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Rebuilding the category, reviving its legacy

We recently engaged with the management of Eureka Forbes (EFL) to delve into its organizational reboot. KTAs: 1) EFL is transforming its product, service, and operational verticals, unlocking significant growth in its core categories of water purification/vacuum cleaning (which it pioneered), and where it continues to enjoy leadership with ~40%/60% market share; it recently entered the air purification vertical; 2) EFL, via various strategic initiatives, has been addressing category-growth barriers, with focus on i) increasing affordability (targeting non-users), ii) building relevance (category-creating consumer campaigns), and iii) improving availability (distribution expansion), thereby driving double-digit category growth; 3) driving premiumization by leveraging the extensive customer base through R&D-led product introductions; 4) a revamped approach toward its service business, including affordable tiered AMC contracts and digital capabilities (achieved ~50% of the service revenue via digital platforms, significant rise in app-based engagements); 5) with gross margin expansion now largely having played out, EFL remains focused on optimizing EBITDA margins; EFL’s EBITDA margin expanded to ~11% in H1FY25 (vs ~6% in FY23) and is now in a cash surplus position (vs net debt in FY23). EFL trades at 134x TTM PER (61x Sep-24 annualized).

Addressing category-growth barriers uplifting the growth trajectory

EFL's leadership position in the highly underpenetrated categories (~6% penetration in water purifiers, ~1% penetration in vacuum cleaners) gives it an immense growth headroom. Leveraging its competitive strengths around market leadership, strong service network, product innovation pipeline, and digital initiatives, EFL has been strategically focusing on addressing category barriers for driving double-digit category growth (vs 2-3% over the past decade), with focus on increased affordability, building relevance, and improving availability. Key initiatives like affordable water purifiers (starting at Rs6.5K/unit) and premium models (higher ASPs of Rs15K-20K; 1.7-2x ASP of the existing range) have driven significant volume growth across price segments. EFL has also addressed challenges in its vacuum cleaner (launched product across price points; also introduced robotic vacuum cleaners) business, leading to renewed adoption (56% of customers acquired in the last 2 years). Its strong innovation pipeline aided by diversified R&D spends (98% higher in FY24) across product categories has delivered several industry-first products, thus addressing the evolving consumer needs

Transformation under way in the service business; digitization to act as a catalyst

EFL has revamped its product and service offerings, moving beyond just AMC, to deliver tailored solutions driven by customer insights and market understanding. Such efforts address broader customer needs (eg ad hoc part replacements) while enhancing customer experience, which has led to 30% increase in appointments through improved cross-selling and up-selling. Digitization, including slot-based appointments and technician tracking, has significantly increased app-based service engagements to 80% from 30%, with approximately 50% of service revenues now generated via the digital platform. However, only a small portion of EFL’s installed base utilizes its services, primarily due to limited awareness, perceived high costs of parts like filters, and the convenience of local providers. To address this, EFL has implemented initiatives such as tiered AMC contracts starting at Rs599 to reduce ownership costs, QR-coded filters for authenticity, and a one-hour service guarantee.

Renewed focus on product profitability; indigenization to reduce import dependency Since Advent's takeover, EFL has driven multiple layers of cost efficiencies and strategic investments in marketing, digitalization, and R&D, leading to revenue growth and margin expansion (~11% in H1FY25 vs ~6% in FY23), along with a cash-surplus position (vs net debt in FY23). With gross margin expansion now having played out, EFL is focusing on optimizing EBITDA margin and targeting growth across the entry, mid, and premium segments, to ensure sustainable profitability and return on investment. Additionally, the company is exploring local manufacturing opportunities to reduce dependency on Chinese imports, particularly in segments like robotics and upright vacuum cleaners. Further, enhanced service capabilities, including digitized processes and direct technician management, will improve operational efficiency and cash conversion cycles.

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