Ladies and gentlemen, good day and welcome to Eureka Forbes Limited's Q1 FY 2024 earnings conference call. We have Pratik Pota, Managing Director and CEO, and Mr. Gaurav Khandelwal, CFO 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 dial an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. Before I hand it over to Mr. Pratik Pota, please note 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 earnings call of Eureka Forbes Limited. My remarks will be in two parts. I will first speak about the quarter's performance and then frame our performance in the context of a larger transformation journey Project Udaan. Starting off with Q1. Our Q1 performance showed an improvement in trajectory both in top line and in bottom line. In a subdued demand environment, our net revenues stood at INR 505.3 crore, a decline of 3.8% over last year. This is in the context of an average of an 8% + decline seen during the past two quarters. Without the impact of discontinued businesses, our Q1 FY 2024 revenues were flat. This performance was driven on the back of volume growth, both in EWP and vacuum cleaners.
Our margin improvement journey continued last quarter with our adjusted pre-EBITDA margins expanding to 9.8% vs 9.3% in Q4 FY 2023 and 8.2% in Q1 FY 2023. This is the highest ever quarterly EBITDA margin for Eureka Forbes. As I said, it is important to see and understand the quarter's performance in the context of a larger transformation journey. We began our journey by correcting the profitability and cash profile of the business, which has enabled us and given us the headroom to invest in growth levers. From a historical 4%-5% EBITDA margin range, we have now stepped up to 9% + in the last two quarters. Equally, our net debt has reduced by 85% in just one year, which is allowing us to invest in CapEx to drive innovations and in digital transformation.
We also moved fast on the people strategy and have built out a new leadership team at both CXO and CXO- 1 levels. This, along with some structure changes, helped us bring a lot closer to our customers and to our partners, and the early results of this are becoming visible in terms of superior on-ground execution. A transformation of this scale needs a sense of joint ownership and entrepreneurial energies across the entire organization. Towards that, I am pleased to share that we have recently rolled out an industry-first inclusive ESOP program, under which every single manager at EFL has been allotted stock options. With these foundational blocks in place, we are now much better equipped to drive profitable growth in the business. In a c ategory and of business that has not seen volume growth for some time, this quarter's volume performance is therefore an important inflection point.
We believe that these categories of water and of cleaning and of air are ready for and amenable to expansion, and as market leaders, it is upon us to take charge and drive the same. Additionally, an important factor for us to keep in mind is that in our categories, our product sale is not just a single one-off transaction, but opens up an opportunity for lifetime value creation through service revenues, cross-selling, and upselling. Going forward, we will drive growth through a number of initiatives. Number one, increasing penetration and driving category growth. Our current campaign aimed at converting non-users through improved affordability, improved distribution, and functional communication has shown encouraging results, and we intend to sustain the same. Number two, we will drive differentiated innovations with a focus on the premium price segment, both in water and in vacuum cleaners.
Number three, we intend to provide our customers an elevated and industry-best customer experience in terms of both speed of service and quality as well. Lastly, we will drive growth through best-in-class in-market execution in every store and in every home. To summarize, under Project Udaan, we have witnessed encouraging progress on profitability, cash profile, and people. Going forward, we are confident that our growth interventions, supplemented by our customer and digital initiatives, will help in further improving the business trajectory, leading to a sustained and profitable growth. We are excited about the journey that lies ahead towards the goal of transforming Eureka Forbes into a D2C health and hygiene powerhouse. On that note, I will now hand you over to Gaurav Khandelwal, our CFO, to provide more details on the financial performance. Over to you, Gaurav.
Thank you, Pratik. Good afternoon, everyone, and thank you for joining us. In the backdrop of a continuing soft demand environment, our revenue at INR 505.3 crore declined by 3.8% on a year-on-year basis. Adjusted for our discontinued businesses, our revenues were flat. This represents an improvement over previous trends, driven by volumes across the portfolio in both water purifiers and vacuum cleaners. Our gross margins improved sequentially as a result of our cost actions and operational efficiencies. On the cost side, overall expenses before ESOP charge were flat sequentially and declined by 6.6% on a year-on-year basis. Within expenses, our employee cost witnessed an increase primarily on account of increments and new hiring. We expect our employee cost to be range-bound from here on. With the objective of building ownership and alignment for the transformation agenda, ESOPs were given to the managerial cadre in this quarter.
This resulted in a non-cash ESOP cost of INR 3.8 crore. It may be noted that this is not the full quarter impact, and we expect the quarterly impact to be approximately INR 10 crore. Given the above, while commenting at the key profitability matrices of EBITDA and PBT, we would be referring to the pre-ESOP EBITDA and PBT and calling them as adjusted EBITDA and adjusted PBT. Adjusted EBITDA percentage witnessed an expansion of 164 basis points vs previous year and also a sequential improvement by 49 basis points. Q1 adjusted EBITDA represents a 15.5% year-on-year growth. The improvement in EBITDA margins was driven by a combination of cost initiatives, operational efficiencies, and a relatively softer commodity environment. We recognize the criticality of the cost as a lever, and we continue to drive various cost initiatives across the entire P&L value chain.
