Ladies and gentlemen, good day and welcome to the Eureka Forbes Limited Q1 FY 2026 earnings conference call. We have Mr. Pratik Pota, Managing Director and CEO, and Mr. Gaurav Khandelwal, CFO, Eureka Forbes, with us. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. Before I hand it over to Mr. Pratik Pota, please note that the disclaimer, certain statements made by the management in today's call may be forward-looking statements. These forward-looking statements reflect management's best judgment and analysis as of today.
The actual results may differ materially from the current expectations, based on a number of factors affecting the business. I now hand the conference over to Mr. Pratik Pota. Thank you, and over to you, sir.
Good afternoon, and I welcome you all to the Q1 FY 2026 earnings call of Eureka Forbes Limited. Q1 was a difficult and challenging period. There was a continuing softness in consumer demand, which was aggravated by pressure on free working capital owing to the slowdown in cooling products, especially in April and May. It was only in June that we saw some recovery. In this tough external environment, we are pleased with the results we delivered in quarter one. Overall revenues grew by 9.9% on the back of a double-digit growth in our products business. This growth was driven by a double-digit volume growth in both our key categories of EWPs and VCs. In EWPs, our strategy of focusing on driving penetration and premiumization worked well for us. Our economy range of EWPs continued to grow strongly.
During the quarter, we scaled up our range of EWPs with two-year filter life. These products significantly lower the lifetime cost of ownership, and we are confident that they will help drive penetration and growth for us. We now have more than 40 products that offer two-year filter life. In the premium segment of EWPs, we scaled up our smart IoT-enabled range during the quarter. We are pleased with the early results and feedback. Our innovations launched in prior periods also continue to do extremely well. In vacuum cleaners, our conviction and early bet on robotics is beginning to bear fruit. We rolled out and scaled several new products during the quarter. Forbes SmartClean Home Mapping Turbo, Forbes SmartClean Auto Bin Turbo, and Forbes SmartClean Fully Automatic Cleaning Station. We saw 52% growth in robotics, and this helped drive the vacuum cleaner category to strong double-digit growth.
One of the most encouraging new developments in this quarter was the service turnaround. We had a healthy double-digit growth in fresh service bookings. This growth came from a combination of growth in AMC count and an increase in the ASP. We also saw an increase in the number of multi-year bookings. We had taken several initiatives to drive service revenue growth in the preceding periods. We had first launched segmented AMC offerings to improve affordability and to provide choice to our customers. We then invested in building a strong B2C engine for our AMCs, and nearly 2/3 of our AMCs are now bought digitally. In addition, we strengthened our engagement with our business partners and our service technicians and rolled out direct payouts to the technicians, along with performance-based incentives.
As you are aware, we also launched differentiated filters and rolled out a campaign last year to create consumer awareness around them. We are pleased to see that all these efforts are beginning to bear fruit, and we are confident that this momentum in service bookings will sustain in the periods ahead. On the profitability side, the adjusted EBITDA margins for quarter one came at 11% after accounting for higher service charge payouts and with the increased growth investments. Our profit after tax grew by 24.1% over last year. In summary, in a difficult external environment, we have started the third year of our transformation with a double-digit volume growth, delivered the seventh successive quarter of double-digit value growth in our product business, and witnessed a clear and decisive turnaround in our service business.
As we look to the future, we could not be more excited at what lies ahead. Our categories have low penetration and offer immense potential, and we are confident that we have the right strategy and the right set of plans to win in this market and to deliver sustained and profitable growth. With that, I hand you over to Gaurav Khandelwal for his remarks.
Thank you, Pratik, and good afternoon, everyone. Before I start off, I would like to bring to your notice that we have given additional information in our investor relations pack. We hope it helps in providing a better understanding of the business. Starting off with the Q1 headline numbers. Our revenues at INR 607.7 crores grew 9.9% on a year-on-year basis.
As mentioned previously, starting Q1, there would be no divergence between reported growth and continuing business growth. Profit after tax at INR 38.5 crores grew by 24.1% on a year-on-year basis. On the revenue side, product business continued to register double-digit growth both in volumes and value. Growth was led by the economy and premium segments in water purifiers and robotics and VCs. Our ahead of curve investments in both innovation and the robotics category is paying off, and both of these now make meaningful contributions to our growth. On the service side, we reached a significant milestone. Bookings grew by double digits in value, and this was driven by both volumes and ASPs. Within that, multi-year AMC mix improved, which helps in driving customer retention.
While the reflection of service bookings and financials will come with a lag due to service amortization, this provides a healthy revenue stream for the quarters ahead. Our transformation interventions have taken us to a place where we believe that we will be able to drive double-digit bookings growth in service in the quarters ahead as well. Moving to gross margins. Our Q1 gross margins at 59.7% were range-bound versus 60.5% last year, and 20 basis points higher on a sequential basis. Commodity costs remained benign for most parts. Given the challenging market conditions in the quarter, tactical promotions were run, which led to a gross margin drop. We believe that our structural advantages and guardrails on gross margin in the form of a healthy product and service mix, portfolios straddling various price points, and effective cost management give us several levers on gross margin.
