Eureka Forbes Limited (543482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Eureka Forbes Limited's Q3 FY '24 Earnings Conference Call. We have Mr. Pratik Pota, Managing Director and CEO; and Mr. Gaurav Khandelwal, CFO, Eureka Forbes, with us. [Operator Instructions]. Please note that this conference is being recorded. Before I hand it over to Mr. Pratik Pota, please note the disclaimer. Certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect management's best judgment and analysis as of today. The actual results may differ materially from the current expectations based on a number of factors affecting the business. I now hand the conference over to Mr. Pratik Pota. Thank you, and over to you, sir.

Good afternoon, and I welcome you all to the Q3 earnings call of Eureka Forbes Limited. During the quarter, we reported a strong revenue growth of 14.1% over last year with a revenue of INR 538.6 crores. Excluding the impact of discontinued operations, our Q3 revenue grew by 16.8% year-on-year. There were several dimensions to this growth. Growth was broad-based across all the 3 product categories of Water, Vacuum Cleaners and Air and also across the Service business. Water Purifiers and Vacuum Cleaners continued the trend of volume growth for the third successive quarter and registered strong volume growth in quarter 3 as well. Within these categories in Water Purifier, we saw good growth in both our economy and our value-added segments. In Vacuum Cleaners, our robotics range primarily drove the growth, along with the range of upright vacuum cleaners. We have an omnichannel presence and the quarter's growth was reflected across all our channels. Within them, modern trade and e-commerce registered the strongest growth. Lastly, our revenues are beginning to reflect the impact of the innovation pipeline that we are building. I will speak more about that in just a bit. On the profitability side, adjusted EBITDA margins continued to expand on a year-on-year basis, up to 9.8%, up 111 basis points from last year due to operating leverage and our structured cost optimization programs. This margin improvement was delivered despite the conscious choice of significantly dialing up our advertising spend this quarter, both versus last year and versus last quarter. Our cost program has been instrumental in giving us the headroom to invest behind growth, and we'll continue to remain focused on driving cost optimization. We continue to strengthen our balance sheet with a net surplus of INR 60 crores as compared to a net surplus of INR 9 crores in the previous quarter and a net debt of INR 122 crores in quarter 3 FY '23. As we reflect on our transformation journey, I'm pleased to see that many of our efforts are beginning to bear fruit. Our growth of 16.8% is a visible improvement versus the last few quarters' performance and also compared to earlier long periods of sustained low single-digit growth. The fact that this growth was volume-driven is an important dimension and difference versus the largely pricing-led growth of the prior year. Our focus on driving innovation is showing some visible outcomes. In quarter 3, we launched new products in all our categories. In water purifiers, we launched the Aquaguard Slimtech glass range with a classic contemporary design. Aquaguard Blaze Insta with a differentiated functionality of instant hot water and 2 new products with alkaline water functionality. In Vacuum Cleaners, we launched an exciting range of convenient handheld and cordless vacuum cleaners, the Forbes ZeroBend Z series and a category-first pet grooming kit, the Forbes Buddy. Our new range of 360 Surround Air purifiers, too, did well last quarter. Importantly, the quality and profile of our innovations like the Slimtech range, the ZeroBend vacuum cleaners, et cetera, indicate Eureka Forbes reclaiming its role as a pioneer and innovator in our categories. We will continue to focus on innovations, and we plan to launch several new products in the coming quarters as well. Building up categories and driving growth will require compelling and category-creating communication. As you know, we made a start with a Nal se Kapda campaign early in the year. I'm pleased to share that the campaign was selected as an Effie Award winner, which is an award, as you know, for marketing effectiveness campaigns. We increased our advertising spend in quarter 3 and ran the first-ever TV campaign on our Forbes Pro robotic vacuum cleaner with extremely encouraging results. We will continue to invest on advertising and category creating communication. And to this effect, we have recently launched our first-ever service campaign to increase awareness of Genuine Aquaguard service. Our efforts at improving our customer service levels have also begun to deliver visible results. Quarter 3 saw a significant improvement in service levels and turnaround times, and our NPS was at an all-time high. In summary, we are happy with our strong all-round quarter 3 performance. Looking ahead, we feel very confident that we have the right strategy and the right set of plans to drive sustained and profitable growth in the future and to transform Eureka Forbes into a D2C health and hygiene powerhouse. On that note, I will now hand you over to Gaurav Khandelwal, our CFO, who will provide more details about our financial performance. Over to you, Gaurav.

