Thread by @kforkashish

Why am I bullish on Eureka Forbes?

Demerger + New Promoter - Metamorphosis

A thread ⏬

“One man’s problem is another man’s opportunity.”

Debt-laden SP group had to reduce its debt and most of the group`s businesses were not in good shape. The group’s inability to repay the debt post the Sterling Wilson listing made things tough

ultimately, forcing them to sell out the crown jewels and one such jewel is Eureka Forbes Ltd, the iconic water Purifier brand, the OG water purifier found in the majority of the Indian households.

Forbes and Company has multiple businesses under its umbrella like Engineering(Precision tools and coding), Real Estate, Shipping, E-commerce, etc. and also carries Health and Hygiene products under EFL

The SP group was looking to sell out EFL for the last 2-3 years to pare down the debt(media articles hinted towards billion-dollar valuation). They got the OTR(one time restructuring) done with the lenders where the debt covenant mandated to sell the stake in EFL partly/entirely.

To facilitate the sale, SP group decided to spin out EFL and list it separately. As per the scheme of arrangement, shareholders of Forbes will get 15 shares of Eureka Forbes Ltd(EFL) for every 1 share held in Forbes

FY21 sales of 1800 crores has grown at 3% CAGR over last 7 years and abysmal 80 crores EBITDA(4-5% margin,over last many years).While this is no major feat to celebrate but things are changing and one needs a fine-tooth comb to unravel this complex structure and the possibilities

To begin with, Advent International recently signed a definitive agreement to acquire a controlling stake in EFL for an enterprise value of INR 4400 crores. Read more about it here (bit.ly/3mku6hU)

Private Equity buying out Forbes itself speaks about the brand value of EFL. With the new promoters on board, the PE DNA in the company will change the growth orbit as we have seen in the past in case of Max Healthcare, Sequent Scientific etc

EFL has lost the market share to various players such as Kent, Luminous, HUL over the last few years which is clearly visible from the growing sales of competitors and Advent would be looking to capture it again.

The current EBITDA margins of 4-5% are significantly low. Take a look at other consumer businesses, whether it be in the kitchen appliances or electronic appliances or other consumer services/products category, with that of a decent size like Eureka,I am not aware of anything<10%

You will be surprised to know that Kent RO has grown in double digits over last few years and has clocked in 25% EBITDA margin with 25% ROCE

If Eureka can do 15% margin with the new promoters, EBITDA can shoot up from 80 cr to almost 250 cr(highly possible with cost-cutting measures and operating leverage kicking in) and with growth finally coming back, the financials would look completely different in next 3-4 years

Basically, Forbes is undergoing metamorphosis which would turn into a butterfly post the listing. With improved financials and strong growth, stock has a high chance of getting re-rated.

At 4300/sh, we are getting a chance to buy the EFL(to be demerged and listed in 9 months) at a slight premium to Advent. The parent, Forbes&co`s valuation is subjective to the biz performance but the icing on cake is 600 cr land bank apart from the above mentioned businesses

EFL is not just a water purifier company anymore. Over the period,it has diversified into air purifier,vacuum cleaner,home Automation system(digital security). Basically, EFL has evolved into a diversified consumer product company and we all know how consumer brands are valued

An iconic brand at 2.4x sales is surely something to look out for in terms of investment.

Disclosure: Invested. The above post is not investment advice. Please consult your financial advisor before acting on the information.

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