We continue to exercise cost discipline, and both employee expenses and other expenses grew at a rate lower than top-line growth. Employee expenses grew 7% and other expenses grew 6.1% on a year-on-year basis. It may be noted that the increase of 6.1% in other expenses is after growth investments being sustained at elevated levels. The increase in service charge of 17.6% is attributable to the double-digit increase in service bookings. As we have communicated previously, while the revenue is amortized over the tenure of the AMC, the cost is recorded upfront. Non-cash ESOP charges were INR 5.6 crores and are expected to remain at these levels in FY 2026. After absorbing the higher cost due to service bookings and growth investments, adjusted EBITDA margins came in at 11% in Q1. Adjusted PBT grew 14.2%.
Depreciation for this quarter stood at INR 8.3 crores, largely in line with the previous quarter, and amortization reflected an increase due to deployment of technology investments. Other income increase was largely driven by higher treasury income linked to a larger cash balance versus previous year. In summary, in challenging market conditions, volumes have grown in double digits and our transformation interventions have led to the service business turnaround. This has enabled a robust performance for the quarter and provides the necessary platform to drive our performance in the quarters ahead. As highlighted earlier, we will continue to be growth-focused and aim for margin improvement on a full-year basis. Thank you.
Should we open the floor for questions?
Yes, please.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star then one on their touch-tone phone. If you wish to remove yourself from the question queue, you may press star then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Request to all the participants. Please, you may ask one question and one follow-up. If you have any further questions, you may rejoin the queue. Our first question comes from the line of Umang Mehta from Kotak Securities. Please go ahead.
Hi. Thank you for the opportunity. The first question was on the service business. Your commentary this quarter is much more kind of encouraging than past few quarters. I heard Gaurav mention that service bookings also could continue with double-digit growth going forward. Any outlook on how the revenue acceleration would take place? Do you have visibility of service growth kind of not weighing on overall growth in few quarters? Any qualitative comments on that would help. That's the first question. Thank you.
No, Umang, thank you for that question. Let me begin by first addressing the larger point about service revenue growth. Then I request Gaurav to chip in and talk about when you can expect to see this flowing in the reported numbers. I think you are absolutely right. All the efforts that we've been making and that we've made in the prior periods, we see them coming together now and helping us drive both significantly improved customer experience, and in this quarter especially, strong double-digit service booking growth. What encourages us is that, A, the growth came on the back of both AMC count growth, in other words, there was a volume growth which came by, as also a greater number of multi-year AMCs. That's a reflection of customer retention and customer longevity that eventually higher lifetime value.
It was both a volume and a value-driven growth in AMCs. We also saw growth in both our offline channels and of course, in the D2C online channels. So it was a fairly balanced growth profile. In addition to the AMC growth, we also saw growth come by in our filters business. As you may recall, in the prior investor calls, we've talked about putting in place a new go-to-market system for selling filters and spares. That's now beginning to stabilize and that helped us drive growth in quarter one. As we look ahead at the period ahead, we feel very confident that we will see double-digit growth in service bookings sustain, and all the efforts that we've made and that we continue to put in service transformation, picking up pace and helping us drive growth.
In terms of impact in the P&L, you can expect to see the numbers show up in the reported numbers by quarter four of this year. Gaurav, you want to add anything?
Yes. One of the reasons for that is that the revenue gets amortized, and hence it comes with a lag. I think the important part from our perspective is that going by what we've seen in quarter one and the line of sight that we have, that pipeline looks quite healthy, and we will start seeing this getting reflected from Q4 revenue onwards.
Understood. That's very helpful. The second one was on gross margins. You did mention about some tactical promotions had some impact this quarter. I also kind of read, picked up about this big exchange which you've launched recently. Any outlook you can give on that front? How should we think about gross margins going ahead, and the impact of this exchange program on our margins?
Yeah, I think our focus is on driving innovation and getting adoptions going. Our experience has been that our exchange program has worked quite well. That is something which as a program will continue, and that has helped in driving growth, particularly in our premium segment. That is one part. Second, from a gross margin outlook, as I mentioned, Umang, we've got multiple levers in hand. We've got a 2/3, 1/3 split of product and service business. In product, we straddle all the price points. Our higher volumes have now given us buying efficiencies which are coming in, and hence our view on gross margin is that it will be range-bound. There will obviously be elements of seasonality which are there, which will play out, but we expect this to be range-bound.
I'll just also draw attention to the fact that if you look at the last three years, in some way, we've pursued a strategy of driving penetration. Our product growth has been ahead of our service growth. If you look at a three-year view of our gross margins, they've been very range-bound. Our belief is that there are multiple levers in hand, and we will keep gross margin at a place where we think that it remains range-bound. Obviously, you're well aware of the market conditions, so we are very conscious of the fact that we will be pursuing growth and will be price competitive in the market, but we will use all levers available to make sure that our gross margin remains at a particular level.
