Eureka Forbes Limited (543482) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Eureka Forbes Limited Q1 FY '27 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 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 Q1 FY '27 earnings call of Eureka Forbes Limited. The operating landscape in quarter 1 continued to be impacted by inflationary pressures and currency volatility and the associated uncertainty. Against this backdrop, I'm pleased to share that we delivered a solid start to FY '27. Revenue for the quarter grew by 15.3% year-on-year to INR 701 crores, supported by accelerated and broad-based growth across the product business, especially water. The Water Purifier category grew by high teens on the back of a double-digit volume growth. Emerging categories also delivered strong growth, especially on robotics and softeners. Overall, our product business grew by late teens, and this growth was also broad-based across channels with retail, direct and e-commerce all delivering strong double-digit growth. In Water Purifiers, our growth was driven by strong momentum in the economy range by our expanded range of stainless steel products and also by our premium offering in hot and D2C and IoT. Our growth was well ahead of the category, leading to healthy market share gains across the board. Our emerging categories continue to perform well during the quarter with strong growth across all emerging categories. Within this, robotic vacuum cleaners delivered strong growth driven by increasing premiumization and shift towards a fully automatic cleaning product. We recently launched a new campaign featured in Shraddha Kapoor for robotics aimed at accelerating category adoption and strengthening our leadership in this fast-growing category. Water softeners also reported strong double-digit growth, reflecting the growing relevance and the potential of the category. In Service, revenue growth dragged that levels in the recent quarters. The price increases implemented the EMC led to some moderation in bookings growth. Our filter portfolio grew well in quarter 1. During the quarter, we further stepped up our awareness campaigns on the importance of installing Genuine Aquaguard filters well had drive growth filters. We will stay focused and continue to invest in driving awareness and changing customer behavior. Additionally, our service KPIs remain strong and we rolled out a series of digital interventions aimed at improving the customer experience. On the profitability front, the adjusted EBITDA margin came in at 10.5%, a decline of 46 basis points year-on-year, primarily due to a moderation in gross margins and our planned and deliberately higher growth investments. That said, the underlying drivers of profitability, namely healthy gross margins, operating leverage and ongoing productivity initiatives remain absolutely intact and continue to provide a strong foundation for the business. We keep investing in driving growth while simultaneously driving stronger execution, productivity and cost efficiencies. As shared earlier, we expect full-year EBITDA margins to be broadly in line with last year. Looking ahead, given the strong start in quarter 1, we are confident of delivering a clear step-up in our FY '27 full-year growth. All the product categories are seeing healthy momentum and we have strong plans lined up for the future. We believe that the long-term opportunity across all our categories remains significant, supported by low penetration levels and increasing consumer preference and awareness of health and hygiene solutions. We will continue to invest behind our brands, our innovations and strengthening our distribution capabilities as we progress through the year. With that, let me hand over to Gaurav for more details on our financial performance.

Thank you, Pratik, and good afternoon, everyone. I will begin by covering our financial performance for the quarter. Revenue for the quarter stood at INR 701 crores, registering a growth of 15.3% year-on-year. The growth was broad-based and supported by continued momentum across our product portfolio with steady contribution from the emerging categories. Our product business delivered growth in the high teens, driven by strong performance of water purifiers. The growth was largely fueled by double-digit volume growth and calibrated price increases at the start of the quarter. Emerging categories also sustained growth momentum, led by a higher mix of premium products in robotics and volume-led growth in water softeners. Our service revenue growth was largely in line with the past few quarters' trend. Moving to profitability. Our gross margins continue to demonstrate resilience despite a dynamic operating environment. Gross margins for the quarter stood at 58.4%, lower 131 basis points year-on-year, reflecting the impact of higher commodity costs and adverse currency movements. While the cost environment remains challenging, we are yet to see any meaningful reduction in input cost. Our focus will be on driving our cost savings program and product mix. Moving on to operating expenses. Employee cost stood at INR 90 crores, an increase of 10.7% year-on-year. The year-on-year movement primarily reflects normal annual increments. We expect employee cost efficiencies to kick in over a period of time, supported by productivity gains. ESOP charges increased by 16.2% year-on-year to INR 6.6 crores, primarily attributable to fresh employee grants and expanded ESOP coverage as part of our talent attraction and retention strategy. Service charges grew by 2.7% year-on-year to INR 83 crores, reflecting the relatively softer growth in the underlying service bookings to some extent and our ongoing initiatives to cover leakages. Other expenses, which include A&SP spend grew by 21.4% year-on-year to INR 162 crores. This increase is primarily due to higher advertisement and sales commission expenses with investments focused on strengthening in-store presence in modern retail. As a result of the above, adjusted EBITDA for the quarter grew by 10.5% year-on-year to INR 74 crores with adjusted EBITDA margins at 10.5%. Adjusted PBT for Q1 came in at INR 61 crores, while reported PAT grew by 44% to INR 55 crores. During the quarter, the company recognized a onetime gain of INR 19.5 crores on account of reversal of gratuity expense. Adjusting for this one-off reversal, pre-exceptional PAT grew by 6.1% year-on-year to INR 41 crores. Turning to balance sheet. We ended the quarter with a net cash surplus of INR 425 crores. Our focus continues to be on maintaining a strong balance sheet while investing selectively in areas that can support long-term growth. We remain committed to generating healthy cash flows and sustaining strong capital efficiency metrics. To summarize, quarter 1 reflects a strong start to FY '27, a result of strong execution by the company. Looking ahead, in a continuing uncertain environment, our focus will be on stepping up growth for the full-year. We will continue to remain vigilant on cost and our focus will be on cost efficiencies and productivity improvements with the aim to maintain margins in line with last year. With that, I hand it back to the moderator and open the floor for questions. Thank you.

