Eureka Forbes Limited (543482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Eureka Forbes Limited's Q2 FY '25 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.

Thank you. Good afternoon, and I welcome you all to the Q2 FY '25 earnings call of Eureka Forbes Limited. I hope all of you have a good Diwali break and my best wishes to you and your family. Starting off with the Q2 performance. In Q2, we reported a revenue growth of 13.6% over last year with a revenue of INR 672.9 crores. Excluding the impact of discontinued operations, our Q2 revenues grew by 14.7% year-on-year. This was the fourth successive quarter of double-digit growth for a continuing business, and it was underpinned by product business, which grew in excess of 20%. Our interventions last quarter in the areas of innovation, portfolio, pricing and the step-up in growth investments led to sustained high growth in our product business. In line with our strategy, we stepped up our advertising and sales promotion spend, which grew 40% year-on-year in Q2. This, as you would recall, is on the back of a 21% growth that we had in quarter 1. The consumer response to our innovation and new campaign has been quite encouraging. And during the quarter, we also launched aggressive buyback offers to drive replacement and upgrades and this we're seeing a very encouraging response as well. The vacuum cleaner category continued its pivot towards convenient cleaning with Robotics Devices and the premium of price in cordless vacuum cleaners being the engines of growth. An important dimension to draw attention to is the increased growth being witnessed in both our categories. A combination of higher activity, more innovation, premiumization and increased visibility is helping drive this growth. This, as you can understand, is and will be a helpful tailwind for us in the future. On the channel side, growth was broad-based across all channels with particularly strong growth in e-commerce and modern trade. As you are aware, we picked up service transformation in Phase 2 of our strategy earlier this year. As part of this, our focus continued on improving the customer experience in growing our service franchise. Our AMC base expanded year-on-year, driven by more affordable segmented AMCs, albeit at a lower ASP. In addition, we strengthened our distribution and our go-to-market system for filters to tap into the non-AMC customer base. The impact of growth and the associated operating leverage was visible on all profitability parameters. On the profitability side, adjusted EBITDA margins increased to 11.5%, expanding 106 basis points on a year-on-year basis. This margin improvement was delivered despite a deliberate choice of significantly dialing up our advertising spend that I spoke about earlier. Our profit after tax grew 83.2% year-on-year at INR 46.7 crores for Q2. As we look ahead, we will remain focused on executing our transformation strategy, drawing energy from our recent performance. With our product business continuing to grow strongly and with the acceleration of our service transformation efforts, we are confident of driving sustained and profitable growth in the periods ahead. With that, I'll now hand you over to Gaurav. Gaurav, over to you.

Thank you, Pratik, and good afternoon, everyone. Starting off with the headline numbers. Our revenues at INR 672.9 crores grew 13.6% on a year-on-year basis. Adjusted for discontinued businesses, our revenues grew by 14.7%. Adjusted EBITDA margins expanded 106 basis points year-on-year to 11.5% in quarter 2. Adjusted PBT grew 36.2% year-on-year, and PAT at INR 46.7 crores grew 83.2% year-on-year. On the revenue side, product business clocked plus 20% growth, and we continue to see broad-based growth in both electric water purifiers and vacuum cleaners, driven by premium innovations, realizations improved, leading to both volume and mix being growth drivers. Growth initiatives are supported by bolt-on growth investments in advertisement and sales promotion spends. In line with our strategy, our advertising and sales promotion spend grew 40.1% year-on-year in quarter 2. Part of these investments are also driven by an early effective season and supporting new innovations. We intend to continue stepped-up growth investments. Our quarter 2 gross margins at 56.3%, was 111 basis points lower versus previous year. This was driven by a combination of buyback offers and channel mix. Commodity prices remained range-bound during the quarter. The sequential drop in margins is a seasonal phenomenon as witnessed in previous years also. This is largely due to the fact that in quarter 2, the product business has got a higher share compared to the service business. Driven by operating leverage, our expenses as a percentage to revenue, excluding ESOP charges, were lower by 217 basis points versus previous year. Our focus on cost program will continue to drive further efficiencies. Within expenses, if I were to add some color, service charges reduced by 12% year-on-year. This reduction was mostly driven by a larger share of digital AMCs and consumer interaction happening via the digital route and also leakage control measures that have been taken by the company. Going forward, we will make specific investments in driving improved customer experience. Non-cash ESOP charges stood at INR 5.7 crores versus INR 10.7 crores in quarter 2 last year and INR 8.7 crores in quarter 1 FY '25. We expect ESOP charges to now stabilize at these levels. Other lines below EBITDA remained largely stable. Depreciation for the quarter stood at INR 7.2 crores and amortization was at INR 6.8 crores. It may be noted that while depreciation charge is linked to CapEx investments, amortization charge in the P&L is largely for intangible assets, which were created as part of acquisition accounting. On the balance sheet side, the net surplus improved to INR 119 crores. Trade receivables increased due to channel mix with higher growth in e-com and modern trade. There are standard trade terms in both these channels, and we expect this to unwind in half 2 of this year. Inventory increase was due to festive buildup that was carried out. In summary, sustained double-digit growth for 4 quarters for continuing business and steady year-on-year margin improvements despite significant bolt-on growth investments give us the confidence in our strategy of driving sustained profitable growth. Thank you.

