Honasa Consumer Limited (HONASA.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Honasa Consumer Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Pooja Kubadia from JM Financial. Thank you, and over to you, ma'am.

Good evening, everybody. Welcome to the 2Q FY '26 Earnings Conference Call of Honasa Consumer Limited. Today on call, we have Mr. Varun Alagh, Co-Founder, Chairman, and Chief Executive Officer; Ms. Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Mr. Ramanpreet Sohi, Chief Financial Officer. I'll now hand over the call to Mr. Varun for his opening remarks. Over to you, sir.

Welcome, everybody, to the call for quarter 2 and H1 FY '26. We're going to take you through a few core agendas today. So starting with, again, crystal gazing the future of Indian beauty. We've been talking about different categories and today, we will talk about a very different category, which till now isn't considered exactly as beauty. But as we see the developed markets, we are seeing the rise of oral beauty that is happening. And over the next decade, we expect this to shape in India as well. There is a lot of premiumization potential in this category. And if you look at the bathroom shelves today, almost all categories from skin care to hair care to fragrances have premiumized significantly, but oral has not seen the same level of premiumization. And while this category started with functional hygiene as a Stage 1 of growth, which is what almost 50 years of this category was all about. And it moved on to targeted wellness, which is where sensitivity and freshness and [indiscernible] created. And we believe over the next couple of decades, one of the strong partitions which will get created in this category is aesthetics and aesthetic expression, right, where your smile will be a core part of your beauty and how you take care of your smile through oral and it will be a play that can happen in beauty and personal care. And it's not a small market, we believe this to be a $700 million opportunity by 2030 with the premiumization and rise in aesthetic consciousness. So that's a point of view that we wanted to bring to the table from a I-Beauty perspective. Moving on to the financial snapshot, we have done well in quarter 2 with a 22.5% growth in revenues. Our gross profits are at all-time high, at about 71.9%. EBITDA continues to be stable at 8.4%, INR 48 crores EBITDA leading to a PAT of INR 39 crores. Strong UVG at 16.7% and we continue to be in the negative working capital zone. And while this is the like-for-like comparison in terms of what we have been showing you over the last 6-odd quarters, there is one change in our financial reporting that has happened in this quarter, which is on account of a change from one of our key customers, which is the Flipkart Group. At a group level, Flipkart Group has changed its settlement process with vendors and sellers, right, we operate as a marketplace seller with the Flipkart Group. And earlier, the way it used to operate was that we as sellers used to have a certain revenue and we used to remove our discount tax and costs to arrive at our gross margins. And Flipkart as a marketplace used to share with us a invoice for the logistics and fulfillment costs, which is what used to go in our costs. Now the change that they have made since last quarter is that they are not sharing this cost with us as an invoice, they are actually reducing that from the revenue itself. And hence, in a way, charging that to the consumer, which is why the revenue recognition, the cost that used to be there. So if you see the calculation that we've shown, for INR 100 product, there used to be INR 32 of logistics and fulfillment cost. Now that INR 32 is being reduced from the revenue itself, while rest of the things remain same. So sales commission cost, COG, et cetera remain same. So while in value terms the net contribution margin or EBITDA from the [ sale ] remains same, but the revenue recognition denominator has reduced. In terms of actual financial impact, this has had a INR 28 crores revenue recognition impact in the quarter to us, but it has no effect on absolute profitability for the company. If you were to see from a like-to-like basis, which is what we have been showing as our results in the past, right, our base is INR 462 crores, our delivery is INR 566 crores, which is a 22.5% growth. And if we were to see this after Flipkart adjustment, our reported for Q2 FY '26 becomes INR 538 crores while the like-for-like also for the last year same quarter becomes INR 440 crores for comparison purposes. And then we do view a similar growth of about 22.4% and the profitability is being same in terms of actual revenue terms. But of course if you look at in terms of percentage, because the denominator goes down slightly and the percentage EBITDA looks slightly higher. And this is something that the customer has taken call on for all sellers that sell in Flipkart, right, and hence is something that is an impact on us as well. But we'll continue to share like-for-like based numbers for better understanding and correct comparisons in future as well. In our H1 level, we've delivered 14.5% growth. Gross profit has also improved Y-o-Y by 112 basis points, EBITDA margin of about 8%, and INR 93 crores EBITDA and PAT at about 7% is what we have. From a highlights perspective, I think the good thing is that the core of strategies that we had talked about at the beginning of the year have continued to deliver well for us. And I think the first core strategy was to focus on a few core categories and actually gain strongly in those categories. The growth in those core categories is actually much better than the overall growth of the company. And the growth now in focus categories is across channels, right? So e-commerce also is 20% plus, modern trade also is 20% plus, and GT also is double digit secondary sales growth in the core category that we've seen. And from a 70% contribution last year, the core categories are already contributing 75%. And that was of the plan that over the next 4 to 6 quarters, we intend to take this number itself to 84% to 85%, which will lead to strong share ownerships within these categories as well. So that continues to do well. The second thing that we had talked about and was a strong focus area for us was turning around Mamaearth. I'm happy to share that Mamaearth is back in green in terms of growth. With [indiscernible] based, both are strong sort of growth from Mamaearth now across channels again, earlier e-commerce and modern trade has started showing good growth profiles. General trade is also on a growth trajectory in terms of secondary sales Y-o-Y. And this is also visible in the share gain that we are seeing based on where we continue to gain Y-o-Y share. And we've also been able to build another hero SKU, an ingredient for us in rice face wash, which is our third face wash for the brand to enter the INR 100 crore plus growth and continues to grow fairly strongly. So that's something which is heartening for us. We are very confident that now