Ticking the right boxes; structural growth in continuing businesses may sustain in rest of FY25
Takeaways: (1) Eureka Forbes’ (Eureka) volume growth continued for fourth consecutive quarter led by slight product mix shift towards economy segment (in our view). (2) Continuing businesses sustained healthy growth traction (+10.8% YoY) on stable growth in core businesses and high growth in relatively newer sub-segments. (3) EBITDA margin expanded 17bps to 10.2% (near historical high of 10.4%) on operating leverage and cost-saving initiatives. (4) Strong cash generation continued as Eureka has net cash position of INR 600mn (vs net debt of INR 320mn in Q1FY24). While growth was largely driven by volume over the past three quarters, we reckon it may get driven by premiumisation/differentiated products in H2FY25.
We note Eureka is progressing well across parameters of – growth, margin and cash generation. We remain constructive on Eureka following strong business tailwinds. Maintain BUY with DCF-based revised TP of INR 590 (implied P/E of 65x on FY26E EPS).
Q1FY25 result
Eureka’s revenue, EBITDA and PAT were up 9.6%, 11.5% and 26.3%, respectively, YoY. Healthy double-digit growth (+10.8% YoY) sustained in continuing business for third consecutive quarter. Gross margin contracted 65bps YoY due to higher commodity costs and inferior product mix, in our view. However, EBITDA margin expanded 17bps YoY led by operating leverage and cost efficiencies. Profitability was lifted by higher revenue and lower finance cost (-51.6% YoY).
Strong growth traction in continuing businesses
Continuing businesses grew 10.8% YoY in Q1. The growth in continuing businesses seems structural considering its consistency over the past three consecutive quarters. Core water purifier and vacuum cleaner segments have sustained the growth traction in Q1. We model buoyant growth trajectory in continuing businesses to continue in rest of FY25 led by thrust over premiumisation and differentiated product launches.
Thrust over economy segment may have led to volume growth
Benefits of higher investments (made in H1FY24) in economy segments have continued further, from H2FY24, in Q1 as Eureka registered healthy volume growth. We expect volume growth to continue in H1FY25. A blend of volume-value growth may drive revenue thereafter as the benefits of investments over premiumisation may start reflecting.
Premiumisation and differentiated/innovative products may drive growth
While volume growth started stabilising in H2FY24 (led by investments in economy segment), we note Eureka had prudently shifted its investment strategy towards development of differentiated innovative and premium products. The company had launched multiple innovative products across its premium portfolio in Q1. We expect the trend to continue in coming quarters and it may drive the growth in FY25.
Improving balance sheet status
Healthy cash generation has continued for third consecutive quarter. Eureka’s balance sheet status continues to improve as it has moved from net debt position of INR 320mn in Q1FY24 to net cash position of INR 600mn.
Maintain BUY
We remain structurally positive on Eureka and model it to report revenue and PAT CAGRs of 11.3% and 28.7%, respectively, over FY24-26E. We maintain BUY with DCF based revised TP of INR 590 (earlier: INR 600) with an implied P/E of 65x FY26E. Key risks: Steep increase in competitive pressures and higher commodity prices.
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