[Operator Instructions]. Our first question comes from the line of Siddhartha Bera with Nomura.

Sir, first question is on the service business. While we have seen a very strong momentum and probably improved momentum in the water purifier and other businesses, I think service growth may have been flattish to a very marginal growth in my assessment for the quarter. So some sense when should we see some pickup here given the initiatives we did last year? If you can also highlight what was the amount of price increases which we took in the AMC and that should ideally reflect in a better growth also going ahead. So some thoughts there is the first question.

Siddhartha, thank you for the question. I think like I said in my opening remarks, service revenue growth tracked in and came in at similar levels as earlier quarters. When it comes to service bookings, however, given the price increase that we took, we did see some deferral and some postponement of AMC renewals, which we expect to reduce and mitigate and normalize over time. Our price increase that we took differ from the price increases for a single year AMC versus a multiyear AMC. The price increase, the band was roughly between 3% to 12%. We have, as you're aware, a number of initiatives going on driving our service revenue. We have a lot of targeted interventions aimed at customers who are due for AMC renewal. We also have a very focused web [scheme] aimed customers who are out of warranty or out of AMC, but have a service request to a complaint. And when they land up to our website or when they call us, there is a very clear effort aimed at converting them into an AMC user. In parallel, we also, as you're aware, have stepped up our efforts on driving our filter business. Towards the end of last year, we had launched a simplified assortment of filters. We had gone down from 65-odd filters to 5 universal filter which are there in the market. We also reached out to the open ecosystem of distributors of filters and spares and created a new distribution system targeted this market. And we are seeing some encouraging signs there as well and we expect this to pick up as we go forward.

This is Gaurav. I think just to clarify, I think you made a point that in your assessment service revenue growth was flat, that is not the case. The growth that we've seen -- the revenue growth that we've seen in our service business is very similar to the growth that we saw in quarter 4. I think important to call out and that you may have noticed as well in the annual report, there is a deferred liability balance increase that is there. And that is an annuity stream which starts coming into FY '27. So from a revenue growth standpoint, the service business has indeed grown in quarter 1, but at levels which are similar to quarter 4.

Second question is on the price hike. So while you mentioned that costs have remained steady. In terms of price hikes, how are we planning to take any further price hikes? Or how are we planning to sort of manage the elevated costs which are there in the current quarter?

See, our current view at this point in time is that there is a momentum that is there in the category and across all the categories in which we are operating. Hence, we are going to be very calibrated and measured about any price hikes. Yes, while we may not have fully covered for the cost increase in percentage terms, in absolute terms, we have indeed covered for it. We've been watching the costs very, very closely and there are ongoing initiatives to offset the impact of cost as we go ahead. At this point in time, we are going to be more measured as far as consumer price increase is concerned because we see a very, very strong tailwind as far as growth is concerned and our bias will be towards not disturbing that. And how do we then kind of drive efficiencies for other parts of the business to keep margins. I think the best reference point is you look at quarter 1 gross margins, they are at 58.4%. So a combination of business mix, portfolio [standing] across different price points. I think all of it just helps in managing our gross margins.

Sir, last question is on the A&SP. I mean overall other expenditure is up 21% Y-o-Y. How much would have been the A&SP growth in the current quarter, if you can just highlight the numbers?

Siddhartha, we don't give out the segregation for other expenses, but you can attribute almost the entire increase that has happened in other expenses to be mostly led by A&SP. I think within that, if I were to kind of make it even sharper, it's been driven largely by our investments within store. So you will see a lot more of Eureka Forbes in retail outlets now. So it's been very, very focused investment in driving in-store investments and consequently the growth.

Our next question comes from the line of Keshav Lahoti with HDFC Securities.