Sir may we proceed with the question-and-answer session?

Yes, please.

[Operator Instructions] The first question is from the line of Umang Mehta from Kotak Securities.

Congrats on a good quarter. So just one -- first question was on if you can share some ballpark growth rates in water purifier product, vacuum cleaner product and service segment if not for the quarter, just for the first half, that would help to understand the mix growth?

Thank you very much for your question and for your wishes. As we mentioned in our opening remarks and as our results reflects, I think our quarter 2 performance was on the back of a very strong product growth in excess of 20%. This growth was extremely broad-based. We saw similar strong growth across both water purifiers and vacuum cleaners. This came on account of A, volume growth: B, the success of a premium innovation and C, our investments that we made in driving advertising and driving visibility, of course, both on air and on the ground. The growth was, as we mentioned earlier as well, broad-based in terms of channels as well. While e-commerce was the fastest-growing channel, we saw robust growth in retail and in our direct channels as well. So I would say, in terms of both category as well as channels, our growth was extremely well distributed.

Sure. Maybe on the service business. So like in first quarter, you had highlighted double-digit growth in consumer spend. At least that trend would have continued in the second quarter.

I'll take the question. Yes, on the service side, we've now moved to as part of Phase 2 strategy of growing the franchise because our focus is on replicating our experience that we saw on the product side where you get more consumers into the franchise. So as part of that strategy, what we've done is that we've made our offerings even more affordable. As a consequence of that, what we have seen is our AMC base to go up. We've also seen our AMC volumes to go up, and that is something which has given us an indication that our strategy of product that worked well for us is something that should work well in service as well. So that's how service is panning out. As you can imagine, getting more people into the franchise in an annuity business is critical, and that has come with the ASP drop, which we are conscious of. But going ahead, we would then see that on a lifetime value basis, you will see this playing out in the quarters ahead. An important number I'll draw your attention to is the fact that if you look at the liability that we carry on our balance sheet, which is towards the unamortized revenue, that continues to remain very, very healthy.

We have the next question from the line of Siddhartha Bera from Nomura.

Congrats on a good set of numbers. Sir, first question, again, you have mentioned that the product volume growth -- product growth has been very strong at 20% in the quarter. Some color there about, is it largely volume-driven or what amount can be volume and what can be the ASP that will be very helpful to understand this? And some indication about -- now we have completed the festive season, so some indication about how the growth trends are, are some of these trends sort of better in the near term in the festive period? So some color there will be helpful to understand the growth momentum.

Thank you for the question. On your first question on our performance on the product business and some color on that. I'm happy to report that both for water purifiers and for vacuum cleaners, our growth was a combination of volume of -- on the back of volume growth as also an increase in our ASP. Let me double-click on both the categories individually. In the case of water, as you're aware, we have a penetration talk that's been ongoing. And that's reflected in our decision to invest once again in an advertising campaign to drive awareness. And again, that led to a very strong volume growth in the water business. In addition, our premium innovations, one of them was under-the-counter product. The other one was an instant hot water product. Both of these helped strengthen our ASPs. Our premium portfolio within water purifiers grew well ahead of the others. And as a result, our ASPs improved as well. So in water, it was a clear combination of both volume and ASPs. In the case of vacuum cleaners, vacuum cleaners, as you're aware, there is a pivot happening in the category, which we've spoken about earlier, and that is towards convenient cleaning. The categories for a long time, been driven and anchored in conventional cleaning categories, canister-based vacuum cleaners and corded vacuum cleaners. In the last couple of years and especially in the last 2 to 3 quarters, we have seen that pivot accelerate. And this quarter, we saw growth again led by the premium segments of robotics and the handheld like vacuum cleaners. Again, in this category, we were happy to see volume growth, but a much greater bias of the overall growth came from the ASP improvement. I think it's important to also underline that in neither of the categories was there a pricing-led growth. We did not take pricing. It was on the back of both volumes and ASPs. I hope that answers your question, the first question.

Yes, yes.

Got it. On the second question that you asked about festive, you're right. Now we've had the entire festive season behind us, and if we look at our overall performance, especially in the last -- in the most recent period of Diwali, I think we saw two patterns play out. First, the growth that we saw from the pujas to Dussehra to Navratri period to Diwali, there was a very clear acceleration. The growth picked up. The consumer, the footfalls in the market and the sentiment improved, and there was a very clear uptick, which in turn reflected in robust demand during Diwali across all our channels. Once again, as I mentioned earlier, e-com was the fastest-growing channel even during Diwali and overall festive. But modern trade did well as did our direct channels. Traditional trade, while also growing, was slower to grow compared to the other channels. So overall, I would say we are happy with the way festive has performed for us. It was a strong performance. Our tertiary sales were robust and again, reflected what we spoke about earlier. There was a volume impact, and there was a very, very encouraging response to our premium innovation. And therefore, the festive momentum was very positive. I think it is important to, however, underline in the same breath that given the festive and Diwali timing, a lot of the primary billing that went behind this tertiary billing actually happened in quarter 2, and it's reflected in our performance and which we called out in our remarks as well. So while the tertiaries have played out through -- and will play out through October and through Q3, the primaries have been baked into the Q2 numbers. We will now see the replenishment happen through November and December.