Thank you, Pratik. Good afternoon, everyone, and thank you for joining us. Q2 witnessed a continuing step-up in our performance on all 3 fronts of revenue, profitability and cash flows. Our revenue at INR 538.6 crores grew by 14.1% on a year-on-year basis. Adjusted for discontinued businesses, our revenues grew 16.8%. More importantly, this growth was broad-based across categories and channels and intrinsically driven by volumes. Gross margins were flat at 58.9% versus previous years, and we expect these to remain range bound. Our diverse portfolio, a service revenue stream and an ongoing cost program gives us the levers to drive gross margins. Our continued focus on cost initiatives ensured that our employee cost and service charges were largely flat versus previous year. Q3 employee costs include a noncash ESOP charge of INR 10.7 crores, and we expect these ESOP charges to remain at these levels in the coming quarters. Our key agenda is to drive profitable growth. And towards this end, this quarter witnessed increased advertisement spends to support our launches and innovations. Year-on-year increase of INR 21.7 crores in other expenses line is largely attributable to increase in advertisement and sales promotion spends. Our efficiency initiatives in various cost lines have given us the headroom to invest more for growth. It is important to call out that a year-on-year EBITDA margin improvement of 111 basis points is after a significant 310 basis point increase in our advertisement and sales promotion spends. Also, when we see a quarter-on-quarter EBITDA margin movement, there is an increase of 150 basis points in advertisement and sales promotion spends. We believe that there are more efficiencies that can be extracted to drive growth investments and profitability. Strong cash flow generation continued in quarter 3. From INR 122 crore debt in December '22, we moved to a surplus of INR 9 crores in September '23 and were at INR 60 crores in December '23, leading to a 60% lower finance charge year-on-year. The combined effect of the above has led to an adjusted EBITDA growth of 28.6% and adjusted PBT growth of 45.6% and a PAT increase of 131.3% on a year-on-year basis. In summary, all 3 financial metrics of top line, bottom line and cash flows show an improving trajectory. We continue to remain focused on executing the transformation agenda to drive sustained profitable growth going ahead. Thank you.

[Operator Instructions] The first question is from the line of Priyank Chheda from Vallum Capital.

Sir, my question is on if you can help on some data point on the service income. So what would be the percentage of new customers buying your renew -- your new AMC plans on the new products? And in a few calls earlier, you had mentioned that large universe of your customers' existing base is getting serviced on parallel or gray market. So how has that been trending now with all the interventions coming from your side?

Thank you for your question, Priyank. Let me begin by first talking about our service business and the performance we delivered in Q3 in service. I think we were encouraged to see a robust value growth in our service business, but equally also a very encouraging volume growth in the number of AMCs that we sold. Within this, one small nuance that I want to call out also is the fact that our web-based AMC saw a significant increase versus both last year and versus last quarter. Like you rightly mentioned, there is a large segment of unorganized service play wherein the parallel market provides service to our customers. It is precisely to talk to this customer base that we've launched an advertising campaign, which calls out the benefits of Aquaguard Genuine service. We've also launched our new filters, which look different, which are in a gray packaging and gray sort of body. And they also have a QR code, which allow for authentication by customers and which we are calling out very, very clearly in our communication. Our segmented AMC that we had launched last year is also helping in driving both volume growth and the expansion of the franchise of customers that we service with our Genuine service. So overall, I believe we've got a strong set of plans in motion that we believe will help us grow our service business sustainably and help us address this large market that you said of parallel operators.

So just to clarify, the volume growth in the service, so the number of AMCs sold as a percentage would be much higher than what the product -- new products are getting sold. I hope the reading is correct.

No, Priyank, I did not comment about one as compared to the other. My comment was, which I also called out in my opening remarks that we saw good growth in both the product business and in the service business. And in the service business specifically, like I said, we saw both value growth and a growth in the number of units of AMC sold, in other words, volume growth. And we also saw an increase in the online element within that of service sales. I hope that clarifies.

Got it. Got it. And in the continuation of this service portion going up as we progress, how should we view gross margins in the long term? And this is kind of a contrasting to your guidance of -- in the CFO remarks, I heard we have a guidance of keeping gross margins at a similar level. So how should we view for the longer term as service income grows, how should the gross margin trending ahead?

Yes. I think, Priyank, I'll just call out the fact that, yes, gross margins for the service business is higher than the product business. And yes, directionally, it will be gross margin accretive for the business overall. Having said that, if you go back to our strategy, it is also about driving penetration, yes. And there will be an equal amount of push on the product business as well. So they will go in tandem. And our belief is that between the 2, there will be an element of balancing. But obviously, wherever there are opportunities to drive gross margin improvement, those opportunities we'll be looking at availing off.

Got it. Very clear. Just the last question, if may I add. Being such a young organization in our new avatar, why would our growth get restricted at 15%, 17%? Would we see a kind of a linear pickup in our sales growth is how our category would see? Or would we see a very step-up growth after a few years of investment into brands? And as well as if you can call out what would be the percentage of sales coming from the new product launches?