Sir, happy to see that accelerated growth. Just want to get a sense on this growth, this time after a long we have seen a pricing action, out of this 15% growth, how much would be pricing that.

Keshav, thank you. We are happy with the pickup and acceleration in the growth. As I mentioned earlier, this growth has been broad-based across all our categories. What was most encouraging for us to see the strong turnaround in water purifier growth. We grew by high teens, like I said, and it was on the back of double-digit volume growth. Therefore, what we saw clearly was a volume-led growth in the case of water with some impact of price coming through. We were also happy to have grown ahead of the market and gained some market share. When it comes to our cleaning portfolio, it was about robotics specifically, the growth was more led by premiumization where our top-end products, the fully automatic cleaning station that we launched last year did exceptionally well, and that drove a shift in mix towards the premium segment. In the case of softeners, the other emerging category, there was a strong volume tailwind that helped us drive growth. It was for water and for softeners, it was much more volume led. In the case of robotics, it was a change in mix towards the premium, which drove the growth.

Sir, service, you highlighted the growth in line with last quarter, despite of the taking a price hike, still the growth is not picking up. So is it more like a [indiscernible] service revenue, possibly that revenue that is differed in lost revenue, how should we read a possible increase quarter for pent up demand. And when should we expect the revenues to hit the double digit mark? My last question is service side, we [indiscernible] double dight growth on service revenue, which we are not saw this time, has the scenario changed?

Keshav, on service specific, as we mentioned, in our response, we are not taken price increase between 3% to 12% for a single year and multiyear AMC. We saw that while in the case of product, our price increases went through reasonably smoothly. When it came to AMC, we found customers -- some of our customers postponing the purchase of AMC and waiting for a little bit more time before opting for the AMC. Therefore, that led to the overall booking growth being softer than what we expected have liked.

Have you seen any revival in the service part in this quarter. Because revenue growth continue this kind of number what we deliver, and possibly prices gone hike and growth also, it would be easily beaten down the double digit mark.

I think, Keshav, I'll just make one call out. What you're referring to is the bookings growth. The revenue growth comes in with a bit of a lag because typically, the AMC tenure is of 18 months. So there is a lag effect which comes into play as far as AMC bookings are concerned and translating into AMC revenue. So there will be that lag effect which will come into play. Also, I think just to draw attention that from our perspective, there are 2 drivers for service revenue. One is AMC. The other is driving the filter sale portfolio. So that is an important part of our portfolio because that is helping us capture the customer at a stage where maybe the customer has chosen not to opt for an AMC or at a stage where the customer maybe does not want to renew an AMC and is waiting out. So that's the other pivot that we've done nearly 7, 8 months back that is where the focus is and that is an area where we are investing a lot in driving awareness, and that is an area where we continue to see growth.

Last question from my side. What would be the ESOP expense expected for this year?

We expect ESOP to be in the range of INR 25 crores to INR 26 crores. We should be in that range.

[Operator Instructions]. Our next question is from the line of Umang Mehta with Kotak Securities.

Congrats on a strong top line trends. My first question was on products. It had 2 parts. First is the price hike that you have taken, how is it relative to what peers have taken water purifiers? The second part to it was the recently launched 3 products of peers. Any thoughts on that? Any plans internally? Anything you can share? That's the first question.

Umang, thank you for the questions and for your compliment. On your first question, the price increase that we took, our peers followed albeit with a lag with almost similar price increases. As I said there was a lag, I think roughly, [indiscernible] period, when we had pricing ahead of the others. But now, at we stand today, there is again price equilibrium versus competitors. On your second question, I think it's important to take a step back and look at the water category, and water purifier category. We know that in a country like ours with the water quality that we have, this category has an extremely low penetration, just about 7%. Among the barriers that we know to be a big one barrier is a perceived high cost of ownership. Anything that addresses and tackles this barrier of the high [TCO] will help drive category growth and will help get new customers in. Knowing that, as Eureka Forbes, we have done a number of things to reduce the TCO and get new customers in. Going back to 3 years ago, we had launched our segmented AMCs, the tiered AMCs with AMC starting as low as INR 699 to again reduce the perceived cost of ownership, number one. Number two, last year, we launched the largest range of water purifiers with filter life. And that helped us again reduce the cost of ownership and attract new customers. As we said earlier, about 70% of customers who entered into this portfolio are first-time category entrant. So that clearly helped us grow the category. More recently, about 45 days ago, we were the first in the country to launch water purifiers with a 4-year life. We launched 2 products in e-commerce, Glow 4X and Ritz Pro for [this industry], price at roughly INR 20,000 and INR 35,000, respectively, and they met with a very, very positive response. Just to sort of underline the fact that we did this about 45 days back and our competitors followed more recently. So we were the first in the market, more generally one. Anything that is -- that helps unlock category barriers that helps get new entrants in and therefore, the category will always be to our advantage as the largest and the most trusted brand in this category. So our sites are focused on growing the category, and we'll do what it takes to reduce the barriers towards that.