Got it, sir. Sir, second question is on the schemes you have launched to drive upgradation with consumers. So some numbers you have about how -- what percentage of buyers would be upgrading between your product sales? And any sort of data point would you have to share there?

No, that's a really good question. I'm glad you picked up the schemes that we have driven -- in a very concerted plan that we have driven to drive upgradation to drive faster replacement. And if you recall in our earlier calls, especially last year, we have spoken about the fact that while Part 1 of our agenda in water was to drive penetration, Part 2 was indeed to drive replacement and upgrades. And that has played out this year, especially in quarter 2. We are happy to see, therefore, that the response to our buyback scheme was very, very strong. And that came from both our existing installed base of users, but also from our nonuser base, our competition base. Our premium portfolio did well with almost half of the new customers who are coming in, half or more being upgraders in our premium products. And as you can imagine, this was focused sharply on our premium products. The premium products actually saw a very encouraging response with, like I said, more than half of the users being upgraders or people who are buying faster. I hope that helps.

The next question is from the line of Naushad Chaudhary from Birla Mutual Fund.

Congrats on a good set of numbers. First, the bookkeeping, sir. In the P&L, our service charges this time was slightly lower year-on-year. What has happened there? And is this something we should take as a new normal for the business?

Yes. Thanks, for your question. The service charge reduction was largely driven by two things. First is the fact that as we digitize more and more of our business, we are seeing the extent of our digital AMC sales go up and equally, our consumer interactions via digital means go up. Just to give you a data point around that, today, 80% of our interactions are now happening through digital forums. Now when that happens, it obviously leads to a situation where the service charge that you are paying through the non-digital or offline route, those go down. The second thing that has happened is that, as you can imagine, on a very large network, there would always be opportunities or there would always be certain areas of leakage that could arise, and those leakages are being addressed one by one. As we've mentioned in the past, driving cost efficiency is a continuous process. And again, as an ongoing process, we keep identifying the opportunities that are there to keep driving efficiencies. So that is the other thing which has played out. Having said that, I think as we mentioned in Phase 2 of our transformation, the service is an absolute priority. And while these efficiencies come in, it gives us the headroom to invest in certain consumer -- customer experience initiatives, and we will make those investments as we go ahead. So this will be a combination as we go ahead in this journey, a combination of certain efficiencies playing out, but then part of -- some parts of those efficiencies getting deployed back in driving superior customer experience.

Understood sir, very clear. Second, on the expected BIS regulation for the water purifier. Any update on this? And if that happens, how do think this can benefit or impact to organized players like us?

That's again a very good question. And I think the impending BIS rollout, I think it's very good for the industry, and it is something that will give the organized sector a much-needed boost. It will also encourage all of us to drive products that have high water recovery and therefore, are far more sustainable. I'm happy to say that all our products are and will be compliant well in time for the BIS implementation. We are aware that this is something that is a very important initiative and an important area of focus for us. And our entire portfolio will be compliant. And we believe that as BIS guidelines get accepted and get implemented, this will help drive the organized sector more favorably.

We have the next question from the line of Aniruddha Joshi from ICICI Securities.

Sir, the efforts that we have done, so definitely, the fruits of those efforts are seen in this quarter. Just wanted to understand how are we in terms of the market shares across the products? So what would be the performance, let's say, in market share terms across the regions? Then secondly, have we seen the growth broad-based, means is it across the regions of India? Or is it in some pockets? Because most of the companies are indicating weaker consumer offtake, we are among the very few companies which have shown such a robust performance. So is there any particular region where we are getting this growth or any other abnormality or any rural, urban kind of light if you can share more on that? So that is the second question.

I think we spoke about the fact that we had a strong broad-based growth. Happy to report that it also reflected in a market share increase that we have seen in our retail business. This market share increase was evident in both our traditional trade and the modern trade channels. And clearly, therefore, we have, in the last quarter, outgrown the market. Your second question about the growth profile was it broad-based? I think the growth was broad-based. We spoke about the category buyers of growth broad-based across both, water and cleaning. It was broad-based in terms of regions as well. All our regions had strong growth. But amongst the regions, we have seen the South region grow faster. And again, that's something that was over-indexed on our overall growth. In terms of town class, we saw all town classes grew, but the Tier 2 and Tier 3 towns and the mid-tier towns actually grew faster than the metro and Tier 1 towns. And that, again, that growth pattern and profile reflect what we are seeing in other consumer businesses elsewhere, where the smaller towns have grown a little faster. So I would say while there was uniform growth everywhere, the growth bias and the growth over-indexing was: a, in e-commerce; b, in the South region; and c, in the Tier 2 and Tier 3 towns.