Several initiatives have been executed, and we will continue work on creating new pipelines of cost actions. Continuing process improvements led to a net debt reduction from INR 216 crore as of end June 2022 to INR 32 crore, an 85% reduction. This was also reflected in our finance cost, which reduced year-on-year by 46%, from INR 6.3 crore- INR 3.4 crore in quarter one. Aided by EBITDA margin expansion and lower finance cost, our adjusted PBT before exceptional items grew by 42.6% to INR 34.8 crore. Adjusted PBT margin for the quarter was 6.9%, an expansion of 224 basis points year-on-year. PAT for the quarter was INR 22.1 crore compared to INR 17.8 crore in quarter one, an increase of 24%. To summarize, in a challenging demand environment, the trends on both top line and bottom line show an improvement trajectory.
We continue to remain focused on executing the transformation agenda under Project Udaan and intend to build on the improved trajectory and make steady progress on other transformation fronts. On that note, I would now like to open up the floor for Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handcuffs while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Ashwini Agarwal from Ratnabali. Please go ahead.
Good afternoon, sir. Hi. Congratulations on the numbers, sir. It has been one year since Mr. Pota has joined the organization, and clearly his work on margin expansion and steadying the ship is visible, and we like to congratulate him again on the same. However, as shareholders, we expected some growth in the pipeline since it has been almost one year since the new management has taken over. By and large, we are still stuck in that same INR 500 crore quarterly run rate on top line . Could you explain to me what is the reason apart from the sluggish macro? We know that the macro has been tough. We expected that now that the new management has been there for last one year, and when we mentioned that the category is under penetrated, there has been a transition from old management to new management.
We observed that you have launched new products. We have hired so many people on sales and marketing front and also launched an advertisement campaign. Despite all of this, why are the numbers not translating into sales growth? What sort of quarterly or annual run rate are we looking at least three to four years down the line? I will wait for the answer before I ask my second question, sir, or whatever you suggest.
Thank you, Ashwini. Thank you for the question and for your remarks. I think before I respond to the question, let me just recap a few data points that I spoke about in my opening remarks. I think, in this quarter specifically, if we take out the impact of discontinued businesses on a revenue basis, we were flat vs last year. If I double-click on that further, I think the most encouraging green shoots for us came from the volume growth. This volume growth came from both water purifiers and vacuum cleaners. You remember, Ashwini, that this category and this business has not seen a whole lot of volume growth in the past, and growth has typically come on the back of pricing. This category has in many ways become almost unaffordable for a lot of consumers.
So one stated part of our strategy, as you would recall, was to grow the category penetration, make the category more affordable, more accessible. The first evidence of that we have seen is in the form of volume growth coming out. So even as we look at the net revenue numbers, and your remarks are valid, within that, I think it is important to recognize that we are seeing a fundamental change in trajectory as far as volumes are concerned. Of course, we know that in this category, like I mentioned in my opening remarks, additional units sold, additional customer acquired, is the gateway into a lifetime of value and a lifetime of a relationship being harvested through service revenues, through sales of filters and spares, through, of course, cross-selling and upselling. That is the other point.
Now, it's also equally important to remember, Ashwini, that the first couple of quarters, and indeed more of the last one year of the transformation journey, was spent in rebuilding the team, strengthening the foundations, correcting some of the culture issues. I would say that that's still WIP in many ways. We now feel that we've begun to lay the foundations. The foundations are being laid. I talked about people earlier in my remarks. I talked about the fact that we've got our EBITDA margins in a range which is much better than they were last year or before. The net debt has improved significantly, giving us the elbow room to invest in growth drivers. All of those are the significant positive news, if you will, which will help us drive growth in the future.
If I take a step back, the reality is that these categories are, as you mentioned yourself, having extremely low penetration. Water is a category which has a universal need. Pure water is a universal need, yet it is a very low penetration category. One large part of that is that the total cost of ownership between product cost and service cost has been quite high. Therefore, as market leaders, we are now playing this role of making the category a lot more accessible, a lot more affordable, and therefore growing the category and growing volumes. Equally, we recognize that there are many India's and multiple customer segments. We also have a large base of installed customers and units who are looking for upgrades. So we are also investing in driving differentiated premium innovations targeted at this cohort, at these segments.
You will see the impact of that coming out progressively over the next few quarters. If I can summarize, I think foundations are being laid. Volume growth is a very encouraging positive. The fact that our EBITDA margins have broken out from the earlier range bound level of 4%-5% to almost 9.5%-10% now. That's the other positive news. Investments are being made and have been made in driving growth, in driving execution improvement on the ground. The results of that in terms of net revenue growth, you will start seeing in the quarters ahead. I would not belittle the work that's been done by the team in the last two to three quarters of just investing in strengthening the foundations that enable much faster growth and transformation.
Thank you, sir. That was heartening to hear, and probably we are building the foundation even more stronger. Sir, could you also help me to understand your employee costs? Every quarter, the number tends to throw up surprises, because I just checked. Ex of ESOP cost, it was INR 70 crore in June 2022, then it shot up to INR 105 crore in September 2022. It went down again to INR 70 crore in December 2022, then INR 60 crore last quarter. This year now, ex of ESOP cost, it's INR 72 crore. It's been all over the place and it sometimes comes as a surprise to us. So I'm assuming there were a lot of new employees that came in, a lot of increments, bonuses were given in.