moving forward, this growth in Mamaearth will actually only get better and towards the goal of double-digit growth that we want to get into. Young brands again continue to deliver well 20% Y-o-Y growth is what we are seeing on the young brands portfolio. And we continue to do the right kind of core category activation and innovation across BBlunt, Aqualogica, Dr. Sheth's, and Staze. And Derma Co, which is the larger brand after Mamaearth is again touching newer heights. The brand has delivered a INR 750 crores net sales ARR in the quarter with high single-digit EBITDA profile. And basis Euromonitor, it has become the #1 sunscreen brand in the country for 2024, and we are quite happy to see that. While we continue to strengthen our position in the core categories of face wash, face serum, and sunscreen, the brand is now looking to build moisturizer and shampoo as categories as it gets in the stage to get to INR 1,000 crores plus kind of a brand over the next 1, 2 years, which is how we see the brand shaping up as we move forward. We continue to strengthen our general trade distribution. This is another focus area that we have. And we have seen sequentially growing secondary sales rate growth and 35% Y-o-Y increase in terms of direct outlet billings. And based on Nielsen, now the brand is available in 250,000-plus retail outlets. And very importantly, last year, we had taken an initiative to move away from super-stockists to direct distributors. And last year same time, our super-stockists contribution was 2/3 and direct distribution contribution was 1/3. And happy to say that now, as we stand today, 80% of the business is actually coming from direct distributor contribution. And that's a change which has been hard, but necessary, and forms a foundation of our growth of multiple brands in the future. So I think we're quite happy with the progress that we've made in this quarter. R&D and product superiority is another area where we continue to develop new technologies and formulations. We developed deep penetration formula in Derma Co where we have found the right kind of actives and encapsulation technologies to enhance penetration of our active serums. In Aqualogica, we have developed the first in vivo tested sunscreen with anti-pollution factor. The kind of pollution there is nowadays, consumers not only want sun protection, but something that can also provide protection to them from pollution. And this is a formulation which is clinically tested to do that. So we're happy that we've been able to crack such a technology, which is relevant for India. Premiumization is another area where we continue to work and we have collaborated with a lot of influencers, creators to launch more premium ranges. In BBlunt, we collaborated with Tarini. In the Mamaearth, we've collaborated with a dermatologist couple Dr. Sarins to develop a Dermasoft range, which is developed by them in line with what they think is right for baby skin and launched together with them. And we also continue to strengthen our prestige play within brands. In Dr Sheth's, we've launched multiple prestige serums now with new to India ingredients like Argireline, PDRN, et cetera, and we'll continue to do that in future as well. And then overall, we continue to focus on core categories to find avenues to use innovation to gain share within those categories. And across the core categories, we've had relevant innovations, which are helping us gain share within those categories. Now that we are feeling confident about the new playbooks, media mix development that we have been working on, we've also been now actively looking at further engines of growth from a long-term perspective as well, and hence, actively looking at new brand or category opportunities. The first one that we've been working on for almost 1-1/2 years now and we have finally launched last week is a brand called Lumineve. This is almost, in fact, in the morning, we were just searching and asking ChatGPT if there is any brand in the world that focuses only on night care, and the only brand it talked about was Lumineve. So we generally believe that this is probably a first to world innovation in terms of brand propositions where a brand that specifically focuses on night care is what we have developed. And beauty sleep as a concept is a very relevant concept amongst consumers. But there is actually deep science behind that concept as well. When you're sleeping, the cellular regeneration and skin repair is at its peak. And this is the time when you -- if you take the right kind of night care regimes, you can make the maximum impact on your skin health. And that's the underlying science behind this brand. And we've launched this for 6 different skin types by working with Indian and global dermats. And this has currently been launched exclusively with Nykaa that happened to collaboratively work and capture the prestige market. And we believe this is not just a brand which will take India sort of by surprise, but also probably help us in global expansion as well in the future. But this is our first entry into prestige skin care, which is priced almost 2.5x of what our current products and categories are priced at. Apart from this, we've also made an investment in the future of oral beauty. Like we said, there is rise of oral beauty that we expect over the next decade. And one of the things that we have been thinking about is the only inorganic play that we were actively doing was by participating with majority acquisitions. And we realized that that while is great for categories and portfolios which we want to get involved in high capacity right now, but that also -- this allows us to participate in Horizon 2 kind of categories, which could be additive to our business, but where the founders might not be looking to give away strategic control right now. And that's the opportunity that we are looking at participating in by funding brands like Fang, which are at early stage level and taking a significant minority, helping the founders build the brand into something extremely meaningful. And we see Fang to be clearly one of those brands which can become a prestige leader in the country from a oral care perspective. It's a beautiful set of products and a set of founders which come with extremely relevant experience. And this is a team that we would like to back and we would like to support them with the playbooks that we have to build this brand into something larger. And of course, on our goodness initiatives, as our brands grow, our contribution to community continues to grow and Mamaearth has hit its goal of planting 1 million trees, which we had till 2025. And we have taken a goal to plant another 1 million trees over the next 5 years and which we are very confident that we'll achieve. And this happens as the brand grows and as more consumers engage with us and all the other brands also continue to be on their journey of making the community impacts as they grow. Thank you so much for your patient hearing, would love to answer questions that you have. Thank you.

