Eureka Forbes: Elements in place for long term value creation

14 Feb 2024 , 12:03 PM

Recommendation: Buy; Target price: ₹603

 

Eureka Forbes (EFL) in its new avatar, post-acquisition by Advent Intl (73% stake) and under the leadership of Partik Pota, is ambitious to significantly accelerate the growth trajectory and create value by responsibly driving penetration and growth in the water purifier and related categories in Health & Hygiene segment. Its unique business model with strong RoCE and FCF driven service revenues, solid D2C presence and brand recall with a large installed base with consumers provides it with an enviable opportunity to grow in deeply under penetrated market. Analysts of IIFL Capital Services estimate 53% EPS Cagr in FY24-27 with a negative NWC cycle, robust FCF conversion and returns profile. Initiate on EFL with BUY recommendation and 12M target price of ₹603, at 55x FY26 EPS (27% potential returns). 

Strong leadership in under-penetrated category: 

EFL, with a strong 45% share in the water purifiers market (5% penetration level), is working various strategies to increase category penetration by offering affordable solutions through low priced units and rental model, and stepping up R&D efforts simultaneously to continue driving premiumisation. Services (30% revenue share from just 25% of the active users) add unique opportunity to have extended profit stream through life time ownership of the product. 

New entrepreneurial team driving growth strategies: 

New management team with varied experience, entrepreneurial drive and enterprise-wide ESOP program (8-9% equity) ensures the team works together aligned with long term strategies to drive growth. 

Earnings to grow 53% Cagr over FY24-27: 

Having demonstrated smart turnaround in the last 18 months, analysts of IIFL Capital Services expect EFL to drive Revenue/Ebitda/PAT Cagr of 15/37/53%, respectively over FY24-27 with >5ppts increase in Ebitda mar gins, healthy average annual FCF of Rs2.5bn, negative NWC cycle of >75 days and asset-light business with negative invested capital (ex-intangibles).