But still, if you could help us breaking it down as to how many full-time employees we have, how many contractual employees we have. Why the employee costs fluctuate so much. The representatives at stores, we have one or two representatives at every Vijay Sales, et c. Are they on our company payroll? Similarly, the AMC people who visit our homes for these services, are they on the payroll and how is that count as increasing or decreasing ?
Sure, Ashwini. Hi, this is Gaurav. Thank you for your question. I think you are right in pointing out that there has been a fluctuation over the past four quarters, but I think it goes back to the point that it's been a journey where we've been putting the foundations in place, and that has meant that there have been certain actions at different points in time. I think it is important to call out two things. One, we are at a stage where if you look at our quarter one costs, that pretty much represents in some ways where we would want to be. It factors in the investments that have been made in capabilities. So from here onwards, one can expect that the cost is going to be range-bound from where we are now. That's one. The second is your question on the breakup of the employees.
That is something that we don't share, but I think it's important to call out two or three things. One, our service technicians who work with our service BPs, they are not on our payroll. So we just want to clarify that. Number two, the sales force that is there with our distributors, with our partners, that again is something which is on their payroll and not ours. Whatever payout happens to them is our trade margin, which we give out and which is market-benchmarked. So I just wanted to clarify that, but I think at a macro level, we are at a stage where we've built the organizational capability that we wanted, and from here onwards, one can expect it to be a range-bound employee cost line.
Thank you for the answer. I'll come back to you.
Thank you. The next question is from the line of Atul Tiwari from Citigroup. Please go ahead.
Yeah. Thanks a lot for the opportunity. I have two questions. What was your market share in the key categories that you were presenting in the first quarter?
Atul, thank you. Thank you for the question. Our market share, as you would know, is a combination of the shares that we have in retail, both general trade and modern trade. Our market share that we have in our eCommerce channels and the marketplaces, as also the contribution that we get from our direct channels, where, of course, the market share obviously 100%. I am happy to report that in the quarter one that has gone by, we reported a sequential increase in market share in the water category. In the water category, as you know, we are market leaders, and we are dominant leaders in the VC category.
Okay, sir. My second question is, beyond these two categories, given the kind of distribution that you have on your pan-India basis , which other products you could launch over next three to four years? I am not asking about whether you have actually plan of launching them or not as of now, those things can evolve in future. But given company's strength in terms of distribution, brand name, and after-sales services, which other product categories are amenable to being launched by you?
Atul, I agree with you that we have extremely strong brand. We have got an omnichannel presence. We have got a national service network. We need to put in place a very strong digital footprint, a digital backbone. Those are very important foundational strengths. That said, we believe that we have that we see in our existing categories, which is water purifiers, and water adjacencies with water softeners etc., c leaning and in air. In these categories itself, there is so much of runway that we see for growth that for the immediate future, we intend to remain focused on these three categories to drive both penetration and to drive both through premiumization and through market share gains. In many of these categories, as you know, there is a significant portion of the market that is unorganized.
There was also intention to try and upgrade and convert these users into the organized segment. To come back to your question, for the immediate future, this is our remit, and this is the category portfolio that we intend to operate with. Beyond the next two years, it is hard to conjecture now, but this is where we intend to remain focused right now.
Okay. Thanks a lot.
Thank you. The next question is from the line of Aniruddha Joshi, ICICI Securities. Please go ahead.
Yeah. Sir, thanks for the opportunity. Two things. Can you elaborate about the innovation and the new products that probably you would have launched in this quarter itself ? Secondly, the margin has significantly improved. So what is the real cause that you would have cut? Or has this margin improved from across the various cost? Can you articulate a bit more on how the margin we are able to improve and what is the further scope to improve the margin over here? These are the two questions, and I will come back with more questions here.
Thanks, Aniruddha. Thanks for the questions. I will respond to the first question. That requires Gaurav to respond to the question on margin. I think on innovations, both in water and in cleaning, we have a portfolio that straddles multiple segments, multiple price points, and allows us to therefore offer different propositions to different customer segments. We have in the last three to six months rolled out a number of innovations in different segments. I am happy to report that in most of these innovations, we have made significant progress. To illustrate with one example, in the stainless steel segment of water purifiers, we have made two launches in the last three months. Actually more than three months, last three to four months. And we have seen a significant impact of that in terms of both growth and in terms of market share.
So that is one part of my answer. Equally in our category, it is important to recognize that while product innovations will certainly play a role, we also have a lot of room for business model innovations beyond just product. So there is a lot of work that is going on and which will see light of day very soon in terms of different model innovations, which will allow us to offer customers more affordable options, both in terms of product, in terms of service, easier access, and more convenient access through better control and through more digitization, as also in driving more of improved customer experience, and especially across multiple categories, which we will see that play out in the coming quarters.
But I think the great news and what gives us a lot of encouragement and confidence is that whenever we launch an innovation, I think given the nature of our brand, there is a lot of great acceptance. Distribution happens, we get a lot of consumer interest, and then there is immediate pickup and immediate trials. So excited to say that we have invested in the last six months now in strengthening our R&D and innovation team. We have got capabilities strengthened in electronics, in design and engineering, in cleaning category, in water itself and water adjacencies. And in marketing, we have rolled out a category-specific structure. So between the new marketing structure and strengthened R&D and innovation capabilities, we are very confident about rolling out a very aggressive innovation plan and innovation calendar in the coming few months. G.K., on the margins, please.
