cleaning, with Forbes Smartclean Pro, Robo Vac N Mop Easy, and Smartclean Auto Bin driving strong growth. The direct sales network cross-sells robotic devices even during water purifier inquiries, demonstrating the product inside the customer's home.
• Air purifier revenue tripled: Off a small base, air purifier revenues grew 3x, with a significant portion from the North but momentum beginning in other markets. The company is prioritizing water purifiers, vacuum cleaners and service first, and is using the direct channel rather than e-commerce for air purifiers because ROI on platforms does not yet work for a category this small.

Pota: "I think we've gone from, in some ways, being laggards on innovation to now very clearly moving to a space where we are taking the lead."

Service Transformation: The Long Tail of Behavior Change

• Service revenue underperformed product growth by design: Product interventions were rolled out first in the transformation; service interventions, including tiered AMCs, the D2C website, and technician workforce management, came in Stage 2. The lag reflects the time needed to shift legacy behaviors across three constituencies: consumers, channel partners, and technicians.
• A large parallel market complicates the turnaround: An unorganized parallel market interplays with the organized Aquaguard and Eureka Forbes service market. Steps to cut leakages, including customer number marking rolled out a year and a half ago to secure customer data, are making incremental impact, and management feels more confident now than a year ago.
• AMC volume grew robustly, but ASP diluted the revenue line: The tiered AMC strategy launched earlier in the year succeeded in making AMCs more affordable and driving unit adoption. However, consumers gravitated toward lower-priced tiers within the portfolio, muting revenue growth. Management views sustained volume growth as the prerequisite that will eventually translate into value growth.
• Digital backbone is strengthening steadily: A very significant and growing portion of service revenue now comes from digital assets, with the share rising every quarter for the last 8 quarters. Product commerce functionality on the D2C website has picked up momentum, and a Diwali festival program on the platform saw very strong response.
• Green shoots are visible but early: Management expects service revenue to gain momentum in the periods ahead and is beginning to see some green shoots, but the cumulative impact of initiatives on leakages and behavior change will take more time to fully play out.

Pota: "One is that there are existing behaviors, legacy behaviors for many, many years, which take time to change. And I say behaviors, I mean behaviors from consumers, behavior from channel partners, behavior from technicians. So, these take time to change and for the impact to play out."

Margins: Headroom Exists, Normalisation is Early

• Gross margin YoY compression driven by two factors: The 142 bps decline to 57.5% came from the continuation of consumer offers beyond the festive period and an adverse channel mix. Sequentially, margins recovered 125 bps from a Q2 that was impacted by seasonality.
• Operating leverage delivered nearly 250 bps of cost absorption: Expenses excluding ESOP as a percentage of revenue fell 236 bps YoY, driven entirely by the 11% revenue growth. This demonstrates the operating leverage inherent in the model even as gross margins remain below desired levels.
• Technology investments are now going live and adding to depreciation: Several technology and product innovation investments have been commissioned, reflected in an increased depreciation charge of ₹8.1 crores. ESOP charges are expected to stabilize at ₹23-25 crores annually going ahead.
• Management sees clear but undated margin headroom: At the aggregate level, operating leverage from scale will drive profitability. On the service side, plugging leakages and extracting efficiencies is an ongoing process. The product portfolio margin is lower than where management wants it, with identifiable cost efficiency opportunities. The company aims to keep driving year-on-year margin efficiencies.

Khandelwal: "I think, clearly, there is a very clear headroom which exists as far as profitability is concerned... it would be way too early to kind of say that are we reaching a steady state? Certainly not."

Channel Dynamics & Competitive Positioning

• Growth was broad-based across channels, but retail softened: E-commerce delivered particularly strong growth, followed by direct sales. Retail segment growth was muted and further softened after the festive period ended.
• Direct sales remains a structural advantage: The direct sales GTM allows a representative to sit inside a customer's home, identify an old device, demonstrate new products like robotic vacuums during a water purifier inquiry, and close sales. This model is central to both the buyback program's success and the robotics category's growth.
• Competitive benchmarking reveals room to improve: Management studied Kent's DRHP filing and acknowledged seeing many areas to learn and change, particularly around channel mix. It sees clear headroom for improving profitability when benchmarked against competitors, but did not specify whether the category should settle with a lower general trade mix.
• Credit rating upgraded for the third time in two years: CARE upgraded the rating to AA- Stable, and CRISIL initiated coverage at similar levels, reflecting improving creditworthiness alongside operational momentum.

Pota: "As we look at the competitive context and competitive benchmarks... we see clearly headroom for improving profitability."

Guidance & Commitments

Key Metrics