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Eureka Forbes (EFL) delivered yet another resilient quarter with 15% sales growth, notwithstanding the challenging market conditions (visible in muted growths for consumer durable peers) and high base. Key positives were – a) high teens growth in product business, b) turnaround in service business seen in 1Q further accelerated with double-digit growth in AMC bookings led by volumes & ASP. While reported services revenue (due to accrual accounting) has been relatively lower, the strong growth in bookings led by its interventions provides visibility on uptick in growth from 4QFY26E. Margins expanded YoY despite higher service charge and brand investments, led by leverage benefit. Management sounded confident, expects revenue momentum to sustain which along with cost optimisation/scale leverage should provide fuel to invest behind growth as well as drive margin expansion. We like EFL’s growth story (focus on breaking category barriers to drive growth in products/services business) & see scope to improve margins. Execution so far has been impressive; a debt-free balance sheet, negative working capital and strong FCF generation provide comfort. With product business momentum sustaining, likely uptick in service business revenues over next few quarters can lead to further rerating. Maintain Buy with unchanged TP of INR 715 (40x Sep 27E EPS).

* Strong execution on products: Despite challenging external environment (mixed consumer sentiment and postponed purchases in anticipation of GST 2.0) and higher base, consol. sales grew c.15% YoY to INR 7.7bn (3-4% above our and street estimate). Products business saw high-teens growth YoY with traction in both premium and economy segments. In terms of subsegments, water purifiers continued to drive robust volume performance on the back of scale up in its 2 year range (reduced cost of ownership), with 70% of buyers being first-time category entrants, and smart IoT range. In cleaning segment, robotics (now contributing c.60% of vacuum cleaner sales) continues to remain a major growth driver led by premium portfolio and omnichannel expansion

* Turnaround in service business gaining momentum: Service business which showed early signs of turnaround in 1Q, further gained acceleration in 2Q with high-teens growth combining filter sales and AMC bookings. Double digit growth in AMC bookings was driven by volume and increased ASP (also visible from higher service charge in the quarter) due to a higher mix of multi-year AMCs that lead to a better customer lock-in. Management expects service business transformation to continue with sustained momentum in both AMCs bookings and filter sales

* Gross margin expansion with scale leverage drives sharp earnings beat: Gross margin improved by 52 bps YoY to 57.1% (JMFe: 56.3%) driven by healthy mix and effective cost control, but contracted by 300bps QoQ due to seasonality led product changes. Staff cost including ESOP grew 2.4% YoY, while other expenses grew 13.8% YoY - owing to increased brand investments (+21% YoY). Service charge was up 17.4% YoY driven by double-digit growth in service bookings. Positive gross margin progression coupled with scale leverage drove sharp EBITDA margin expansion of 179 bps to 12.6% (193bps better vs. our estimate). EBITDA growth of 33.7% to INR 977mn was 20-23% above our/street estimates. Adjusted for ESOP charge (flat YoY), EBITDA grew 31.2% with margins at lifetime high levels of 13.4%. Reported PAT was up 31.8% YoY to INR 629mn. Going forward, management expects revenue momentum to sustain with YoY margin expansion

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