Got it, Priyank. I think, first of all, it's important to take a step back and look at the growth we delivered in this quarter in a broader context. We delivered this growth. And as you know, this growth represents a continued increase in growth over the last few quarters. I called out the fact that this growth was volume based. The fact that this growth was broad-based across all our categories, and all our channels. That's the other important point to underline. 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. We have a very clear plan to drive penetration in water purifiers to expand the category size to get in many more users by converting nonusers into users. We also have a very clear plan, early signs of which you are seeing already of launching differentiated and premium innovations aimed at providing our existing customers and nonusers with very, very value-added propositions. Again, thus we've seen some launches happen already, and you will see more action in this in the future. We also have a very clear strategy of growing our service business, and we spoke about it just a little while back. And the fourth element of our strategy is to grow our D2C and our digital business. Again, we saw some green shoots on that both in quarter 3 and earlier. All of this, we believe, will give us a path and will have put us on a path to deliver sustained growth in the longer term. I don't want to comment on quarterly outlook because there will be some noise there. But if I take that shorter-term noise out, the fact that we are well positioned to deliver sustained growth and sustained profitable growth in the longer term, that is unambiguous. That is absolutely clear.

The next question is from the line of Devika Sethi from Ratnabali Securities Private Limited.

Congratulations on a great set of numbers. So sir, I wanted to understand what kind of seasonality do we experience in our products and why?

Thank you, Devika. Thank you for your compliment. On your question, there is a seasonality that we see certainly in the Water business, wherein typically, our quarter 2 ends up being a bigger quarter, because it's accompanied by monsoons and there is a very clear effort both from consumers and from people like us to drive categories, and there is a heightened concern about people falling ill. So quarter 2, typically, you end up seeing some spike. Our attempt has been to -- even as we drive the seasonality and make sure we grow and we gain share, we also want to grow the shoulder quarters. And therefore, our innovations, our initiatives in quarter 3, as you saw, were significantly more than what we delivered in quarter 2. So if you look at the last 3 quarters and our journey, our first attempt, and if I go even earlier back to last year, our first attempt and first set of initiatives were aimed at building capability and laying the foundation, getting the team right, building the right set of plans. In Stage 2, we created elbow room for ourselves by driving improved profitability, elbow room to invest, elbow room to drive growth. And in quarter 3, you have now begun to see the impact of innovations come by, impact of innovations, impact of more sustained and more aggressive advertising support, and that led to the growth that you have seen this quarter. So while there is seasonality, which we will ride on and we'll build on, but we also intend to grow the other adjacent quarters and the shoulder.

Okay. My next question is we made commercial water purifiers and even vacuum cleaners, for institutions, schools, et cetera. And because of the increased intensity of air pollution, do we plan to make commercial air purifiers as well? Is it in our pipeline?

Devika, what we intend to do in the Air Purifier business is first to invest in growing the residential and the domestic market and the B2C market. We believe that with air quality turning adverse and there being a lot more awareness and sensitization about the harmful effects of poor air quality, we believe there is a long runway we have to drive growth in the B2C segment itself. So you will -- and in fact, in quarter 3 as well, as I mentioned earlier, we launched a range of air purifiers. We saw a very, very encouraging growth and response, and we intend to sustain this and build on this. We believe air could be a very big category for us in the future, but we will invest in it progressively in a calibrated way. As of now, we have no plans to enter in the B2B side of air purifiers.

[Operator Instructions] We have the next question from the line of Aniruddha Joshi from ICICI Securities.

Sir, 3 questions. One, if you can elaborate on the rental model, which we had launched only in Tamil Nadu. So what has been the feedback on that rental model? Is the success as per the expectations of the company? And secondly, do you see this plan getting rolled out pan-India basis? Question one. Question two, we have introduced a Pet Buddy, but how big is the market? And do you see any real investment in this kind of a model can really lead to a sizable revenue at least over the next 2 years, 3 years. So what has been the thought process? And what is the revenue potential over a 3- to 4-year time frame, if you can indicate? And third, sir, we have already done a good amount of portfolio restructuring. So do you see there is a still need to introduce some of the premium products and even to reduce or cut down some of the older SKUs so as to rationalize the number of SKUs in the market. So where are we on this thing? Yes, that's it from my side.