Understood. Thank you so much. I'll just call back in the queue. Thank you.
Thank you. Our next question comes from the line of Aniruddha Joshi from ICICI Securities. Please go ahead.
Yeah. Thanks for the opportunity, and congrats for a great set of numbers. Two questions. One, in terms of PBT, you have indicated that we have launched a water filter with two years of life, targeting the non-users. If you can indicate about the TAM or the finding that the company sales or marketing teams would have got regarding the market size of these non-users, and what will be the growth potential over, let's say, next two or three years in this market. That is question one. Second is an accounting question for Gaurav. Let's say a multi-year plan is taken by any consumer. Let's say a three-year plan is taken by any consumer and he pays the money upfront.
How does the accounting happen, whether it is based on the servicing or it is any periodic accounting that is done, that every month some revenue is recognized out of that, and till that time, whether the money is in current liabilities or some portion is in current liability and other remains in long-term, in a way, obligations? Yeah. These two questions.
Aniruddha, I'll answer the first one, and I'll request Gaurav to chip in on the second question. I think the two-year filter life products address a very fundamental category barrier for water purifiers. The water purifier category, as you know, Aniruddha, has a penetration of only about 6%. Even in urban India, the penetration of EWPs is about 12%, and rural, of course, is much lower at 3%. One of the big barriers that holds back EWP is a perceived high cost of ownership. If you recall, about two and a half years back, we had launched an economy range of Aquaguard which addressed another barrier, which was the high upfront cost of entry. By launching Aquaguard at less than INR 7,000, we have tackled that barrier and we are seeing very encouraging growth and penetration increase thereafter.
And all the data has shown that more than 2/3 of the customers who had bought that economy device were first-time category entrants. This time, with the two-year filter life products, we are addressing the other barrier, which is the high cost of ownership barrier. By launching purifiers which have a two-year filter life, our customers can actually save almost INR 18,000 over the entire lifetime of ownership. And we believe very strongly that this will help drive category penetration immensely. And because of that, we have launched a range of these purifiers and not just at the premium price points, but across, starting in economy to mid-price to premium. And we believe that this can significantly expand the market. If you think about the current market and the penetration being only 6%, you can do the math.
As the penetration increases, as we address this fundamental category barrier, we will see the category grow. And look, if you look at any other peer country in the neighborhood, let's look at Sri Lanka, penetration of about 18%-20%. China, upwards of 25% now. Korea, upwards of 60%. Thailand, upwards of 25%. So these are all markets which are very similar in profile. And we believe that our penetration in India will follow the same trajectory as we systematically attack both the consumer barriers, like the one I mentioned just now, or indeed activate the triggers. So that's for your first question. Gaurav, on the—
Yes. I'll cover the books on the accounting. I'll cover all dimensions. So revenue is done on a straight line basis amortization. So let's say it is a two-year AMC, and let's say the cost of that is INR 7,200. So it will be INR 300, which is getting recorded every single month as a revenue. So that is how the revenue keeps getting reflected every month.
Hence you have upfront bookings and a cash inflow of INR 7,200. What you see in the financials is INR 300 every single month. Coming to the cost bit of it, the entire cost of acquisition of this AMC of INR 7,200, that is recorded upfront. So that cost is not amortized over the tenure of the AMC. That cost is upfront, and hence you see the service charge increase happening at a rate higher than what you would see reflecting in service revenue. Now coming to the balance sheet part of it. For the parts in a two-year AMC, up to month 12, that will appear in current liabilities. From month 13- 24, that will appear in non-current liabilities, and this keeps shifting for whatever balances which pertain to within 12 months from the closing period.
Okay. This is very helpful. Just one further clarification. Essentially, we are right now booking all the costs, but a partial revenue is getting booked when a service revenue is booked. Is that correct?
You are absolutely right.
Okay. As this phase will get normalized, let's say in a period of one year or maybe—
Sorry to interrupt.
One and a half year.
May we request you return to the question queue for any further follow-up questions, please?
No, actually this is a clarification only. So we will see a margin, relatively better expansion, as we are booking the additional cost. Is that understanding correct?
Yes, because the costs are coming upfront and hence the revenue will come later, and then you will see a margin expansion. The thing to be kept in mind is that on a sustained basis, if you are growing bookings, then there will be that cost which will come in. But on a standalone basis, you are absolutely right that the entire cost of a INR 7,200 AMC is coming on day one, while when you start recording future months, there is no corresponding cost that you have to record. But then again, you may book another AMC at that point in time, and that cost will come.
Okay, got it. This is very helpful. Many thanks for this.
Thank you, Aniruddha.
Thank you. A request to all the participants. Please follow with one question and one follow-up question, and you may rejoin the queue for any further questions. Our next question comes from the line of Harshit from Elara Capital. Please go ahead.