Sure, sir. This is very helpful. Last question. So when you had started somewhere around that time, there were 8 million water purifier installed base, and I guess we were directly servicing around 1 million water purifiers. So where does this number stand now? In a way, has that penetration of direct servicing has gone up considerably? Or how should we read that? And where do we see this number, let's say, going up in 3 years because we have done a lot of on-ground initiatives on this. So just wanted to check it for an update. Yes, that's from my side, thank you.

Thank you and that's a really good question. And you're absolutely right. We had talked about a significant expansion in our installed base. Our strategy, as we discussed earlier, was to drive volumes and drive penetration. And in the year 1 of our transmission strategy, we spoke about a significant volume growth that we delivered on the back of the affordable Aquaguard and the advertising campaign supporting it. So that led to a significant growth in our overall installed base. We've also seen, as we mentioned earlier in the call, growth in our service franchise and our service installed base. We've separately also spoken about, and it's there on the investor deck about the fact that we've got access to almost 14 million first-party data. And that, again, as you imagine, is an extremely valuable asset. So happy to say that our installed base has grown overall. Our base of AMC users also has grown encouragingly. But as you're aware, we don't give these numbers separately. We don't give volume growth numbers separately. But I think they both have moved in the right direction, both our overall installed base of Aquaguard users and also within that, the base of AMC users.

The next question is from the line of Nandita Rajhansa from Marcellus Investment Managers.

First of all, many congratulations to you, Mr. Pota and Mr. Khandelwal for an excellent set of numbers. So my questions are twofold. One is a little macro related and the second is basically on the accounting side. So the macro-related question is that we've been hearing this and I'm seeing this in the data as well that there is a slowing urban demand overall across the country. So I wanted to understand that whilst we've had a really good Q2, which could seasonally also be good because of the monsoon and therefore, the higher consumption of water purifiers, but how sustainable is this going forward? And the accounting questions are regarding increase in trade receivables and reduction in trade payables as well as the gross margin reduction Q-on-Q. So if you can just give us more color on that, that would be great.

Thank you for the wishes. And let me respond to your first question before handing you over to Gaurav for the question on receivables. I think you've spoken about the context as where being demand challenges. And I think we have spoken about that as well earlier. I think the change that we're beginning to see now is that we are seeing a greater adoption and a greater acceptance of the water purifier category. I think there is increased activity. There is a lot more innovation happening. There's a lot more visibility in terms of advertising and on the ground. There are more players entering. So there is a lot of excitement, plus the fact that we, in the last 18 months or so, have sustained our advertising investment in driving basic category need and relevance. I think all of that is reflecting in an improved category adoption and category growth rate. So that's the tailwind that's working for us, which I spoke about in my opening remarks. In addition, what we've been doing, as you're aware, is being focused on driving our own penetration efforts and driving more recently our premium innovations. These have worked for us. And as we mentioned earlier, we've had now 4 quarters of double-digit growth in a continuing business. Product growth has been high teens. This quarter was 20% plus. We feel good about the plans that we've got lined up for the future. We feel good about what we've got, being getting rolled out in both quarter 3, quarter 4 and beyond. We feel that between our efforts of driving penetration, driving innovation, creating more relevance, investing, as we said earlier, ahead of the curve on advertising and of course, our execution improvement on the ground, we believe that we'll be able to sustain strong product growth in the foreseeable future. I don't want to quantify it and get back down to numbers, but strong growth, robust product growth, we have immense confidence in being able to deliver it. Yes, Gaurav?

Yes, to the first question on trade receivables, we've seen from a growth profile standpoint, strong growth on the e-com side and strong growth on the modern trade side, while other channels and geographies have also grown, but the growth has been relatively higher in these two channels. These channels operate with standard terms of trade, in terms of credit that is there with major players. And hence, what you see is a reflection of those trade terms in our debtors' position. So this is something which is very, very normal. It is something which will unwind between October and November because that is when collections fall due and part of that has already happened in October. You will also note that this is a consistent pattern that happens every year because of the simple fact that festive is always around October or early November. So that's the reason why trade receivables have gone up, but this is more a question of timing than anything else. The second thing is around gross margin. Again, when you look at gross margins from a sequential basis, this again is something which is a function of seasonality. Quarter 2 for us is the biggest quarter of the year. And within that, the product cadence goes up because there is festive selling, et cetera, that happens, there is selling which is related to monsoons that happens. Given the fact that product gross margins are lower than service, there is an overall portfolio effect that happens. If I draw your attention to even, let's say, last year, there was a sequential drop of gross margin that had happened. And then these gross margins come back again in quarter 3 once the portfolio rebalances. I'll draw your attention to our half 1 margins. If you look at a half 1 basis, on a half 1 basis, our margins are 58.2% versus last year of 58.8%.

Understood. And there's a point about trade payables, there's been a reduction in trade payables as well.

I think it's just -- it's a function of -- so part of our trade payables is linked to our import portfolio. So there are certain, for example, the vacuum cleaner portfolio, that supply chain is China-based largely. Now for a festive buildup, you bring in DCs, et cetera, and those payment terms is something where you end up giving payments. So it is more a function of, again, linked to inventory, which is there, and its regular inventory payments that are happening.

The next question comes from the line of Diya Brijwani from White Whale Partners.