Thank you, Aniruddha. Let me start with your first question on the rental pilot and the rental model. Like you rightly said, we've got the rental pilot in play in Chennai. We continue to observe and monitor the rental business and the rental pilot very closely in Chennai. And you'll be happy to know that there's some very valuable learnings that we are distilling from the pilot. There are some learnings that we have drawn about the pricing and the product and the range that we need to have. There's some very clear learnings about service and customers' expectations of service, both the speed of service, the reliability of service. There's some learning for our on-ground teams, our field teams on execution, on the responsiveness, on the rigor and also some learnings on our digital experience and ease of access, the intuitive nature of UI/UX, et cetera. And that's what we are drawing as learnings. We are -- now based on these learnings, we are looking to scale this up in the next financial year. And as you can imagine, this is the time of the year when we draw our annual plans for next year. So doing a progressive extension of this pilot is something we certainly evaluate for FY '25. The extension will be calibrated. It will be measured because we believe this could be a very, very big market, but we want to make sure we take measured steps and not plunge into it headlong right away. So this will be a very deliberate and very measured expansion of rental, starting with a few towns based on the learnings from the Chennai pilot. That said, I must also say that we don't see this happening earlier than second half of next year. So that's the answer on rental. On Pet Buddy, and I'm glad you noticed that product. It's one of my own personal favorites. It is a very, very convenient product for pet parents. All our consumer work shows that the pet care market is a market that's growing very, very rapidly and growing very encouragingly and can be much bigger than what it is right now. All our consumer work again shows that pet parents tend to indulge and have a very different threshold to expenditure compared to other consumers. And we are seeing that already in the early response to the Forbes Pro Buddy. And as you can imagine, Aniruddha, having a channel -- a direct sales channel is also a very effective channel for us to do the demonstrations and to do the category creation work required for Forbes Pro. On a lighter note, the challenge happens sometimes when our frontline team members are afraid of pets, but there is a way that we found of doing working around that, but the learning has been very encouraging. And this could be a big product for us in the future. I don't want to put a number to it, because I think the number would be misleading because the number would be very, very large. I don't want to cap our ambition, but it could be very significant and meaningful in the future. And again, going forward, this will not remain a one-off product. We will certainly evaluate based on the early learnings on how we can expand this and create a larger range around pet care. On your third question about portfolio restructuring, you're right in your observation that we have done some work already in restructuring and optimizing our portfolio. What we intend to do in the future is -- and I called it out in my earlier remarks as well, there's 2 or 3 things. First one is we intend to stay focused on driving penetration in the category, and that may require us to create the right products for different consumer segments and different nonusers. So that's the first thing. The second area where we remain focused is on driving innovations, driving differentiated innovations and driving premium innovations and value-added innovations. That will require us to add some products in our portfolio. And again, going back to what you asked, the expansion and the innovations will happen at both ends of the spectrum. You will see innovations coming at the value end, but you'll also see some very exciting and very significant innovations coming at the super premium end and the premium end. And that will play out over the next few quarters progressively. As we launch these new products, you can be sure that we remain focused on looking at opportunities for rationalization and culling products that do not belong in the future. So we'll try and stay lean, try and stay optimized on the portfolio, but we will be investing in creating new propositions and driving innovations at both ends of the spectrum.

Okay. Sure, sir. Sure. Understood. Sir, just last one question. Now we have seen in case of air purifier, the market is shifting in other way also. For example, there are air conditioners, which offer some sort of air purification also or even there are companies who have introduced ceiling fans with the benefit of even air purifier also. So will we contemplate launching such products? Or how do you see the -- in a way, air purifier per se market getting impacted by such products? So what will be the strategy of Eureka in this regard?

No, that's a good question, Aniruddha. And you're absolutely right that there are people attempting to enter this category and address this opportunity from different vantage points. And that's absolutely outstanding news because the more people enter this category, the more news they create, the more will be the visibility of this category and more will be the awareness creation. This category is so small now, Aniruddha, so microscopically small that any attempt to grow this category can only be accretive, can only be growth any play. So as of now, our focus remains on the consumer, and we believe that we have the right strategy and the right plan to incubate and grow this category. That said, we will remain open. We will remain consumer-focused and consumer-centric. If the consumer wants us to do something different, we'll, of course, remain open to it. But the category is so small right now that there is enough and more than all of us can do to just work together and grow this category. Also, just one more point in regard to this one, just to conclude that point. Remember, our service business ends up being an important dimension and an important force multiplier for us because in many ways, air purifiers are analogous to water purifiers and require service, require filter changes. And again, our strength in service will help us we that and grow the category and grow the range much more effectively.

The next question is from the line of Siddhartha Bera from Nomura.

Sir, first question is on this growth side. So is it possible to sort of indicate -- so we have done this affordable launches in the past to expand the market. So I mean, how much percentage of our revenues will be coming from the affordable products in the Water Purifier category? If you can share some numbers, it would be really helpful to track the progress.

Thank you, Siddhartha. Thank you for that question. I think our quarter 3 performance, as I mentioned earlier, saw very encouraging growth across all our categories, Water Purifiers, Vacuum Cleaners, Air across the board. In Water Purifiers, our growth was driven not just by the value segment and not just by the economy products, but we also saw strong growth coming from the mid-price segment and the premium segment. As you also saw, in quarter 3, we launched a number of innovations and all of these were at the premium price points, be it the Aquaguard Slimtech range or indeed the Blaze Insta Hot product. They are all at the premium price points. So going forward, you will see our growth come from a variety of products and propositions. As we enter, you will see the value range driving growth, but you also see us drive growth in the mid-price and the premium segment. One very interesting data point that I want to call out is that as we see customer entry into the mid-price and premium segments, just like we saw in economy, a large number of customers are entering to the mid-price and premium products. So even new entrants are opting for more expensive, more premium but more differentiated product proposition. So therefore, our belief now is that it will be not just economy and value that will drive penetration. It also drive penetration to the complete stack and the complete range of purifiers provided, they deliver to a customer proposition and customer relevant proposition meaningfully.