Hi. Thanks for the opportunity and congrats for a good set of numbers, sir. Two questions from my side, starting with, we see a double-digit growth across the product category. Would you be able to share whether in economy, mass premium, and premium, all three segments were in double digits for water purifier? Was it because of the average selling price mix, we see that probably the value growth was a bit lower than the volume was, specifically to any particular segment, and do you think this trend is what is going to continue?
Harshit, thank you for the questions. Let me start by responding to your first question, which is about the growth in our group profile in our EWP portfolio. I think as I mentioned in my opening remarks, we had, in line with our strategy, a very deliberate focus on driving the economy segment to drive penetration and to get in new users. That strategic objective yielded us results very clearly in quarter one, as indeed it has in the preceding periods as well. We saw very strong volume and value growth in the economy segment. Again, in line with our prior experience, our dipstick on these new users or this new acquisition told us that most of them were first-time category users. Again, the objective of growing penetration was served by the growth of the economy segment.
In addition, we also have a very deliberate strategy of upgrading the mid-price segment and the mid-price user via premium offerings at competitive price points. Our prior innovations of Blaze Insta hot water product or indeed the under-the-counter product or our various stainless steel products, or more recently in the last quarter, a range of IoT products. All of them help upgrade the consumer from mid-price to premium. As a result, we saw a very strong growth in our premium portfolio as well. I think as Gaurav mentioned earlier in his opening remarks, I think we are the only brand in this category that has a very balanced portfolio across price points, across propositions, and we brought all of that to bear in driving growth last quarter across price points. On your second question, I think we were fortunate to see both a double-digit growth in volume and in value.
There was no material dispersion between volume and value growth.
Understood. Sir, and secondly, on servicing, would you be able to share some comments on, since you're ramping up the servicing portfolio, how is the filter production, inventory management, and is there any input element on this filtration side as we see more bookings coming up? Are we have enough service people or are we required for any further investment in this category?
Harshit, that's a really good question, and let me answer both parts of it. First of all, given the growth that we are seeing in our product business and as the category penetration grows, expanding our service network and growing our service capacity is an ongoing work stream that will continue in the foreseeable future. We have a very large and a very capable, and a very solid network of business partners and technicians in our existing markets, and we intend to strengthen our partnerships with them. But as the markets grow and as the categories grow, we will need to ramp up our network of partners and technicians. That, like I said, is an ongoing effort. Number one. Number two, in terms of your question about imports, et cetera, all our manufacturing of filters, et cetera, is done in-house.
We have two factories, as you know, one in Lalru, one in Bangalore, and it's all done in-house. We have abundant capacity to accommodate for filters growth in the foreseeable future. The third point around filters, and it's important to underline this, is that there's a lot of work that we've done, and you'll see a lot more of that in the near future as well, on filter innovation to make sure that we are having very clearly differentiated products across our filter range and relevant for different parts of the country. For example, we have a filter called Iron Remover, which removes iron from groundwater and from the water source, and that's very relevant in markets in the eastern part of the country.
Last quarter, we had launched a HMR cartridge, which is heavy metals removal cartridge, which again, is relevant in many markets where you have issue of heavy metals, markets like Bihar, markets like UP, Chhattisgarh, et cetera. So that's an example again of filter innovation, and we continue to do a lot more of these innovations to make sure that we offer differentiated and relevant filters for different parts of the country. Lastly, on filters, I mentioned that earlier also, in order to make sure that these filters reach the consumer, we are strengthening our network of distributors and partners. I think it's important to call out that historically, we've been focused a lot more on AMCs, and we haven't really had the same distribution outreach in filters as required. This filters ecosystem is a very different ecosystem.
Therefore, this new network of distributors that we've created and are strengthening will help us reach this large network of the aftermarket, with technicians who are not employed with us and not working with us, but who service customers nevertheless. All of these put together will help us really realize and leverage the vast opportunity we have in tapping into the base of customers who don't use our AMCs, that are available for AMCs right now.
Thank you, sir, for this elaborate answer. Wish you all the best. I will join the question queue.
Thank you. Our next question comes from the line of Mehul Desai from JM Financial. Please go ahead.
Yeah. Hi, sir. Thanks for taking my question. My question was more on the EBITDA margin side. Obviously, you did allude to the fact that gross margins will remain range-bound, and you also highlighted that service charges might not materially come down because obviously you are focusing on increasing the bookings and that double-digit booking growth will sustain. To that extent, and obviously growth spends also, my sense is that will continue. Can you provide some flavor on how do you see EBITDA margins? Will they be also range bound at these levels, or do you see levers for EBITDA margins to improve from this 10% level, at least in FY 2026? Or should we assume that the margin expansion will be more seen in FY 2027 when the service revenues start kicking in?
Yeah. Thank you, Mehul, for your question. No, I think just for immense clarity, we continue to aim for growth.