Really appreciate the initiatives you have been taking on the AMC contracts. But any metrics that you can share on the renewal rates, given that the first year service is free. So any metrics that you can share on that? That would be my first question. Second is, any updates, so you mentioned on the pilots that you've been running on the rental model. So how has the progress on that been? That's it.

Thank you for the question. On your first question, on metrics linked to our AMCs and our contracts. I think -- let me first pull back and talk about what we have seen in the service business that we spoke about earlier in the call as well. Our service strategy, to recap, has been to sort of follow the same analogous path that we did with product 1.5 years ago, which is to recognize that one big barrier to our service and to our AMC and to our contract has been the high perceived cost. And therefore, what we have done, as you're aware, is to offer consumers and our customers segmented and tiered AMC options to drive unit sales and unit offtake, knowing that in annuity business, the more volumes we have and the more customers come on to the franchise, the better will be the revenue stream in the future. So with that objective, we have rolled out affordable AMCs. As I mentioned earlier, we are seeing that reflect now in a growing service franchise and service base. So that has been the first encouraging output and outcome of what we have done. That, of course, as I mentioned earlier, has come at a slightly lower ASP, but that was by design to drive affordability. I think we don't share detailed metrics of how conversions have trended, but happy to report that our conversion, and I think you asked a question about the first-time user. Our conversion metrics have improved in terms of people who were first-time adopters of AMC. So people who had bought the device and were into warranty and the adoption of AMC actually has improved last quarter. We sort of don't share numbers beyond that. On your second question, the rental pilot, the pilot continues on a slow burn, and I want to sort of talk about that a little bit because it's a question that we've been asked earlier as well, and it's a very, very fair question. I think the rental pilot continues and it's delivered whatever we wanted to deliver in terms of learnings, in terms of the KPIs. The debate that we have internally is when to step it up. And the interesting -- and this is a problem of plenty in many ways because when we are growing at 20% plus in our product business, we want to be careful not to de-prioritize that when we open up a new front as far as rental goes because any such initiative will require investment, will require creating the right awareness, the right field and focus on the field and go-to-market system. So it's a matter of prioritization. And as of now, we are choosing to prioritize our product sales business before we scale up our rental business. That remains on a peripheral vision. But given the strong momentum and our strong, I guess, just the conviction that we have in product, we believe that this is not the right time to digress and to distract our teams from the agenda by getting into scaling up rentals.

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

Once again, congratulations for a very good set of another good quarter. A few questions from my side. So when you mentioned that premium product has been one of the major contributors. How would you define a premium product? Is it based on price point? Or is it based on [indiscernible]? And what contribution is premium in your current portfolio within water purifier and a vacuum cleaner?

Thank you for the wishes and the feedback. And we have seen, as you mentioned rightly, growth come by in our premium business, in premium portfolio. And -- while I will talk about and answer your question in detail in just a minute. I also want to underline that we saw growth in all parts of our portfolio. It wasn't just in the premium business. We saw strong -- first of all strong volume growth overall in the water business, and indeed in VC. We saw a strong growth in economy as well and not just in the premium. So therefore, we were encouraged to see that the growth was very broad-based. Now coming to your specific question on premium growth and how do we define premium products. They are defined by price points and the price points are different for RO devices and different for UV devices. In the case of UV devices, the price point that we have is more than INR 12,000 for UV devices and for RO devices, it is more than INR 20,000. Any product that we have in the price band, which is like I mentioned earlier, more than INR 12k or more than INR 20k will be defined as a premium product.

Okay. And what percentage right now would be of your premium product in your portfolio, sir?

While we don't share that breakout, Harshit, given the fact that the premium portfolio has grown faster than the overall category average, you can imagine that the mix of premium has strengthened compared to last year -- versus last year. And again, just to wind the clock back a little bit, same time last year, as you would recall, our growth was driven largely by the economy segment. And we were talking about our intent to grow premium and to make sure we have a much more balanced growth profile. Now as we look back and reflect on the last 1-year journey and of course, last quarter, we feel good about the journey we have traversed where our penetration work and efforts continue to bear fruit and give us volume growth and revenue growth. But we now have a second growth engine firing for us, which is the premium innovation and the premium business.

We have the next question, ladies and gentlemen from the line of Anupam Goswami from SUD Life.

Sir, if you can give some light, I missed some points on the service segment and how much we are growing in that and given our newer launches, do we give any minimum sort of free services or a warranty period? And where do we see the service segment as a percentage of our total revenue going forward?