Yes. Aniruddha, just to shed some light on the margin. I think first, as a principle, the approach that we are taking is to look at the entire value chain of the P&L and see where the opportunities lie. If I were to give you two, three examples of that. One key enabler for cost efficiencies has been digitization. If I were to just compare the number of customer complaints that came on app vs a call center for the last six months, it has doubled, which automatically means that there's a flow-through effect on our call center cost, for example. Another example is that while we build newer capabilities in people, and that is something that you see reflected in the people cost line, that has also gone hand- in- hand with reducing our dependence on outsource partners.
There are a lot of work which was being done by outside firms, consultants, et c. We've got that work in-house. Those are just two examples, but at a principal level, our work continues across the entire P&L value chain. There are still opportunities in COGS, there are opportunities in procurement, and we are striving across all opportunities. Having said that, from our perspective, when we look at profitability improvement, we are not just seeing it from a lens of cost only. We're equally cognizant of the fact that operating leverage will come from growth, and hence, while we root out inefficiencies, we are equally very focused on investing behind growth as well.
I think we spoke about our new campaign in the last earnings call, and I think the fact that a category which has not seen volume growth for a while, for that to appear in this particular quarter is a signal that this category is amenable to growth investments, and we will continue to do that. We believe that there is still leeway in cost actions that we will take, but at the same time invest in growth so that at an overall level, we are able to get operating leverage from growth.
Sure, sir. That's helpful . Last question. There is a mention about B2B sales in the presentations also. So what exactly B2B sales as a percent of revenue? Who are the major customers, et c., and in this business? That's it from my side. Thank you.
Your voice was breaking up a little bit, but I assume you are asking about B2B. Let me respond to that question. Yes. In addition to our B2C business, which is of course, a more familiar business that we all know of, we also have a B2B business under the name of Forbes Pro. Under this, as part of this business, we cater to institutional customers and SMEs through both our own channel, our own company-run channel, and also a network of partner-run channels. We have a presence directly and through our partners in roughly the top 60 cities in the country. That is about the B2B business, and it is an important part of our portfolio. As part of this, we also service these devices that some of those devices that we install also get a service revenue, which we then are able to benefit from.
Okay. Sir, sorry, one more question. We have seen many brands which sound very similar to Eureka Forbes. Something like, there is a brand called Sureka Forbes, and I guess they have a they have a website etc., and again business also . Probably, Eureka brand has got more, we can say, awareness than the actual sales. There might be some guys who are there in the market. How do we tackle this issue and what are the efforts done by the company in this regard? That's it from my side. Thanks.
Absolutely. Let me be absolutely unambiguous and unequivocal about the first part of your question. Sureka Forbes is a fraudulent entity, and it is cheating customers in its area of operation. There is a legal case that has been filed, a criminal case has been filed. The matter is sub judice, and we will take this forward and make sure that there is no further possibility of this entity cheating our customers and misrepresenting who they stand for. More generally, if I step back, and I referred to this point earlier as well, we are aware that there is a large market which is an unorganized service market, which is catered to by small operators across most markets in the country.
We intend and we have rolled out a very clear and a focused program of converting this gray market and this parallel operation through a combination of three or four things. First one, from a legal point of view, we are working with the authorities to identify these gray market operators, manufacturers of fake filters, distributors of fake filters, and going after them. That's one work stream. The other vector is about creating customer awareness, ensuring that our customers are able to discriminate and identify easily what is a genuine Eureka Forbes Aquaguard filter and what is not. Number three, we're looking to differentiate our filters and to make sure that there is both a visible and a functional advantage that comes from Aquaguard filters. Through a combination of these work streams, we intend to attack this parallel market.
Additionally, I spoke earlier about the fact that this category has kept the cost of ownership high. That has been, like I said, both in terms of product cost and in terms of service cost. The high cost of service actually is a barrier in driving data penetration. We intend to make, just like we've done with product affordability, we intend to drive service affordability as well, and open up our service offering to a much larger segment of customers at different price points and with different segment of offerings. This, we believe, combined with the other action I spoke about, will help grow our service universe and our service footprint significantly in the country.
Thank you. Our next question is from the line of Parth Sanghvi from Nepean Capital. Please go ahead, sir.
Yeah, hi. My question actually is building on the previous-
Sorry to interrupt, sir. May we request you to use your handset, please?
Sure. Even better.
Hello?
Okay. Can you hear me better now?
Yes, sir, that's better. Please go ahead.
Yeah. I guess my question is building on the previous question. Of the INR 500 crore of top line, how much of that would we see a recurring annual maintenance contract?
Yeah. Hi, Parth. Thank you for your question. We don't share the split of our product and service business. To be honest, the reason for that is in some ways in the previous question itself. This is, we believe, important competitive information. Given that we are in a unique place where we have a large customer base, and there's an opportunity to convert that base into a service revenue, convert people who are from the unorganized market into a service revenue for us, this is something that we believe is important competitive information, and hence, we've kind of stayed away from giving the split of this.