And margin expansion on a full-year basis. I think that is something which we have set out as an agenda, and we continue to remain focused on that. That is part one. Part two in terms of what are the drivers that are available to us? I think first is going to be operating leverage. With a gross margin profile like ours, growth automatically leads to an operating leverage. That is something which will continue to be there. The second element that is there is going to be to drive cost efficiencies in terms of wherever we find opportunities. That is something that we will keep working on. If I were to correlate these two with, let's say, our Q1 performance in some ways.
We are in a situation where the Q1 margins on a year-on-year basis are down by 36 basis points, but this is after absorbing additional growth investments of 56 basis points, and this is after absorbing nearly 80 basis points on higher service charge. It just tells you that intrinsically, the margin profile is quite strong and hence we believe that we have got enough and more levers which are there to help achieve the ambition of driving a full-year margin improvement. There should be absolutely no doubt whether the margin expansion agenda is being pushed to FY 2027. Certainly not. It very much remains part of the ambition for FY 2026.
Got it. When you say operating leverage, obviously your two big line items are your advertisement and sales promotion expense, and then the other big line item service charge. I was assuming that ASP spends as a percentage of to sales might not come down in FY 2026, but service charge is where you will still see an operating leverage kicking in even when you are going for a double-digit booking growth?
Mehul, it may not come in service charge because I think service bookings is something where we feel that there will be sustained double-digit growth. But the other big lines which are there where operating leverage will come are employee cost. For us, it is a INR 300 crore- plus line. If you look at quarter one, our employee cost increase has trailed revenue growth.
Yes.
Even within other expenses, if you were to look at, there is one element which is advertisement and sales promotion. Outside of that, there are other expenses where we continue to exercise very strong efficiency measures. The levers that are available to us outside of service charge is a fairly large universe to look at, and I think our trend so far has been that on those lines, we've been able to sustainably drive operating leverage, and that is something that we believe will continue as we go ahead.
Cool. Got it. Thank you so much, Gaurav.
Thank you. Our next question comes from the line of Anupam Goswami from SUD Life. Please go ahead. Mr. Anupam Goswami, your line is unmuted. Please proceed with your question.
Hi, sir. Sir, if you can just clarify, how are we seeing the market competition now? What is our market share in this? What is the competitors? Also, sir, if you could mention the service revenue, if just a clarification from the previous participant, if you take the service revenue from the current liabilities, that part, and add it along with the cost, should we get an adjusted sort of feel that how the margins and service revenue are playing out? Would that be a correct approach, sir? That is all.
Sorry, Anupam. I will answer the first question, and then I request Gaurav to clarify on your second query. As you have mentioned, and as I am sure everyone has noticed, there has been a significantly increased competitive activity in this category. Thus, number of brands that have either entered or scaled up their presence in the last few months. We believe that this is an extremely positive development for the category. Entry of new players and new entrants with new communication, new innovations, all are signals that they all believe that there is promise and potential in this category. Number one. Number two, they create more awareness about the category, they create more interest in the category, and more levels of visibility. All of these will help stimulate and drive category growth further.
As the largest and the strongest brand in the water purifier category, Aquaguard will stand to benefit as the category grows and expands. We have been very cognizant and very watchful of the evolving competitive activities, and we have been very swift to respond and to take action as required. We stepped up our activation and our innovation efforts across different spaces in EWPs. I mentioned earlier in one of my remarks that we have scaled up the two-year filter life product. We have also scaled up a range of our smart IoT-enabled product. We have also done a number of other things across all channels, whether it is in modern trade or in traditional trade or indeed in e-commerce. We have been very aggressive and very forceful in our response.
You will be happy to know that notwithstanding the increased competitive activity, our market share has not gone down. It has been absolutely unchanged, and we feel confident about that going forward as well. Gaurav?
Yeah. Anupam, on your second question, just to get my understanding right of what you are saying is that, what I am trying to understand is that if you were to add the current liability part, would that be a reflection of revenue? No, that may not be the right way because this is a rolling thing. So there is a particular balance as it stands at each period end. Then you sell fresh AMCs and there is then a fresh CL and non-CL bifurcation that happens because some of the past AMCs also expire. So this is something which is an ongoing feature and hence looking at a standalone balance on a particular balance sheet date and taking that as a view, that may not be the right way to look at it.
I think a good surrogate, in some ways it may not be exact, would be to maybe keep looking at the service charge line. That gives an indication, although I must call out service charge has got two components. One is revenue related and one is just the cost of servicing. But I think the balance sheet approach may not give the exact answer or even an approximate answer in some ways.
I got you. Service cost growth. Sir, just a clarification on that.
Sorry.
Sorry.
I am so sorry, but there are several other participants waiting for their turn.
Sure.
Thank you very much, sir. Our next question comes from the line of Mr. Achal Lohade from Nuvama Institutional Equities. Please go ahead.
Yeah, good afternoon, sir. Thank you for the opportunity. Sir, if you could clarify in terms of what kind of installations we have at this point in time, and how much is the penetration of the service offering for us at this stage, and what could be the potential, if you were to paint a blue sky scenario, what could be that number in terms of penetration? Just a broad sense on the same.