Got it. On the Service segment, while we don't give out the segmental revenue every quarter, it would be fair to say that service revenue constitutes about 1/3 roughly of our overall business. Our service transformation agenda was picked up earlier this year. Our transformation strategy was divided broadly into two phases. Phase 1 was to restore product growth. And this was a business you would recall, that hadn't had product growth for almost a decade. So it was important for us to bring product growth back, which we began doing last year. And very deliberately, this year, in addition to product, we picked up our service transformation agenda. We feel good about the progress we've made in the last 6 months. I spoke earlier about the fact that we've driven now affordable AMC, we've also now picked up the agenda of targeting the non-AMC users, the installed base of customers who are comfortable, in fact, would prefer not to have an AMC and are very comfortable replacing filters as and when they need them. We've now bolted on our efforts by having focus on a new filter go-to-market that I spoke about earlier. So that's beginning to bear fruit as well. So that's now reflecting in our service segment expanding, the franchise or AMC base expanding and also a pickup and have a strong pickup at that in our filter sales. So we feel good about that, also what we have not spoken about, and it's important to underline is that our customer experience KPIs also have improved significantly year-on-year. Our service KPIs, our service stats, our NPS numbers are far higher than last year and at lifetime highs. So that's on your first question. On your second question, how is the service -- how is the whole service structured? Yes, when we sell a new product, in the first year, we have a warranty that covers the first year. As part of that warranty, depending on which segment the product falls into, we either have one or we have two free service options being given to the customer. And that's part of the warranty offering, wherein our technician goes to the customer's home, cleans up the filters, if any other help is required, services the device and comes back. At the end of the 1-year period, we then attempt to convert our customers into our AMC offering. Some customers pick it up right then, some customers wait for some time. And some customers, like I said earlier, prefer not to go in for an AMC and wait for a filter change to come by. So that's the way it's structured, the construct.

And sir, this time, the margin improvement, is it only because of the premium segment catching up? Or is there any service segment also coming up? I'm talking from the point of view that where we could see the margin going forward. One was the cases that service segment will come up, and we had a lot of leakage in that segment and also premium product. Where is that strategy playing out?

Yes. So I think at a macro level, the margin improvement is being driven by operating leverage. Because fundamentally, if you look at, it's the near 14% growth, which is giving us that operating leverage advantage because at gross margin -- at high gross margin level, that plays out quite well because, again, I would just like to reiterate that this margin improvement that you see is after a 40% year-on-year growth in advertisement and sales promotion spend. So it's largely being driven by operating leverage. There will obviously on an ongoing basis, opportunities of cost efficiencies that may be kind of worked upon. But at a macro level, it is going to be operating leverage, which is the biggest source of profitability improvement.

The next question is from the line of Harsh from Nepean Capital.

So I just had two questions. Firstly, on the buyback front, how much of the buyback has contributed to our 20% product growth? And secondly, on the ASP improvement, I understand that we are focusing on the broad-based growth with penetration and premiumization both. But I would just like to understand what's our mix that we have in our mind given that the premiumization should stand, the mix of premiumization should stand given that how the margin moves. Yes, that's the two questions I have.

I think let me sort of start with the first question -- second question before I come to the first question. I think the exciting opportunity that we have in water purifier is that we have both a penetration task as also an upgradation task. In a category that has 6% penetration, as you can imagine, there's a long runway we have to drive category adoption and convert nonusers. And towards that, we remain invested in driving awareness, driving relevance, driving affordability, driving access and distribution. And that has led to a strong growth in our economy portfolio this year and therefore, in our volumes, which I spoke about earlier. Equally, we are lucky to have a very large installed base of users. And the average replacement cycle of water purifiers has been typically 6 to 7 years or in many cases, even longer. And that is much, much longer than what other durables typically have or have begun to have more recently. And the reason for that is the category has not driven innovations significantly until recently. So therefore, a big part of our strategy now is to tap into our installed base and indeed installed base of water purifier users more generally and to give them very, very differentiated and clearly different products and premium products, which they can upgrade to. And that is what will lead to and that is what leading to an ASP increase. So our growth in last quarter was a combination of both of strong volume growth in water, accompanied by a higher mix of premium, which led to an ASP increase. Going forward, we expect this two-step tango to continue. We will have a focused, almost most organic based approach that we will have a very clear focus on driving penetration. We will make sure that we drive affordability, we grow volumes, we drive relevancy. Equally, however, we will remain focused on driving innovations, driving differentiation giving consumers specific functional reasons or other reasons, aesthetics, design, form factors to upgrade their devices faster. So we expect both of them to grow and which will lead to a very healthy and a balanced growth profile. I think on buyback, you asked about the contribution, which was your first question. I mentioned earlier that we were encouraged by the response to the buyback offer. And you may have seen our press advertising that we ran across the country. We also ran a lot of digital campaigns around it. We also had a television campaign running both in quarter 2 and more recently in October, focused on premium products. And that led to a very, very encouraging response from our customers. And while we don't give numbers out in terms of the adoption of buyback and acceptance of buyback, the number I did mention is that more than half of our premium device users and the buyback users actually were existing users who came in to upgrade their devices. So that -- this is -- to be honest, this is the first time we've done an effort of this nature at this scale. But we've always had buyback offers running in bits and pieces earlier. But with this kind of support and this kind of visibility, it's the first time. And we've been fairly encouraged -- quite encouraged and enthused by the response we have received, and we intend to continue this as an area of focus for us.

The next question is from the line of Yash from Stallion Asset.

I just wanted to understand, just from the management's vision perspective. So after the transformation project is over, do you believe that the business has potential to have a significantly higher EBITDA margin, maybe something like 15%, 16% over the next 3, 4 years?

