Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AA-/Stable’ corporate credit rating to Eureka Forbes Limited (EFL).

 

The rating reflects the group's leading position in domestic health & hygiene segment, established marketing network, healthy financial profile and efficient working capital cycle and healthy operating cash flows. These strengths are partially offset by its intense competition in the consumer durables sector in India.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of EFL along with its subsidiaries, i.e., Infinite Water Solutions Private Limited, Forbes Aquatech Limited, Euro Forbes Limited and a step-down subsidiary, EFL Forbes Lux FZE.

 

Goodwill amounting to Rs 2,058 crores has been knocked off to arrive at Tangible Net worth.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy market position in the domestic health and hygiene segment and strong distribution network: EFL benefits from its strong market position in the health and hygiene segment as it is engaged in the selling of Water purifiers, Air purifiers, Vacuum cleaners, water softeners among others. With strong brand recognition including Aqua guard, Euroclean and Euro Air (along with step down brands such as Select and Sure), the group has established healthy market share of around 40% in the water purifier segment and around 60% in the vacuum cleaner segment in India. The diversified revenue streams with electric water purifiers contributing ~42%, services related to products with  ~36%, and vacuum cleaners ~14% of total sales should support the business risk profile of the group. Furthermore, the professional line of management with extensive experience in consumer durables and focused R&D team for product innovations, support the steady growth in scale of operations over the medium term.

 

The business risk profile is further supported by its strong distribution network and omni channel presence catering to both business-to-consumer (B2C) and business-to-business (B2B) customers. While the group has presence across channels including E-Commerce, Modern trade, and General Trade, its presence in more than 19,500 pin codes in India along with more than 8000 technicians on ground should continue to help sustain healthy market share.

 

CRISIL Ratings believes the healthy market share, strong distribution network coupled with omni channel presence and a strongly experienced & well-qualified management team supports the overall business risk profile of the company.

 

• Healthy financial risk profile: The group’s net worth remains healthy as reflected in the tangible net worth of Rs 1,963 crores as on March 31, 2024. The limited reliance on the outside debt has led to the comfortable capital structure as reflected in the gearing and TOLANW of 0.02 times and 0.95 times respectively as on March 31, 2024 (0.08 times and 1.05 times a year ago) With the growing scale and healthy profitability leading to steady accretion to the reserves, the capital structure will continue to remain at comfortable levels with gearing being sub 0.1 times and TOLANW below 1 times as on March 31, 2025. The debt protection measures continue to be robust with interest cover of more than 10 times and net cash accruals to adjusted total debt of 3.86 times for fiscal 2024 on account of healthy operating profitability and low interest cost and is estimated to remain strong in fiscal 2025 led by the moderate interest cost and improving operating profitability. In the absence of any large debt funded capex or dividend outflows, the financial risk profile of the group shall continue to remain at comfortable levels over the medium term.

 

• Efficient working capital cycle and healthy operating cash flows: The group deals with both B2B as well as B2C customers, while B2C customer sales are largely on the cash and carry basis, the group offers a moderate credit period to B2B business of around 30 days. The payments are received on time and there is no large stretch seen in the same. The company maintains an inventory of around 60 days on average. This coupled with the healthy profitability leads to healthy operating cash flow generation and a lower dependence on the bank lines for its working capital requirements. The working capital cycle remains further supported by the credit received from the suppliers. Overall, the working capital cycle will continue to remain efficient with no change in the credit offered or inventory holding policies of the group.

 

Weakness:

• Intense competition in the consumer home appliances sector in India: The Indian consumer home appliances market is intensely competitive. With the entry of several large players over the past few years, there has been significant price competition, which may adversely affect the market share and operating profitability of most players. Furthermore, continued product innovations with recent technology and consumer trends leading to high R&D and advertising spending remains a key requirement in the industry. Significant competition or delay in responding to competition or consumer preferences may impact market share and volume growth.

 

Additionally, while the raw material price fluctuations accentuate the pressure on profitability because of the players’ inability to pass on such cost increases to their customers this risk is offset by its strong & well-known brand, strong market position and distribution network with a very vast D2C reach. While historically operating margins have ranged in between 4.7% to 10%  over the last three years ending fiscal 2024, the operating margins improved to ~11% in H1 of fiscal 2025 backed by improving operating leverage. Sustenance of healthy operating margins amid increasing scale of operations remains a key monitorable.

Liquidity: Strong

Bank limit utilization is low at around 10 percent for the past twelve months ending September 2024. Net cash accrual is expected to be over Rs 210 crores which is sufficient against term debt obligation of Rs 25 crore in fiscal 2025 with balance providing cushion to the liquidity of the group. The group further has cash and cash equivalents of Rs 146 crores as of Sept 2024 which remains unencumbered. Current ratio is low at 0.64 times on March 31, 2024 (largely on account of higher contract liability). Low gearing and strong net worth support its financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believe the group will continue to benefit from its extensive supply chain network, healthy market share and improving operating efficiencies.

Rating sensitivity factors

Upward factors:

• Sustained double digit revenue growth on the back of the higher volume sales while maintaining operating margins above 11% leading to higher than anticipated net cash accruals.
• Sustained healthy financial risk profile.

 

Downward factors:

• Decline in operating profitability below 8% or decline in the overall revenue performance leading to lower than anticipated net cash accruals.
• Large debt-funded capital expenditure or dividend payout weakening the capital structure thereby impacting the financial risk profile and liquidity profile

About the Group

EFL along with its subsidiaries & step-down subsidiaries is engaged in manufacturing, selling, renting & servicing vacuum cleaners, water filters cum purifiers, air purifier, etc. The group market its water purifiers under the brand name ‘Aquaguard’, vacuum cleaners under the brand ‘Euroclean’ and air purification system under the brand ‘Euroair’.

 

EFL is listed at Bombay Stock Exchange Limited (BSE) and National Stock Exchange (NSE). Lunolux Limited, Cyprus (an Advent International Corporation entity, Holding Company) acquired majority stake in EFL in July 2022.  EFL is currently headed by Mr. Arvind Uppal (Chairman) and Mr. Pratik Pota (Managing Director & Chief executive officer).

Any other information: Not Applicable