Achal, good afternoon. Thank you for your questions. In response to your first question about what is our installed base, I am happy to share with you that we have an installed base in water purifiers of almost 14 million customers, and that has grown year after year. Notwithstanding that, the reality is that the category of water purifiers has a very low penetration of 6%. Earlier in the call, I had talked about several neighboring countries, not very different from ours in many cases, who have much higher levels of penetration, whether it is a 20% or a 60% or a 25%. There is no reason to believe that penetration in India could be any less. If anything, the groundwater quality in India that we see tells us that the relevance of water purifiers is even more. It is near universal.
I would draw your attention to the recent report by the Central Ground Water Authority, which shows the water quality in different parts of the country having deteriorated over the years, and the fact that groundwater in different parts of the country has traces of nitrates, arsenic, pesticides, heavy metals. This is a universal problem. Therefore, this category has universal relevance and universal need, whether it is in top-town urban India or whether it is in small-town urban India or rural. We have absolutely no doubt that as consumer awareness grows, as affordability increases, and as people like us, as category leaders, we attack these category barriers, we will see growth come by.
Two years back, and maybe this is a bit of a flashback, but two years ago, when we had begun the transformation, we were asked this question repeatedly by people that the water purifier category actually hadn't grown in the preceding four or five years. The question to us was: What gives you conviction that the category will grow? You have seen the growth over the last seven, eight quarters of water purifiers growing by double digits, both volume and value. We have seen that momentum sustain and continue. We have absolutely no doubt as we look at all the data points, our own consumer insight data, the macro data, we know that this category will have a penetration expansion, penetration growth, which will sustain over the next many, many years. I do not want to put a blue sky number to it.
The blue sky number would be 100% penetration because that's the relevance in this country. There is no consumer in this country who does not need this category. That's on water. Let me switch gears and talk about vacuum cleaners. Again, this category was felt or was perceived to be one of absolutely no relevance or very low relevance. However, the onset of convenient cleaning and especially robotics has changed the paradigm completely. In a country like India, which is urbanizing rapidly and which is time-starved and time-scarce, something that removes the burden of cleaning is extremely relevant, and we are seeing that reflect in our robotics growth. As I mentioned in my opening remarks, we took a bet on this category very early on, two and a half years back, and we are seeing those results now come by.
Whether it is cleaning or indeed earlier water, we see the runway for growth being tremendous.
Sir, on the service part of it, where the AMCs are taken up by the customer out of the 14 million customers, what is the penetration at this stage and what kind of number would be more of a fair number next four, five years or 10 years, whatever you feel appropriate?
Yeah. No, thank you. That's a really good question. That again, I think that question illustrates the sheer runway and the sheer opportunity that we have ahead of us. Out of this installed base, that we have the large installed base of Aquaguard, only a very small proportion of these customers avail of our AMCs and avail of our organized services. A larger part of the installed base avails of either the service or the filters from the unorganized parallel market. Our research shows that most of this purchase happens unknowingly. Let me rephrase that. Most non-users of Aquaguard AMCs believe erroneously, believe mistakenly, that they are availing of genuine Aquaguard services and very often paying the same amount. So it's a question of information asymmetry and knowledge asymmetry.
Therefore, as we drive awareness of genuine AMCs, genuine filters, as we drive filter differentiation, as we drive our own go-to-market becoming stronger, as we drive digital lock, we will see a much larger share of this installed base coming under our service offering. One reflection of that runway is the growth that we saw last quarter in service revenues. Like I said earlier, we saw double-digit growth in service bookings, and we expect that momentum to sustain in the period in the future. Going back to your first part of the question, low penetration in product category, tremendous runway for growth, low penetration of the installed base and service, tremendous runway for growth. Really what lies ahead of us is an extremely exciting period of multiple opportunities.
Correct. The second question I had was with respect to the seasonality part of it. If I see in the first quarter, we've had a slight, on a reported basis, I'm not looking at the adjusted EBITDA at this stage. The margin was stable actually year-over-year at 10.1%. Given what we are looking at in terms of the service growth, would you say that, like you said, 4Q it will stabilize, right? But 2Q and 3Q could we see margins remaining stable offsetting the entire operating leverage of the product mix? If you could just give some clarity, because if I look at the EBITDA growth for the first quarter on a reported basis is 9% while bag growth is 20%, helped by the other income. Just wanted a bit of a color on that 2Q and 3Q margins. Could we see margins being stable year-over-year given the offset?
Achal, I'll just reiterate the principle that we are aiming for a full-year margin improvement. Obviously that would mean that for a full-year margin improvement to happen, that would be a journey which would need to span across quarters. On a reported basis, you're absolutely right, our margins are flat on a year-on-year basis. Our expectation and our plan is that to drive a full-year margin improvement there would be a need to keep driving margins ahead of the previous year and the balance nine months. That is what our ambition is. Again, just to reiterate the fact that in our business, operating leverage plays a very critical role. With a gross margin profile which is nearly 60%, that has a very large role. The second element is that our agenda on cost efficiencies, that is something which continues.