Got it. In terms of slightly more color on the growth, will it be possible to indicate generally the growth will be led by the urban regions? Or how is the rural salience or which will be your focus area in the near term and whether this growth number can have further upside if you sort of penetrate more into a particular category? So some thoughts there? And secondly, sir, on the margin side, I mean, you talked about multiple catalysts more remaining for further improvement. So some color which will be these areas, which can sort of support further improvement from current level?

Siddhartha, I'm sorry, I didn't get your second question. Can you repeat the second question, please...

Sir, on the margin side. So what could be the further catalyst for improvement, yes.

Got it. Got it. Sorry, I didn't get that. So let me answer your first -- your earlier question first, and then I'll request Gaurav to chip in on the margin improvement point. I think one additional element of our growth in quarter 3, apart from the growth being cross-category, cross channel was the fact that we saw strong growth in both metros, non-metros and the smaller towns. We saw growth come from modern trade, which obviously, as you imagine, is more in larger towns. We saw growth come from general trade, which goes down the cost strata. We saw growth coming from our direct channel, both in the metros, in the smaller towns, and we saw very strong growth come from e-commerce. And e-commerce, as we spoke to our partners and we saw the data, the e-commerce growth was across the cost strata, small towns, large towns and metros. I would say that our contribution of pure-play rural is still small, but you can be sure that in our plans, we intend to build a much larger rural portfolio going forward. The good news is that pipe water availability, power availability in small towns and in rural is becoming meaningful now. And this, we believe, offers us a runway for growth in the future. Gaurav?

Yes. I think multiple levers available as far as margins are concerned. Let me break this into smaller parts. I think one on the cost side, I think some of the areas where we see very clear line of sight is around COGS. I think an outcome of a volume growth in the business is that it gives you better leverage in negotiating better prices. So COGS is one area that we've identified as a big opportunity. The second is that when we look at some of our spend lines, e.g., our IT spends, our freight and logistics spends and when we benchmark it to other companies, we clearly see a headroom of driving efficiencies. So I think cost is one area where we believe that there is still adequate opportunities to be extracted. The second is around product mix. And I think one interesting thing that we've seen is that the new users who are coming in are not just in the economy segment. They are also coming in the mid and premium segment. So we have a portfolio opportunity within our product business in terms of economy, mid and premium. So that mix is a driver for us in terms of margins. And the third is, of course, our service business. So it's a combination of cost, it's a combination of our product portfolio, and it's a combination of our product versus service business. I think the best manifestation of this is the fact that when you look at a year-on-year margin improvement of 111 basis points, this has come after a conscious investment in advertisement and promotions of 310 basis points. So after having invested this more, we are still able to drive a year-on-year improvement. Even if you look at the sequential margins in a quarter which was nonseasonal, and for a business with high gross margin, the EBITDA margin was down only by 64 basis points. And this is after investing 150 basis points more on advertisement and sales promotion. So from our perspective, I think we see there being multiple levers to drive margin. And from our perspective, we don't see any of these to be a onetime exercise. These are levers which are going to be deployed on an ongoing basis to drive profitable growth.

[Operator Instructions] We have the next question from the line of Abhijit Akella from Kotak Securities.

First, just on the volume growth, while I understand that most of the revenue growth this quarter was driven by volumes, if possible, would it be possible to share some sense of how much in quantity terms the volume growth exactly was for this quarter and particularly in the Water Purifier category?

Thank you for your question, Abhijit, or rather for your question. Like you mentioned, our growth in quarter 3 was strong. And as we had called out, it was driven on the back of very encouraging volume growth. And the encouraging part was that this growth was across all our categories, Water, Vacuum Cleaners, Air. And within Water, we saw growth across all segments of Water Purifiers, economy, mid-price and premium. We also saw strong growth in the RO range of purifiers and the UV range of purifiers. We saw growth in all the regions, and we saw growth across all our channels. So this was very, very broad-based and very robust. As you know, we don't give numbers, but I can say without any doubt that our growth and our volume growth in water purifiers was strong double digits.

Understood. That's helpful. And then on the advertising and promotional spending, is there a rough target we have in mind for this year and maybe next year as well in terms of, say, the absolute amount or percentage of sales? And in that context, can we continue to expect sustained increase in EBITDA margins over the next couple of years, maybe touching 12% or 13% by -- in the next couple of years?

Abhi, let me begin by giving you answer, and then I'll request GK -- to Gaurav to add and build on my answer. I think, first of all, I want to call out the point about EBITDA, the second part of your question, that we had called out in our earlier communication that our journey of margin improvement and our EBITDA will take us to a space somewhere between the durables benchmark and where maybe some competition could be right now. So between 8%, 9%, 10% to 18%, 19%, 20%. We will not be either bookends. We intend to firmly travel on this continuum forward. So that's number one. Number two, even as we invest in advertising, and we will need to invest in advertising to drive category growth, to drive volumes and to drive revenue, to drive our innovations that we are launching. Even as we do that, we believe we have the right levers and the elbow room to extract efficiencies from other cost lines, remove and shed inefficiency and make sure that we drive investments in communication in a way that's sustainable and that helps us drive profitability and margin improvement. Gaurav?