But I think while that's one part of it, I think the second part and the more important part is the fact that there is a very large universe of customers who today are being serviced by parallel market or gray market operators. One of the names was taken on the call earlier. And we believe that in itself is a very big opportunity. So the more we make our service offerings, our AMCs available, accessible, and affordable, we believe that this is a very big opportunity to unlock. Hence our focus is going to be on this area, both through demand-side actions and equally supply-side actions that Pratik spoke about earlier.
Okay, fair enough. Let me ask the question a slightly different way, and I tell you where I'm coming from. I'm trying to gauge the opportunity up here in the years to come. So right now you have eight million customers. I'm assuming a fair number of them have some sort of management contract. Do you know how much that I'm assuming everyone gets a service every year or periodically you only probably see a small portion of that. So do you know how many of those eight million customers you're servicing right now? Can you share that or is that something you want to keep yourself right now?
Yeah. Parth, we don't share the split of how many of those eight million customers are on contract. I think suffice it to say that the number of people who are not in contract is more than the people who are in contract. So I think that gives you a sense of the opportunity that is there. And the reason we find ourselves in this position is the fact that, one, there are these gray market operators that we spoke about. Equally, as a company, how do we make our offerings more attractive, more differentiated, is something which would enable us to start converting this base. But the picture is that there are more people who are not in contract than in contract, and therein lies the opportunity.
And just to add to that part, I think the opportunity would require us to actually approach this from very different perspective. Like Gaurav said, there's a large universe of customers, our own customers, with older devices who are not in our contract universe, and they could turn to the gray market for service and for filters. So one reason for that is that we've not allowed ourselves to become easily accessible and available to these customers. So one part of the solution, apart from doing the work that I spoke about earlier and Gaurav spoke about earlier on making service more affordable, would also require us to have a go-to market solve in making our filters, our service, much more accessible to our customers who are not in contract. So that's the other work that's going on that will help us in the quarters ahead.
Also, I want to go back to what I said in my opening remarks, which is that today's volume is tomorrow's AMC revenue and tomorrow's service revenue. And the fact that we are seeing encouraging volume growth gives us that runway a few months from now, a year from now, in strengthening our service annuity stream. And like I said, this category has always been plagued with below par volume growth. And the fact that we are now able to stoke volume growth, drive conversions, drive penetration, drive more customers, and increase the customer franchise, tells us that down the road, we can expect to see equally strong momentum build up in service as well.
Sorry. And just to clarify, if I take an annual maintenance contract, the person coming to my house to change the filter, is he on the rolls of Eureka Forbes?
No, Parth. He's not. The technician who comes to your home is employed by our business partners who are engaged with us and who get commissions on the AMCs and on every product.
And in that case, how do we ensure that they are selling Eureka Forbes product as opposed to a spurious product?
Absolutely. That's one part of the challenge that I spoke about earlier. Through customer awareness, through ensuring that we create differentiation of our filters, the fact that we clamp down on the supply itself from the back end of these fake filters. There are other means that we like to do and drive, especially the digital interventions. You will see that play out in the months to come. But you're right. The fact that this network is a partner network requires us to put in place stronger controls and stronger governance to convert the AMC customer to a Eureka Forbes AMC customer.
Thank you.
Thank you. Before we take the next question, a reminder to all participants, you may push star and one to ask a question. Ladies and gentlemen, you may push star and one to ask a question. The next question is from the line of Praveen Sahay from Prabhudas Lilladher. Please go ahead.
Yeah. Thank you, sir, for taking my question. First question is related to the service expenses. There, we have seen a reduction. If I recall the last call you had said around 50% service requests coming from the call centers and which you are transferring through digital initiatives. Is it a result of that only or something more to that ?
Sure. Thank you, Praveen, for the question. The service charge line that you see on the P&L is a combination of the complaint call charges that we pay to our service business partners, the cost for call center that is there, the cost that is paid for installations, for managed services, and also the cost that is paid for business partners as trade margins. The reduction that you see is largely attributable to the fact that we have been able to make decent progress on some of our digitization initiatives, and that has helped in reducing this particular cost line.
There is a further room for reduction here as well?
We will continue working on it on an ongoing basis to see what opportunities can be extracted in this area.
Just to add to that, to what Gaurav said, Praveen. Q1 FY 2023, in other words, same time last year, a dominant share of our complaints came from the call center, the voice channel, almost 70%. The balance 30% came from unassisted means, digital, WhatsApp, et c. That number has completely inverted in Q1 FY 2024. That more than 2/3 of the complaints now come digitally or through non-assisted channels. It's only 1/3 or under coming from our call center. So like Gaurav said, that has had some impact on call center savings. But more importantly, it's also improving the customer experience and giving customers much greater visibility and much more control on their entire service journey.
Okay. Next questions are related to the service revenue. So, as you had also mentioned about the gray market operators in that, can you give some sense of how much of the market of a servicing is done by the gray market operator?
Praveen, it's hard to give a precise estimate because of the nature of this gray market that exists. But I think it's important to pull back and go back to the earlier point that Gaurav made, which is that the share of customer service by the gray market or the parallel market, I wouldn't just call it the gray market, is larger than the share that is serviced by the official Eureka Forbes channel, pointing to the vast opportunity that exists, and the fact that with our effort, we can actually harness and tap into that to drive growth.