Our focus will remain very much on that and we remain true to our ambition of driving a full-year margin improvement.
Got it. I will fall back in later. Thank you so much.
Thank you. Our next question comes from the line of Parikshit Kabra from Pkeday Advisors LLP. Please go ahead.
Hi. Thank you for the opportunity and congratulations on a steady set of numbers. I want to understand from the revenue perspective for the services line, I think you said that the margins will start improving by Q4, but the revenue growth rate should start coming sooner rather than later?
Parikshit, what we mentioned is that the reflection of the bookings growth that is happening now, the reflection of that in revenue will start happening from quarter four. The implication of that is that the moment it starts landing as revenue, that also then means it starts flowing into margins as well.
But why would it take so many quarters for it to come up in the revenues? You said this is a straight line method, right? You will start seeing it from immediately the next month.
No. There is a straight line method where the revenue for what you have sold now, that gets recorded in every single month from the first month itself. But what you are carrying forward are the past AMCs, where some of them lapse. So they go away, and you have a fresh booking that happens for which the revenue gets recorded.
Got it. Then let me put it this way. Will we be seeing double-digit revenue growth from Q4 based on current trajectory?
As I mentioned, the impact of service bookings will start getting reflected in our revenues meaningfully from quarter four.
Okay. Got it.
Currently, you see service being the lag on the overall growth, and it creates a fairly large lag at this point in time that will start coming closer and converging from quarter four.
Okay. Thank you.
Thank you. Our next question comes from the line of Dhrumil Wani from Girik Capital. Please go ahead.
Hi. Thank you for the opportunity. Just wanted to ask one question. On slide 20 of the presentation, we have given the weighted average growth rates expected. If we take a weighted average of our product portfolio, it comes to around 13.5% growth rate for the projected period. But despite that, in Q1, which is a seasonally strong quarter, we have done only a 10% growth. How confident are we of achieving the numbers stated, like the category growth rate?
Dhrumil, just to clarify, what you see on slide 20 is an estimate of the total category and total market. What we are showing is that the total market size would be INR 23,000 crores at a CAGR of 13%. That's the reflection of the category size and the category growth momentum. Coming back to your question about quarter one, I think it's important to once again underline and remember that quarter one was a challenging period, in part because of soft consumer demand sentiment, but also because of the headwinds which the cooling category faced because of unseasonal rains, the compressed summer and the mild summer. In some ways, our category was collateral damage as part of that headwind, because trade inventory was stuck and the fact that there was working capital stuck, which impacted velocity, impacted other categories. That's the first point.
The second point is that if you double-click on the growth that we've had, while the reported growth was 9.9%, we've said clearly that our product business grew actually by double digits, both in volume and in value. In an otherwise challenging environment, growing double digits was something that we were extremely encouraged by, especially because the growth came on the back of volume expansion and volume growth. I would imagine that the longer term projection of the category growth that you see on slide number 20, they remain. If anything, I believe that in some categories you see faster growth and higher category size. For example, to illustrate, vacuum cleaner category, it talks about the category becoming INR 1,500 crores by FY 2030 from INR 500 crores in FY 2023 at a CAGR, as you can see on the screen there, of 17%.
I can tell you that with robotics growing the way it is, we are seeing that momentum already being surpassed, and we expect that to sustain going forward. We would expect to see the VC vacuum cleaner category become much, much larger in the FY 2030 time period compared to what you see here. If anything, I would like you to go away with the conviction that what you see on slide number 20 is a modest conservative estimate. And both in water purifiers and in cleaning, you will see growth that has surprised us all.
Okay. And just a follow-up on it. We have on slide 15, given the details on the contribution of online to total AMC booking, which stands at 64%. At what margin and by when we expect that contribution to stabilize?
Dhrumil, I think just to give a reference, the contribution of online earlier used to be roughly 10%-12% and has now gone up to 65%. From a profitability profile, it is not very different from what we would have in offline. I think the important part to call out on is the rationale of this strategic initiative. What online does for us is an ability to get customer retention to be better. Because with an online thing, there are multiple I could prompt a customer, I could send notifications on app, I could alert the customer. There is a bunch of things that I could do with the customer, and that is why it becomes very, very critical from a strategic standpoint as far as customer retention is concerned. From our perspective, our ambition would be to take this number as high as possible.
We have had over the last two and a half years, a journey from 8%-10%, which today is now 2/3. Our ambition would be to keep increasing these numbers as we go along, because it helps in customer retention.
Okay, thank you.
Thank you. Our next question comes from the line of Naitik from NV Alpha Fund. Please go ahead.
Hi, sir. I just wanted to know what was the services revenue growth this FY as far as to compare it year-over-year during this quarter?