Yes. And I think just to build on it, just a couple of points, Abhijit. I think, one, we shouldn't see advertisement spends as a plus-plus to our expense line because this will be done in conjunction with efficiencies in other lines, keeping that in mind, keeping in mind the requirement of growth and keeping in mind profitability considerations. The second is that from our perspective, this is one part of the larger road map that we have in mind in terms of driving year-on-year margin improvement. So we're very clear that we're not wanting to be at either of the 2 bookends that Pratik spoke about would require a year-on-year margin improvement, and we have a road map around that.

Got it. Just one last thing, if I may, is on the improvement in service metrics. Pratik, you spoke at the beginning about improvement in service levels and turnaround times and NPS as well, I believe. So any sort of metrics you could share around that, that would be great.

No, Abhi. I'm glad you noticed that, and thank you for your question. And this is one area which doesn't reflect necessarily in revenue or in margin KPIs, but it's obviously, as you can imagine, a very important enabler for sustained growth and our own reputation and customer experience. So towards that, in quarter 3, we made very good progress on all our key service KPIs. Without putting numbers to them, let me tell you what the kind of KPIs I'm speaking about. The number of complaints that we have opened at any point of time. That number went down consistently and was at a very, very encouraging number in quarter 3. The time taken to respond to complaints, the number of complaints we closed in 1 hour, the number of complaints we closed in 4 hours, the number of complaints we closed in 24 hours. All of these improved significantly. And remember, as we are looking at these KPIs, we are not benchmarking consumer durables. We recognize that the customer expectations have changed. And therefore -- and this is the customer was getting accustomed to the quick commerce kind of service levels and time lines. And therefore, our service aspirations are keeping in mind this context. And therefore, even in that context, we were encouraged by the improved service levels and turnaround times. Yes. So across the board. And of course, like I said, this immediately translated and led to an improvement across the board on our Net Promoter Score and increase in the number of promoters and decrease in the number of detractors.

The next question is from the line of Rahul Kumar Paliwal from Shefa Family Office.

So sir, Eureka created definitely legacy in cleaning and hygiene. But there seems a gap in technology-driven space, like Apple kind of approach, which surprises consumers through advanced health care, new features, deep insights into consumer health areas and perspective towards science and product aesthetics, not only in look and feel but DIY side also. So that's one observation for growth going ahead. Then you spoke about innovation. So my question is on this R&D side, is it in-house team? What is the size of the team? And how does it work for you like talent profile, innovation index measurement? How does it work so far the innovation is concerned? That's question number one. Question number two is on this air purification and water purification side. This seems to be a large opportunity. But when we look about the products, the basic specification like CADR, which is a clean air delivery rate is missing, and that feature is not there in our advanced product even including the new one launched, like a few other European standard product Blueair and all they do about air purification, right? I think we should look into those space. And in the water purification, I feel this electrolyzer moment is a big so far as science is concerned. And that could create altogether new category in water science through not only purification and mineralization space, but beyond it. So maybe you can consider it and answer about the...

Thank you, Rahul. Thank you for your questions. And I was struck especially by your first question, where you were comparing us to other tech businesses, companies like Apple, et cetera. But I think it's a very, very important point that you call out. If you think about it, Eureka Forbes from its inception was imagined to be a direct-to-consumer company with a direct sales channel, with a large service network, and that has remained some of our strengths over the years, even as we have acquired new ones. What we are now doing is to reimagine the company in making it B2C with a much more technology-enabled, digitally enabled, data-enabled way of working. You will -- and which is why in my opening remarks, I spoke about D2C health and hygiene powerhouse. So this is a new form of D2C using the part of digital power of data, et cetera. And you will see us do a lot of work progressively over the months to come. Our D2C revenue business from both service and from product has increased, and therefore, that needs to be something that we need to drive over the quarters to come. You will see us also invest in innovating around smart devices. We know -- and Apple, for example, Apple Watch is a great case in point where consumers, like any wearable device, look at data, obsess over their own data on health and footsteps, heart rate, et cetera. So we know that there is a growing cohort of consumers who would like to look at health data and what better way of driving health than to stay hydrated and to have adequate quantity of water. So therefore, you will see us invest in innovating around smart devices, along with providing customers informed and intelligent value-added insights around their water consumption and hydration. So that will be one area that you will see us invest more and more. So that's number two. Number three, on your question about R&D, the R&D category and the team that we have. I don't want to put numbers to the R&D team, but our R&D team and R&D efforts are largely in-house even as we partner with external agencies like academic institutions, IITs, et cetera, in driving collaboration and partnerships. And I'm happy to tell you that our R&D team is solid, it's best-in-class really in our categories. And in the last 1 year, we've invested in strengthening the capability by looking at -- by adding capabilities around smart, around IoT, around design and engineering, building a stronger team for cleaning and for air. And all of these, we believe will help us drive innovations and differentiation and basic science work much more in the future. You talked about air and water being a large opportunity. I couldn't agree more with you. And your observation about CADR, let me just tell you that both our air purifiers have the CADR called out because as you rightly mentioned, it's a very important metric. Our AP 150 air purifier has a CADR of 150 and our AP 355 has a CADR of 355. That's the name there captures the CADR. And all documentation, customer-facing material has been called out. But I hear your implicit feedback. I will make sure that it's called out more clearly and more unambiguously.