Just to add on this parallel market is also serviced through the partners, channel partners only, right? So if you have also a channel partner, how do you differentiate actually in your services?
This parallel market for the larger part, Praveen, comprises local service operators with a few technicians. Sometimes it is just one technician himself who is almost an entrepreneur servicing devices in his area. In some cases, these happen to be old Eureka Forbes partners who were trited many years ago and continue to operate in this space. Therefore, the ecosystem of the parallel market is largely of this nature.
Praveen, just to add, I think the unlock to this opportunity is not just from a supply side, where it is on gray market operators, but equally from a demand side. Because come to think of it, if most of us, if asked where can you buy an AMC or a water filter, we may not even know. But that would not be the case in many other categories. Hence, while we focus on the supply side, there is equal focus on the demand side as well, where the focus is on making AMCs, filters, consumables more available, more accessible, more affordable. Because then it is a combination of both these things coming together, and when you marry this with consumer education, then it becomes a three-pronged approach to addressing this opportunity in its entirety.
Our intent is to operate on all the three vectors, because the opportunity is fairly substantial.
Great, sir. The last question, sir, related to the more affordable range of product and the services as you had mentioned, which has driven the volume for you this quarter. At the same time also, you had mentioned that the premium price segment, more of SKUs launch the way forward. Can you give some sense way forward? How is the mix going forward, like affordable vs premium in the services as well as in product categories?
Praveen, I'll respond to that question. I think the very interesting and encouraging part of this category is that we see abundant room to grow both the economy segment regarding penetration, as also the premium segment. Let me start with the first part, with the economy range first. You're aware that the penetration of water purifiers in the country is just about 5%. The barriers are many, primarily being affordability and the total cost of ownership, n umber one. Number two, sometimes perceived lack of need. Our campaign that we ran recently, wherein we offered an Aquaguard priced as low as INR 6,499, accompanied by a campaign which talked about the need and created dissonance with our cloth filters, has worked really well and helped drive both of the economy segment. This is one area where we intend to stay focused and continue to do more work.
Just one data point here, which gives us all encouragement, is that more than 80% of customers who bought this economy device were first-time users who actually had not entered the category, and they were converted by the campaign along with the price point and of course, the promise of Aquaguard brand, the brand trust. So that's one part. Equally, we see that there are customer segments who are looking for differentiated offerings, looking for premium offerings with superior aesthetics, superior functionalities, very different form factors. We are looking to innovate across these price points as well, across these consumer segments as well. As we go forward, you will see our innovations play out in the premium segment, in the mid-price segment, and also you'll see us drive growth and affordability in the economy segment.
Okay. Is there any focus on these categories for different channels, like the premium in the certain channels and the economy or affordable in the certain channels?
Yes, Praveen, that's a really good question. I think, the advantage that we have as an omni-channel player is that we have a unique and advantage direct sales system, which allows us to go to customers' homes, evangelize and build category, evangelize and sell premium products. Therefore the role of a direct sales channel will remain focused on premiumization, replacement selling, and category creation. Again, in a category like cleaning or even a category like water, there is room for us to grow penetration at the premium price points. So the direct sales team and that channel will be focused on premium offerings in water and in creating new categories. In retail, general trade, given the nature of the category, the task there is distribution expansion.
And just to again, put some numbers to it, the universe of small domestic appliances are available in more than 2 lakh outlets. And within that, water purifiers are available in a small fraction of that, under 19,000 almost 20,000. So the task here is for us to grow distribution, and that is best done with an economy offering taking the lead. Of course, once the economy product enters the outlet, we cross-sell our entire portfolio, but the pricing open of the outlet and the outlet opening is done by the economy range. Equally in retail, we have modern trade, which caters to a much more affluent, much more aware, much more discriminating customer, typically a replacement customer. And there the task again is to offer premium offerings, differentiated offerings with outstanding and superior on- ground and in-store execution.
So the fact that, we've got the e-com of course, our use cases are many, both in category creation especially in Tier two, Tier three towns, but also in premiumization. So the fact that we have this mosaic of channels allows us to play our portfolio differentially by channel and allows us therefore drive growth, drive penetration, and also drive premiumization.
Well explained, sir. Thank you for this. Just one clarification. Direct is still the highest contributor in this channel, right?
I think, Praveen, direct used to be as you are aware, the dominant channel. I think over the last few years, we have built a very strong and a very robust retail channel as also a fast-growing e-com channel. So the contribution of these channels are equitable and symmetric, and direct is no longer dominant.
Great. Thank you, sir. Thank you for a detailed explanation. All the best.
Thank you.
Thank you. Our next question is from the line of [Amar Maurya from Carl Icahn Advisors]. Please go ahead. Mr. [Maurya], your line has been unmuted. May I request the management, we move to the next participant, please?
Yes, please.
Before we take the next question, a reminder to all participants, you may press star and one to ask a question. I repeat, you may press star and one to ask a question. The next question is from the line of Devika Jain from Ratnabali Investment Pvt. Ltd. Please go ahead.
Hello. Congratulations, sir, on the great set of numbers. So I basically wanted to understand the line items. Sorry. I would want to ask the next question. What do you think will help us in revenue growth? So our typical levers would be product price, reach, or availability, and innovation. What is our geographical reach right now? What do we expect three years down the line? From availability point of view, can you bifurcate region by distributors? Also if you can break it into urban vs rural. What will be our pricing strategy going forward to target those customers who don't use a water purifier now? Lastly, what are we doing in terms of innovation and brand so that we don't get crowded out on such space?