The second question was on service. So you mentioned about the hikes, right? I just wanted to understand the rationale behind taking them, considering that we've accepted in the past that pricing was a barrier, right, in terms of AMC. So why now? My second question was linked to it is stand-alone spares and filters if you can highlight as you've started to see some traction for the new kits, any growth numbers that you can highlight?

Umang, I'm sorry, I didn't hear the second part of the question. Can you repeat, please?

The stand-alone spares and filters outside the AMC, any growth numbers that you can highlight, whether the new range has started to see some traction?

Umang, thanks for that. Let me answer your first question on the rationale for price hikes. Look, as you imagine, we have a full portfolio approach when it comes to pricing, specifically in service and in AMC, we have not had price increase for quite some time. In that intervening period, we have seen inflation across fuel, inflation in labor, and we did not pass it on to consumers. I think things reached a point more recently after the war, etc., we could not hold on to that any longer. Even within that, we did our price increases in a very calibrated way with a lot of analytics on what customer segments were price sensitive and which were not. And that led to a price increase. Yes, unlike in products, in service, we did see some impact of the price increase in terms of fresh bookings, but that's more a deferral. People are waiting for some more time before they renew the AMCs. And we expect, like I said earlier, this impact to mitigate and to normalize over time. On the second question that you had, which is about our non-AMC filters and spares. As I mentioned earlier and as you're aware, we've done a number of things including launch a very simplified portfolio, driving a new distribution system and most importantly, driving enhanced inputs for consumer awareness. Our digital campaigns have been sustained and in fact, increased in quarter 1. We also launched a campaign which was targeted consumer, digital campaign, which talked about the line was stop, check and relax about asking customers to stop the technician and check what filter was being installed before they let it go ahead. I think those campaigns have helped us. We have seen some encouraging signs on filters. And as Gaurav said earlier, we are seeing that part of the business grow well, and we have optimism and we believe strongly that this part of the portfolio will keep growing in the quarters to come.

Our next question comes from the line of Achal Lohade with Nuvama Institutional Equities.

Sir, 2 questions. If you could call out what is the A&SP spend absolute for the current quarter and the last year same quarter? And what kind of spend we are looking at for the full-year?

Achal, we don't give the breakup at a quarter level as far as A&SP spend is concerned. But I think I'll give some color on this. I think first, at an overall year level, we do expect our A&P spend to be ahead of revenue growth. So that is something that we are planning for. Point number 2, bulk of the spends are going to be directed very, very specifically on 2 things. One is in-store presence, which is our availability and our visibility inside the stores, having more promoters, etc. And the second part is in driving more consumer finance adoption. And you will see that the common pattern in both of them is that it's about getting more and more consumers to convert into an Aquaguard purchase. So it's going to be very, very focused investment that we will be doing. Over the past couple of years, we believe we've invested adequately behind the brand, and we believe now is a stage where it's about converting the customer at the point of purchase. But big picture, you should expect our A&SP spend to increase ahead of revenue growth as far as FY '27 is concerned, but in very, very targeted spaces.

The second question I have just on the services piece. So there are 2 parts to this question. One, you mentioned about the liability part, which will get recognized in FY '27 given the deferral accounting. So if you could clarify on that in terms of whether it will have a positive impact on the overall services growth for the year? Number two is that given the weaker bookings, right, did that help in terms of protecting the margins? Because in last year, given it was the initial year for the services piece, you had called out that the upfront impact is actually more negative than positive at the EBITDA margin. So if you could clarify on both these aspects, please?

Yes, Achal. On the first question, yes, the service liability does help in getting revenue in FY '27 and consequentially driving growth. At this point in time, the visibility that is there is that we do expect our growth to continue beyond quarter 1 as well. Having said that, for revenue growth to translate, it does require in-year bookings to come in as well. And given that there is a relative softness that we've seen and these are initial signs that we've seen as far as AMC bookings are concerned, that impact would play out towards the later part of the year. Having said that, at the same time, we continue to see growth in our filter business. So there is that compensating effect which is there. But big picture at this point in time, the visibility that we have is that from a service revenue growth perspective, we expect our Q2 level growth to be similar to what we've seen in Q1 and not very, very different. But beyond that, we'll have to see how bookings go and how the filter business scales up. To your second question on softer bookings, whether it helps in service charge, yes, it does indeed help to some extent, and there is a translation of that in the service charge increase. So there is an element which comes there, but it is not a very, very large impact to drive overall profitability for the quarter.