About electrolyzer moment in science, like we are getting into a time when the gigafactories has been established in electrolyzers. So we are moving from purely purification to advanced stage in not only mineralization of the water, but maybe playing with the water in terms of H2O, right? So a mix of H2O in terms of alkaline water and so on and so forth. So can you look at that opportunity? And the sourcing of electrolyzer, I'm talking about like tangerine water kind of thing also.

Right, right.

So how do you look at this space still be outsourcing and I want to club one other question about manufacturing. I mean, would you continue to be having the white labeling or wanted to get into mode of manufacturing through own processes, technology innovation, in-house quality control and so on, which comes when we own the manufacturing side also, including the margin expansion. So this the -- there will be a certain point of time you might think about it and what will be that trigger where you will think about getting into manufacturing itself then the branding and the service side of these products?

So Rahul, on your earlier question on electrolysis and also on the fact that are we getting into more differentiated products like you talk about tangerine, et cetera. I think -- let me step back and talk about 2 things. In the short term, first of all, I called out also in my opening remarks that our value-added water purifier segment, including the alkaline water space, drove significant growth for us. In fact, we were encouraged to see the response to alkaline water purifiers in general trade channel as well. And we could see that this was, therefore, a much more broad-based acceptance of this segment amongst consumers, not just people who maybe who are more informed and more evolved. So we were encouraged to see that. Going forward, we also are seeing the emergence of exciting new technologies. which are potentially going to open the door for us for the next technology after RO. And towards that, our -- whether it's EDI or CDI, any of the technologies. So our R&D team is doing some very, very exciting work now, both within ourselves and with partnerships. We believe that, that will open the door for us to build the next range of water purifiers in the future. I don't want to spend more time on this because it's obviously sensitive information. But you can be sure that we are at the early stage of new technology and exploring ways of commercializing it. On your second question about manufacturing, our manufacturing of water purifiers is entirely in-house. And we have all the capabilities required to drive high-volume manufacturing. We have a very strong QA team and very robust QA processes. We have 2 factories, one in Bangalore, one in Dehradun. Our vacuum cleaner production is a combination of what we produce in these 2 factories plus what we outsource. And we'll, of course, remain open to looking at ways of in-sourcing more and more of the products as we go forward.

The next question is from the line of Harshit Kapadia from Elara Capital.

Congratulations for achieving a double-digit volume growth, which you have been saying out multiple times. So congrats on that. A few questions from my side. Since we have seen a double-digit volume growth, what has been the market share gains for Eureka Forbes in the water purifier and vacuum cleaner category? So we retain a #1 position, but if you can give a sense, have we touched above 50% share in water purifier and probably around 70% share in vacuum cleaner. That's the first question. Secondly, you had been mentioning on the service side that the consumers who are having Aquaguard and are not using the service of Aquaguard has been significantly higher. So has that proportion now come to equal level? Thirdly, I just wanted to check you on the distribution revenue contribution where we were very significantly present on D2C channel. And now since we are focusing on modern retail, so that share -- how has it moved? And what is the touch point that you have reached in terms of modern retail outlets? And where do you expect this number to go to?

Thank you for your questions, Harshit, and thank you also for your wishes. On your first question, I'm happy to report and share with you that we have gained market share unambiguously in both water purifiers and in vacuum cleaners. In water purifiers, we were pleased to see a very strong gain in our modern trade channel, and we were pleased to see a gain across different chains, different geographies, different segments. This gain -- market share gain was both volume and value. As you know, we don't share market share in absolute numbers. And in any case, the market share is reported only for retail by GSK, the third-party audit. And therefore, that's something we believe, which does not represent and capture the entirety of market share. But both in retail and in its entirety, our market share gain was robust. And like I said, it was both in EWP, in water purifiers and in vacuum cleaners. And we expect that as we drive growth, as we drive innovations, especially in the premium space, we expect to continue to gain market share going forward. Moving on to your second question on service. You're absolutely right. Our endeavor is to talk to the Aquaguard consumer, who is often unknowingly availing of a parallel operator service. And the attempt that we've been making is to drive awareness, drive ease of access, drive ease of authentication to convert a large part of this parallel market into the organized Aquaguard space. And like I said, we are pleased with the progress we made in quarter 3 with both volume and value growth coming our way in service. But this will be a long journey. Behavior 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 1 quarter. But you can be sure that we will stay resolute, we will stay focused, and we will have -- and we already have and we will continue to have a strong set of plans aimed at converting a growing share of this market into the organized Aquaguard space. On your third question of D2C versus modern trade, actually, there is no versus. We believe there is space for both our direct channel to grow, our online D2C segment in the channel to grow and of course, modern trade to grow, indeed, as we've demonstrated in quarter 3. We've had encouraging growth in our direct channel. And one interesting thing -- one element of direct channel growth was our robust delivery of growth through premium vacuum cleaners, especially robotics. And products like robotics respond very well to demonstrations, robotics, upright vacuum cleaners respond really well to demonstrations. And indeed, we delivered that, and we saw that in quarter 3 as well. We also saw a strong growth in modern trade, as I said earlier. And given where we are, I don't think it will be an either/or. We will intend to grow all these channels, modern trade, our direct channels and indeed our online D2C channels. I hope that answers your question.