Hi, Naitik. The service bookings growth that we have reported is a double-digit growth in value, underpinned both by volume and ASP. As far as the service revenue growth is concerned, we are constrained on sharing that for the reason that the AMC business is something which is unique to us. In our view, it is a source of competitive advantage and a competitive moat because we have a very wide service network. We do not share that split. However, I can share that at a big picture level, service is 1/3 Of our business, and as an important source of profitability for us. But beyond that, we do not really share data points for this business.
Right. So, okay, sir. Then in terms of product revenue, safe to say our growth year-over-year was just about double digits then, in that case?
It is not just about double digits, it is more than just about double digits. Because if the aggregate itself is coming to 10%, and service is under index, which is 1/3 of the business, then by implication, product becomes a higher growth.
Understood.
So just for clarity, it is not that the product business is a 10.1% or a 10.2% growth business. It is higher than that. Let me put it that way.
What I meant is 11%, 12%, not say 10%, but about 11%, 12%.
Yeah, I think you have been very clear, Naitik, in all our comments so far. The product business grew in double digits. It was not, as Gaurav as well said, marginally over 9.9% or 10%. It was a decisive double-digit growth, both in volume and value. Beyond that, I do not want to debate and pinpoint a number, but I think you should walk away knowing that it was very clear double-digit growth.
Got it. Thank you.
I think just one last point to add that, in an annuity business like AMC, the critical lead indicator is bookings because that then gives you an assured revenue stream for the future. Your cash flow has all come in upfront. You have taken in the cost upfront. It is just a question of timing of recognition of revenue. So from our perspective, we look at bookings as an important lead indicator.
Got it, sir. Very clear. Thank you.
Thank you. Our next question comes from the line of Keshav Lahoti from HDFC Securities. Please go ahead.
Hi, thank you for the opportunity. What was the ad spend in Q1 as a percentage of sales, and what is the budgeted spend for this year?
As far as spends for the year are concerned, Keshav, we will continue investing for growth because we've got a bunch of innovations which we've launched. Our bet on robotics has moved quite well, and hence we will keep investing for growth. We are also very cognizant of the fact that the market is in a bit of a challenging condition. We don't want to, in a market like this, constrain ourselves, but we'll keep investing for growth. Having said that, we will be choiceful and calibrated about the spends that we do and where we get maximum ROI. That is the balancing that we will keep doing and also keeping in mind what other cost efficiencies we are able to drive, so that our ambition of achieving a full-year margin improvement is also on track.
As far as the quarterly number is concerned, again, we've maintained our spends at elevated levels. Versus last year, we've taken up our spends in absolute terms, and that is something which, going ahead, is something that we will continue doing, but within the guardrails that I mentioned earlier.
Can I just add to that, Keshav? Let me just add to that, Keshav. I think, look, our advertising and promotion expenses serve two objectives. First one, and very important for our category, is consumer education and category creation. So driving awareness, driving behavior change. The second one is about making sure that our innovations that we have done reach the consumer. So driving awareness and penetration, driving our innovations. I also draw your attention to what you may have seen in the last month and a half, two months, which is a very dialed-up visibility, both in print and on television, to some of our campaigns. For example, in the very exciting India-England Test series, you would have seen our advertising on the two-year filter life. You may have seen in multiple newspapers our print ads on, again, the two-year products as also the robotics products.
You see that sustained over time. So driving penetration and awareness and driving our premium innovations will be the agenda that you will see us do. In addition, we also have a task on service, and you will see us driving awareness around service as well. Lastly, it's very important that we bring this alive at the point of sale. So the shopper marketing and the point-of-sale activation, those areas will also get a lot of focus. Indeed, if you go to the market now, you will see a much higher level of visibility around our products in their retail stores. So all of these will be genuine areas of investment for us and all serving the objective of driving growth.
Okay. Got it. That is helpful. One last question from my side. As we are starting to see, finally the service business is growing by double digits in booking terms. What is your sense, possibly maybe a few quarters down the line, whether the service business can catch up the growth rate what the product business is doing?
Yeah. So the reflection of the bookings will start coming in from quarter four, and I think from that period onwards, we expect the service business, which currently creates a lag on the overall growth, for that gap to start getting lower and lower. So you will start seeing the impact of growth coming in from quarter four.
Got it. My question is more on the product business is still growing by good double digits, what you highlighted. Possibly the service business, maybe a few quarters down the line, we should expect a similar growth on this business also, at least in booking terms.
Yes, I think given the line of sight that we have, I think we are quite confident that the service business will grow in booking terms and value on a double-digit basis. That is something that we are fairly confident about.
Okay, sure. Thanks. That's it.
Thank you. Ladies and gentlemen, we will take that as the last question. I now hand the conference over to the management for closing comments.
Thank you, and thank you all for joining the call today. I hope that we were able to answer the questions that you posed to us. In case there are any follow-up queries or any doubts, please feel free to reach out to us, and we will be happy to respond. Thank you. Have a great day ahead.
Thank you. On behalf of Eureka Forbes, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.