Thank you, Devika. On a lighter note, your question is like the question that I asked in my internal reviews and push my team for more information. Coming back to your question, I think our strategy for driving growth is simple and it's clear. Let's start with first water. In water, we have an exciting task to grow penetration by identifying category barriers, unlocking the affordability barrier, and driving distribution. So that's the first part. Equally in water, we have an exciting task of premiumization through our innovations, through differentiated value-added offerings, both functional and otherwise, and form factors and so on. So that's on water. Equally, like I said earlier, in water, we have a distribution task and we have a larger category expansion task. There is that work stream which is clear on water.
In the non-water categories, the categories of cleaning and of air, similarly we have a penetration task. Vacuum cleaners if anything have even a lower penetration than water purifiers as we know. The task there is also premiumization. So even as we grow the category in cleaning, we also intend to double down on the premium segments of uprise of robotics, which are part of what we call the convenient cleaning segment. This segment has grown significantly post-pandemic where consumers are looking to have very accessible and very less effort-intensive cleaning solutions. So that's the second area of work for us.
The third area of growth opportunity for us is, as I think we mentioned earlier, in expanding the service universe. Recognizing that a large part of our customers are not aware right now of our AMCs and our contract service, how do we reach them through combination of more affordable AMCs and affordable service, filter sales sold to them directly and other means, and creating awareness as well. That is the third revenue stream. The fourth revenue stream and the fourth area of growth for us will be digital and D2C. The fact that Eureka Forbes was India's first D2C company many, many years ago. And still we have a very large access to our direct sales network and our service network.
We will build on top of that a very strong digital backbone and use that to drive D2C sales, starting with service, but eventually our product as well. The good part is that when we look at a growth profile of quarter one, we saw encouraging volume growth. We saw volume growth across the cost stream, both in metros and in Tier one towns, and also in the Tier two and Tier three towns. Equally, just like we see opportunity in growing penetration in the smaller towns, we also see opportunity in growing penetration and driving premiumization in the metros and the Tier one towns as well. More broadly, if I pull back, there is an abundance of opportunity.
The work that we have done in the last one year in strengthening the foundations, rebuilding the basics, put us in a very unique and a very strong place to harness and to drive the growth, both through category expansion and through market sharing.
Thank you so much. One more detail if you could give me. As on date, can you bifurcate the region-wide distributors that you have, and also urban and rural breakup?
No, Devika, I'm sorry. That level of detailing we don't give. But suffice it to say that we are lucky to have a strong nationwide and national presence across all regions. I think we are one of the few brands in this category who provide a national service network, which goes down to even small towns. So both product availability and service availability is across Forbes Data. All through combination of our direct sales channels, through the company-owned channel and the partner channel, retail channel, and of course, e-com. Supplemented by the large service network that we have across 10,000 + pin codes.
Thank you so much. That's it from my side.
Thank you. Our next question is from the line of Rajesh Kothari from AlfAccurate Advisors. Please go ahead.
Hey, hi. Thanks for providing an opportunity. My first question is, I think a couple of times you kept insisting that the category is currently not affordable, and therefore, as a market leader, you would like to make sure that affordability of it becomes more affordable product. In that aspect, to make it affordable, it means are you saying that current product pricing point you introduce or you need to introduce products which are basically completely different with a much lower price point? And if the answer to that is yes, then how do you see the impact on the gross margin? This is the first question. I'll follow up with my second question once I get a feedback on this.
Okay, first question. Okay, got it. Thank you, Rajesh. Thank you for that question. You are absolutely right. We have talked about this several times on the call, and we believe very strongly that one factor that has held back category growth and penetration and universalization has been the high cost of ownership, both the high threshold and pre-cost of product, as also the recurring cost of AMC. We intend to expand the category by making the product and service more affordable. We will do this by offering customers fit-for-purpose, customized, segmented propositions at the right price points. We saw the impact of that play out in quarter one. Just one call-out that I want to do, that the growth in quarter one did not come because of any price drop. So we took no pricing action in quarter one. There was no price reduction.
We saw significant growth come in our value offering. Going forward as well, we intend to grow the entire portfolio. We will drive the economy range even as we drive the premium offerings, the premium segments, through innovation, through differentiation, et c. I will cover the question on gross margins, Gaurav, in a minute. But before I do that, I want to underline and call out that the right metric for us to look at is not gross margin, it is look at EBITDA and overall profitability. In this quarter, you saw us deliver good EBITDA increase with a muted revenue performance on the back of volume growth. Going forward as well, we are confident and we believe strongly that as we expand the customer franchise, as we get more customers and grow volume, we will be able to deliver sustained and profitable growth progressively quarter- after- quarter.
Gaurav, you want to respond to the other question?
Yes. Rajesh, coming to your question on gross margin, I think I would see it slightly differently because one way to look at gross margin is just from, let us say, a price lens and a mix lens and see what the downsides are. But I think there are two, three important things to keep in mind. One is that we have a fairly spread-out portfolio, so our ability to mitigate any impact on gross margin is also very high because we straddle across channels, we straddle across price points. That is one. Number two is that for us volumes also create opportunities for cost efficiencies. So higher the volumes also means that our procurement gets better, our freight gets optimized, and when we marry it with a cost program, also delivers efficiencies, which can offset any mixed impact.