Thank you for that question, and I'm glad you sort of asked a more longer-term question because really, the exciting part about Eureka Forbes is that there is a here and now opportunity, but there is also a much more exciting longer-term opportunity. This is a business with tremendous assets. We've got an incredible brand in Aquaguard and a very strong corporate brand in Eureka Forbes. We've got two strong categories, two large categories, which are both underpenetrated, which are both relevant and seeing increased adoption, increased growth, water and cleaning. We've got a very large service business. We've now got a growing digital back end as reflected in all our digital growth, et cetera. So with these foundational assets and such strong assets, we have an extremely promising and a very high growth model ahead of us. We will be a much larger business as we go forward, and we will have growth, and I'm talking over the next 5, 10, 15 years. So this is a business that we are designing and rebuilding as we say often. For the next 40 years, building on the foundations that have been laid in the last 40, yes. So as we grow, as we drive innovation, as we drive penetration, one big part of that effort will also be to improve profitability. And as you can imagine, in a business with healthy gross margins like ours, as revenues grow, there will be some obvious impact through operating leverage on our EBITDA. But equally, however, we have to invest back in driving category growth, in driving -- in supporting our innovations and in general, just talking both the category adoption. So over time, longer term, we will grow. There will be profitability expansion, but it will be calibrated, it will be systematic, it will be step in step. Anything, you want to add to that.

Absolutely. I think one thing I'll just draw attention to the fact is that we are still literally at the end of the second year of the transformation. So obviously, we are at a stage where there is still a very clear runway that is ahead. And if at the end of second year, we are at a margin profile, which is roughly 11.5%, then it also tells us that there is a road map which will take a view on this. Now where exactly it will end time will tell. But from our perspective, I think, again, goes back to the point that with the high gross margin profile and a focus on expanding category, growth comes and with that follows operating leverage, which automatically ensures profitability.

Okay, got it. And just coming back to the previous part of discussion on this buyback scheme. So I just wanted to understand, so are you targeting existing Eureka Forbes customers and telling them that if you upgrade to like a latest model -- I just want to understand how this works.

Actually, the logic like I said earlier, is to talk with the existing users of water purifiers more generally, not just Aquaguard and give them specific reasons, both linked to product and innovation as also supported by some financial incentives and offers and discounts to accelerate their repurchase. And -- so whether it is our instant hot water product or indeed, it is our under the sink product or our glass Slimtech product or Slimtech steel product. We have specific buyback offers, different offers on different products targeted at existing users across all channels, whether it is our direct sales channels -- through direct sales channel or through retail or through e-commerce. We've had different versions of these offers running. And as I mentioned earlier, we've been quite encouraged with the response that we have received.

You will continue this offer for the rest of the year.

It will be part of our strategy going forward, yes.

We have the next question from the line of Rishab Gang from Sacheti Family Office.

Really wanted to appreciate your great performance and efforts from the team. I understand a good amount of growth is coming from the robotic vacuum cleaner, and we have done new product launches as well. I want to understand what are we doing and will do incrementally for product awareness as well as increasing sales, especially cross sales? Like do we have a demonstration at customers' place? Like what is the status of this across India? And any cross-selling initiatives that you have, right, especially for those people who have bought premium water purifier? And any referral mechanism that you have for this?

Thank you, Rishabh. Thank you for two things. One is for appreciating the performance but thank you for asking a question that's very close to my heart. And absolutely right. I think you spotted the opportunity well. And yes, we've talked about robotics being a big engine of growth. Robotics is a category that has now grown handsomely for us for the last many quarters, and we believe that a long runway for growth lies ahead. So what are we doing? Actually, even before that, why is robotics growing so well? I think it's important to sort of recognize the fundamentals that are driving the growth. I think the consumer, especially post-pandemic, realized the need for an automated cleaning solution at home just in case the domestic help was not available. And because the solution had to be automated, it had to be a convenient one. It didn't -- it wouldn't require -- it shouldn't require a lot of manual effort. And that has driven two segments broadly. One is the cordless and the handled vacuum cleaners and the other one is the robotic segment. Robotics, far more than the former. So our attempt and our strategy in robotics is twofold. The first one is to drive robotics penetration and to make sure that there is adoption at different price points. So one part of the strategy is to have a portfolio that straddles from economy to the premium segment. One interesting nuance in robotics is that because it's so low in penetration and there is growing awareness, the consumer is looking for more and more premium options. So we've just launched last quarter a product, which is a robotic device with an auto bin station, with an auto dust station. In other words, the robotic device will go to dock, get recharged automatically. Not just that, the dust in the vacuum cleaner, the robotic device, will get emptied and sucked into the bin. And that bin can store that dust for as much as 60, 65 days. So it needs to be emptied only once in 2 months. So it's extremely convenient for the consumer. Now that obviously has a premium price point that comes at INR 34,000, INR 35,000 base price point as compared to INR 23,000, INR 24,000, which the others come at. But that has seen extremely encouraging adoption because consumers are looking for more and more convenient solutions. So that is the attempt that we have to have a full spectrum of products from the affordable ones, which are maybe more gyro-based to the more premium ones, which are full station to dust station, which are all laser or radar based. So that's the attempt at, first of all, building out a full portfolio of products. The second part, and I think the question you asked was spot on. How do we create a much greater awareness about these products? And how do we use our strengths and our assets like the installed base to drive that adoption of robotics. So for the first time, we've actually begun investing in advertising of our robotic vacuum cleaners. You would have seen in some of the leading publications, full page ads with robotic devices. We've also done a lot of work with digital influencers and the digital marketing campaign has gained ground in the last quarter. And you will see us invest going forward as well in driving awareness of robotic cleaners. I think the other thing we've done, and which is building on our strength from service -- strength of service and from water is offering customers an in-home demo of robotic devices. Of course, our direct sales team does that, and that's a great strength. But the same in-home demo option is available to customers even in modern trade. So modern trade -- a customer walks into a Vijay Sales or into a Croma and looks at a robotic device and wants an in-home demo, somebody will go to their house, take the device, do a demo and land the same. Equally, we are supporting our online sales efforts, so Amazon, Flipkart, et cetera, with an online demo. So we will have a live online demo happen. And if the customer wants to follow that up with a physical demo, that's an option as well. So we are using our strength and our assets to drive awareness of robotics. And yes, both our installed base and within that specifically, like I said, installed base of premium water purifier users, that's a very, very valuable base into whom we can cross-sell these robotic products. And there's work going on in that as well. So we are quite excited by the opportunity that robotics offers us.

