Eureka Forbes stock: JM Financial initiates coverage with ’Buy’ call, sees 30% upside

Stock to buy for long term: Domestic brokerage house JM Financial has initiated coverage on Eureka Forbes with a ‘buy’ rating and a target price of ₹610, indicating a 30 per cent upside from the stock’s current low. The brokerage highlighted the company’s growth potential, strong financial position, and operational efficiencies as key investment drivers. Despite some competitive risks and execution challenges, JM Financial believes Eureka Forbes has significant room for expansion.

Growth Prospects and Financial Strength

JM Financial stated that Eureka Forbes has multiple avenues for growth, including market share gains, increasing penetration, and margin improvements. The brokerage emphasised that the company operates in a large addressable market with ample opportunities, supported by a debt-free balance sheet, negative working capital, and robust free cash flow (FCF) generation. However, key risks include intensified competition in the product segment and a slower-than-expected scale-up in services.

According to JM Financial, Eureka Forbes has the potential to achieve double-digit revenue growth with mid-to-high teen margins. The company’s strong financial position, asset-light business model, and superior return on invested capital (ROIC) add to its appeal.

The stock, which has declined over 20 per cent in the last three months, now trades at a forward price-to-earnings (PE) ratio of 43x, compared to its one-year average of 55x. However, the brokerage noted that Eureka Forbes’ business scale remains smaller than that of its consumer durable peers, and its trading history post-ownership transition is still limited.

Earnings Outlook

JM Financial expects Eureka Forbes’ consolidated sales to grow at a compound annual growth rate (CAGR) of 14 per cent between FY25 and FY27, with profit after tax (PAT) increasing at a CAGR of 38 per cent. This growth will be driven by a steady rise in margins, mid-teens growth in the water purifier segment, and continued expansion in vacuum cleaners and air purifiers. The services business is also expected to contribute positively.

The brokerage forecasts EBITDA and EBITDA (excluding employee stock ownership plan or ESOP) to grow at a CAGR of 28 per cent and 26 per cent, respectively, over FY25-27, with an estimated margin expansion of approximately 274 basis points (bps) and 244 bps.

Market Leadership and Strategic Evolution

Eureka Forbes, established in 1982, pioneered the water purifier and vacuum cleaner segments in India, building strong brand recognition with ‘Aquaguard’ and ‘Eureka Forbes.’ 

According to JM Financial, these categories offer substantial growth opportunities given their low penetration—approximately 6 per cent for water purifiers and below 2 per cent for vacuum cleaners and air purifiers. However, challenges such as high ownership costs and consumer reluctance have historically slowed adoption.

JM Financial noted that the decade prior to the company’s acquisition by Advent International (FY12-22) was lacklustre, with market share losses in water purifiers and weaker profitability due to inadequate product innovation, limited category development efforts, and inefficiencies in service execution. Despite this, Eureka Forbes retained a dominant market position, holding a 35-40 per cent share in water purifiers and a 60-70 per cent share in vacuum cleaners.

Transformation Under Project Udaan

Following its acquisition, Eureka Forbes implemented Project Udaan, a transformative initiative led by MD & CEO Pratik Pota. JM Financial highlighted that the initiative focused on restoring growth in the product business, achieving sustainable profitability, optimising organizational structure, and enhancing cash generation.

Several strategic interventions were made to strengthen product offerings, including relaunching economy-range products, enhancing premiumisation through innovation, and increasing media engagement. The services business also saw improvements, such as better-structured annual maintenance contract (AMC) plans and enhanced digital assets. These measures have yielded positive results, with accelerated revenue growth, improved service metrics, and higher profitability.

Stock Performance and Financials

The stock has seen limited gains over the past year, rising just 1 per cent. However, it has declined over 12 per cent in February, marking three consecutive months of losses—falling 8 per cent in January and 5.5 per cent in December. In intraday trading, the stock dropped 3.7 per cent to a low of ₹465.05. Currently, it is trading 28 per cent below its December 2024 peak of ₹648.40 but has gained 17 per cent from its 52-week low of ₹397.15 recorded in June 2024.

On the financial front, Eureka Forbes reported a 52.5 per cent increase in consolidated net profit to ₹35.03 crore for the December quarter, compared to ₹22.97 crore in the year-ago period. Revenue from operations grew 10.8 per cent to ₹597.74 crore, up from ₹539.43 crore in the corresponding quarter of FY24. However, total expenses rose 8.4 per cent to ₹554.86 crore.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.