The third thing is that affordability doesn't necessarily mean just a pricing play. I think it's important to reiterate what Pratik mentioned, that fit for purpose is a very important part. What you offer to a customer at, let's say, a INR 8,000 price point vs an INR 18,000 price point are different products with different specs, and they also come with different cost structures. That's the way one needs to see it. There are competing factors at play. While there are certain factors which make pressure on gross margin, but there are equally factors which provide a mitigation. But from our perspective, we are keeping two big things in mind. One is the fact that for us, a product sale is the first step towards creating a lifetime source of value in the form of an AMC revenue or cross-selling, et c.
The second is that we would be navigating the business based as an EBITDA margin. I think we believe there is adequate flex available across all P&L lines, and without necessarily pegging ourselves to a gross margin line, what we will seek to optimize will be on the overall EBITDA profitability of the company.
Sir, your economy segment, correct me if I'm wrong, probably will be bulk of your revenue, right? I don't know. Do y ou provide the mix? I'm not too sure.
We don't give the mix, but that would not be the case. I think the best manifestation of that will be the gross margin percentage that you see. I think the-
No, I am saying in terms of revenue mix, the economy would not be the largest?
We have a fairly spread out portfolio. We straddle across different offerings. Economy is just one part of it. There is a mid segment, there is a premium segment, and across the board, we have got offerings.
Sir, that is not the case at all. I think we have a very strong presence in the mid-price and the premium segments.
I see.
And we have now, as I said, made increased efforts to grow the economy segment and to grow the category. As I mentioned earlier, a dominant share of those customers who buy economy products have come from being non-users earlier. They are new adopters of the category. So it would not be accurate, it would be, in fact, incorrect to say that a largest share of our revenue comes from the economy segment.
Thank you, sir. We move to our next question. Our next question is from the line of Ravi Adukia from PGIM Mutual Fund. Please go ahead.
Thanks for the opportunity. My first question is, sir, you gave good color on your strategy, but if you could talk a little bit on your aspiration in terms of revenue growth over the next three to five years. So this is my first question. Second question would be if you can give some color on movement in working capital in the current quarter and, CapEx you foresee over next few years? That is all from my side.
Got it. No, thank you. I will request Gaurav to answer the question on working capital in a minute. But before that, let me respond to your first question, Ravi. I spoke earlier about the fact that we are fortunate to operate in a category landscape with extremely low penetrations, and the fact that this offers a strong and long runway to grow. We also are fortunate to have an incredibly strong power brand in Aquaguard, which has universal trust, universal familiarity, and universal acceptance. We are also fortunate to have a strong omnichannel mosaic and omnichannel network between retail, e-com, and the unique advantaged direct sales channel. We also have very large service network across the country. So these are very strong foundational enablers that we have in place to leverage the opportunity.
Like I said earlier, our strategy is dedicated on, number one, category expansion and growing volumes, even as we also differentiate and offer our customers premium offerings. It is also dedicated on growing the portfolio by playing much more aggressively in the gaming, again, across multiple price points, including the premium segment. The third area is about D2C and using our D2C platform and growing D2C presence to drive direct-to-consumer revenues. The fourth piece, of course, is about service and how do we improve customer service and how do we expand our service network. We talked about earlier in the call about how we tap into the parallel market and the gray market and expand both our contract revenue and our filter revenue through a combination of number of initiatives, including driving more and more customer awareness and improving service affordability.
I think all of these initiatives are beginning to play out. Some early results were visible in the results in Q1, and we are confident that as these initiatives get rolled out, we will see more and more impact and more and more outcomes and more and more visible outcomes play out across volume growth, across revenue growth, across EBITDA margin improvement, customer sat improvement, and just in overall getting our business much more future ready. Gaurav?
Ravi, coming to your question on CapEx and working capital. On CapEx, we have last given a guidance of INR 75 crore- INR 90 crore for the year. We continue to stay with that. I think the important part to call out is that this CapEx is steered towards, one, creating an innovation pipeline for us, not just for this year, but beyond that. The idea being that this then becomes an enabler for growth. Number two, this CapEx could be spent on digitization efforts. As we progress during the course of the year, we will see the CapEx step up. Coming to working capital, it remains a very critical area of focus for us. You have seen our net numbers go down 85% year-on-year, and a lot of it is driven by our focus on driving working capital efficiencies.
This is an area where we will continue to keep working on because we believe there are still opportunities in this area, and we take it from there on.
Okay. Thank you so much.
Thank you. Ladies and gentlemen, that was the last question of the question and answer session. I would now like to hand the conference over to Mr. Pratik Pota for closing comments.
Thank you everyone for joining the call today. I hope that we were able to address your questions satisfactorily. In case you have follow-up questions or in case some queries have gone unanswered or if you want more color, please reach out to us and we will be happy to respond. Thank you so much for your time, and have a very good day. Thank you.
Thank you. On behalf of Eureka Forbes, I conclude this conference. Thank you for joining us, and you can now disconnect your lines.