Also on the AMC front, right, like how are we tapping the existing customers for AMC, which have not been with us for some time? Also, once the product is sold, right, the first AMC after the product warranty, it is very important. If that goes out of our Eureka thing, then the person actually becomes a customer of a non-Eureka AMC. So how are we ensuring that the customer sticks with us post the first year of product? And just a follow-up on the vacuum cleaner. Do we have any aftersales revenue opportunity like service or consumables in vacuum cleaners and air purifier as well? Yes.

Yes, on your second question, the follow-up question, certainly, for both vacuum cleaners and robotics one that you asked about earlier and also for air purifiers, we have a consumables opportunity. And the fact that we have both a direct sales network, but also a growing B2C presence will allow us and allows us to monetize that more effectively. So that's your question on the opportunity, after sales opportunity. On AMCs, you're right, absolutely. The effort is to provide our customers a very, very good and a superlative experience in their first year post purchase, which is within the warranty period. And what comprises that? First of all, post purchase, a speedy installation, making sure that the customers' expectations of installations are delivered, #1. #2, whenever the customer has a query and very often our new users, our new adopters have a lot of queries about the purifier, about the water and all of that. How do we address those queries, both virtually and remotely and if required physically, promptly. The third use case, the third issue is when there's a complaint, and very often, what happens is when the source water quality changes and becomes adverse, the customer calls and complains, so how fast we respond to that complaint will also define, of course, the customer experience. So the better the customer experience in the warranty period, the higher, as you can imagine, is the probability of conversion from warranty to our AMC. It's important to note that the AMC adoption is not a day 1 activity. It's not as if on the 12-month first day, people either do or not do. It's a continuous process. So up to 6 to 7 months after the end of warranty, there is a gradual adoption of the AMC, and that curve continues to increase. That's a function of various things, customer intent, time, the filters continuing to work for longer, et cetera, et cetera. So the revenue opportunity continues for 6, 7 months thereafter. And you are absolutely right. There's a lot of work that's going on in targeting this customer, both through our business partner network and increasingly through our D2C outreach. And like I said earlier, we have seen success, and we have seen encouraging increase in conversion of the warranty users into AMC. That said, I think it's also important to remember that there are many customers who would not want to have an AMC, and they would prefer to change the filters as and when required. Now I mean, going back to your question about aftersales opportunity, the interesting part and the good part about the category is that there will certainly be an aftermarket opportunity because either through AMC or through filter change, there will be necessarily a need for the customer to change the filter. So we have to do two things: a, we have to make sure that the customer is able to differentiate our filters from the parallel market filters, the unorganized filters. And towards that, we had -- we have launched a different looking filter. We've also got QR codes on the filters to allow customers to authenticate. We've also invested in advertising to create awareness. So that's one part of it. The second part of it is the distribution and the access to these genuine filters on which, as I mentioned earlier, there's a lot of work happening in strengthening our distribution and on the go-to-market and our availability. And this would require us talking to the technicians outside the system as well. So there's a lot of work that's been kicked off and that's ongoing in that area. So between a greater focus on AMC and a greater focus on driving filter sales, we believe that our service revenues going forward will be encouraging and will target the large installed base we've got, which offers us a great opportunity.

We need to end the question-and-answer session at this point. Ladies and gentlemen, if you have any further questions, you may reach out to the company Investor Relations team. I now hand the conference over to Mr. Pratik Pota for closing comments. Over to you, sir.

Thank you, everyone. Thank you for joining the call today. We really appreciate the questions that were asked and the effort that you took to think through and ask these questions. And I hope and I trust that we're able to answer the questions effectively. However, in case there any follow-up queries, please do reach out to us, and we'll be more than happy to respond. Thank you, everyone. Have a good day and have a great weekend ahead.

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