Yes. Just one final question to GK. Your CapEx number was at INR 60 crores for FY '24 and '25. Is that the number which you still retain? Or is there any change there?

No. I think like other all areas of spend, CapEx is also an area where we've looked at opportunities of efficiencies that are there. I think 2 or 3 things. We do expect our CapEx to be higher than our previous levels of INR 17 crores, INR 18 crores. We expect this year to be more in the range of INR 40 crores to INR 45 crores. And hence, we would be spending lower than what we thought. It's largely being driven by a choice of moving our digital development in-house. We've made significant investment in our digital teams, and we believe that we have the right capability to kind of build whatever products that we want to build. And hence, that's a conscious model choice that we've made without impacting any of the outcomes. The second point I want to call out is the fact that CapEx on innovations and building the pipeline, which goes beyond the coming year as well, that is something which continues. And the manifestation of that has been some of the recent innovations that you've seen. And going ahead also, you will keep on seeing innovations coming out.

Fair enough. And just last question on premiumization, as sir spoke about. So is it possible to share some sense on what percentage of your product portfolio is premiumized in water purifier and in vacuum cleaner?

So Harshit, it will be hard to share numbers on the mix of the premium products. But like I said, we saw growth in both the value end of the spectrum, the mid-priced products and also the premium segment. Our innovations, as you have seen, have been -- at least in quarter 3 have been much more in the premium space. But as we go forward, we will have innovations and we'll have a strong set of products spanning the entire continuum, the entire spectrum. We believe there is a lot of room for us to drive premium products for sure. And we have seen that in category after category, the premium segments have been more robust, have responded well. We believe there's room for us to also compress the repurchase cycles of our existing customers by providing differentiated products, providing premium products. So that's really the one area of focus. So hard to share numbers, but that's an area you will see us focusing on more and more as we go forward.

The next question is from the line of Kevin Gandhi from CapGrow Capital Advisors.

Sir, just wanted to understand the margin improvement, which you just talked about from approximately 9% to like 14%, 15%. So -- and as we've seen, as Gaurav said that the gross margin has already been capped at a certain level, how do you see from -- which are pockets of expenses do you see this growth in margins coming from? And in how many time or how many years to be -- to say that you expect this margin number to grow? So yes.

Yes. I think 2 or 3 call-outs around your question. One, around the fact that bear in mind the fact that we are a very high gross margin business and the impact of operating leverage is very high. So that is something that as we grow along, that will be one big driver of profitability. So that's one. Number two is around the fact that within the cost lines that we have, there are opportunities that have been identified and we are working upon, which is specifically in COGS and freight, logistics and IT. And there, we believe there is significant headroom for margin improvement. And third, of course, is the mix that we have, both within our product portfolio of premium versus non-premium and our service business. So I think from our perspective, we see multiple drivers across cost, across mix and across operating leverage via growth. I think I just want to clarify a couple of things. One is around the fact that 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. And a lot of those spends have been very, very conscious choices that we've made. The second is that we are not suggesting that gross margin is capped. All that we are saying is that there are going to be competing items at play because from our perspective, the growth opportunity that we see is not just in service, but also in product. And of course, as efficiencies in COGS, et cetera, come and they increase with scale, even a gross margin could be a lever for overall EBITDA margin expansion.

Okay. Understood. Sir, -- just one more question to add. How much was the proportion of the AMC service revenue in this quarter? And how much growth is expected over the quarters ahead? Just some clarification would be helpful.

I think just a couple of points. One, I think in this particular quarter, we've seen growth in our AMCs, both in volumes and in value. So that's an important call out. The second is from our perspective, this is a big source of growth and profitability unlock. And I think the very fact that for the first time, we are investing behind it through our genuine Eureka Forbes service campaign is a clear manifestation of that. I'm afraid we don't give out on a quarterly basis the split of our service and nonservice business. So that is something that we are constrained in sharing. But clearly, from our perspective, we've seen growth in service and product businesses both.

Ladies and gentlemen, we have no further questions. I would now like to hand the conference over to Mr. Pratik Pota for closing comments. Over to you, sir.

Thank you. Thank you, everyone, for your questions and for your interest in Eureka Forbes. I hope we've been able to address the questions to your satisfaction. In case there are any follow-up queries, please feel free to reach out to our Investor Relations team, and we'll be happy to circle back with you. Thank you so much, and have a good day.

Thank you. On behalf of Eureka Forbes, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.