Mid-cap Magic: A structural multi-bagger in the making with 100% RoIC: ICICI Securities

Eureka Forbes is investing to expand margins (10 percent in Q1FY24) which analysts believe will likely release resources for growth.

The Eureka Forbes share price jumped 3.5 percent to hit an intraday high of Rs 505 on the BSE after ICICI Securities put the ‘buy’ rating on the stock with a target price of Rs 700, implying a 40 percent upside from last trading price of Rs 498. According to the brokerage, earnings growth is likely to drive the stock price performance.

The RoCE of Eureka Forbes is less than 5 percent, but ICICI Securities notes that there are intangibles on the FY23 balance sheet worth Rs 51.9 crore. The company’s return on invested capital (RoIC) adjusting for intangibles is higher than 100 percent. “The business operates at negative working capital and also requires limited capex. Hence, we model strong value creation (FCF) over next decade,” the brokerage noted.

ICICI Securities expects Eureka Forbes to average compounded annual growth rate of 12 percent and 50 percent for its revenue and net profit over FY23-26. It also estimated the company to steadily improve the return ratios in this period.

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Competitive advantages 

The company has brands like Eureka Forbes and Aquaguard and sub-brands like Sure and Select, while it boasts of a multi-channel presence with access to 20,000 retail outlets and 10,000-plus PIN codes for services, and has created a large portfolio of water purifiers catering to various needs of consumers, including hot water, copper and zinc benefits, storage, alkaline water and non-electric purifier.

Growth drivers: Multiple low-hanging fruits

Eureka Forbes is focussed on expanding margins to more than 10 percent levels as it will release resources to drive growth. “Operating leverage and cost saving initiatives have potential to raise margins to mid-high teens in medium term,” said ICICI Securities, adding that offering an entry-level water purifier at an MRP of Rs 6,499 is likely to generate consumer trials.

According to the brokerage firm, Eureka Forbes’ services revenue is lower than its potential and it sees strong scope for improvement. Investments in distribution are another positive trigger.

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Pollution to drive growth

Considering lower penetration of less than 5 percent, deteriorating water and air pollution levels in India and failure of multiple brands like Tata Swach, TTK prestige and V Guard, ICICI Securities expects Eureka Forbes to see strong growth in the next decade. “Also, as water and air pollution are largely problems seemingly endemic to India, we do not model in any steep MNC competitive pressures,” it said.

Probable headwinds

Steep inflation in commodity prices, increase in competitive pressures, and failure of new product launches are some of the key risks for the stock. Eureka Forbes share price has stayed flat over the last one year. The stock has a 1-year Beta of 0.38, implying very low volatility.