[Operator Instructions] First question comes from the line of Videesha Sheth from AMBIT Capital.

So my first question was on Mamaearth as a brand that while you've mentioned it's back in the green, that seems to be alluding to the secondary sales. So from the primary growth or primary sales perspective, when do you expect growth to be back in the green?

Primary also is back in green.

And so going forward, if we were to talk about the next 2 years, the outlook is more of a mid-single-digit growth, high single-digit growth. And if you can also double down on the initiatives that you've undertaken a little bit more on the [indiscernible]?

Yes. So from a going forward, I think the first objective is that a high single-digit growth in next quarter and the objective to touch, getting to double-digit growth by Q4 and then try to maintain that as we get into next year. And from our perspective of strategies, I think it's actually been simplification, which is focusing on core categories, sufficiently funding them rather than diversifying our investments too broadly into multiple different sort of categories. Even within those categories, identifying certain new SKUs and actually building them more deeper rather than again spreading ourselves still across categories. So I think focus is the one big change. And second has been media mix modeling based learnings that we did on the brand as to what is the best combination of media which works for the brand, which is the testing that we did over the 4 to 5 months and then deployed it this year, and we are clearly seeing the results of that. I think we will continue executing those strategies going forward.

And second was on the margin side that, given that first half has been better than expectations, are you looking to increase the guidance from the 7% range?

We believe that we will now stay at least at this range even in the coming quarters.

Our next question comes from the line of Nitin from Emkay.

My question -- first question pertains to like like-to-like growth is at around 22%. And when we talk about Mamaearth, it has moved into the growth path and your younger brands have grown 20%. So somewhere I am unable to get to this 22.5% like-to-like growth. Can you please help?

Yes, I think we've been also cognizant that last year same quarter, we had the Neev piece. So actually, if you look at just on pure like-to-like basis, Mamaearth growth will be high double digits. But that's on account of the fact that there is a Neev return base, which is all allocated to Mamaearth. But even if we were to take that base into account, it's still a positive growth for the brand, and which is why we have kept the commentary more to -- more in line with the adjusted sort of base. But yes, you're right. If we were to sort of purely look at mathematically, then Mamaearth growth for the quarter is actually in strong range.

With respect to like our actions in terms of getting into the premium segments in the personal care side plus oral care, any thoughts you guys have around wellness as a category? Because some of the brands are sort of getting into wellness along with the personal care and that's to work as a regime. So any thoughts you can offer here?

Actually a very interesting area of conversation. I think I will park that for probably more one-on-one conversation sometimes. So honestly, you're right. We are observing the trend of wellness adoption, nutraceutical adoptions within the market, and we are also observing the regimen trend happening within consumers. How we want to take on that -- do we want to take on that opportunity in the medium term? Yes, we would like to. How we want to take on that opportunity, will it be as part of our extension of current brands or do we need to sort of take it as a separate sort of play? So it's something that we have a strategic view on, as we speak. And as soon as we have a crafted view on the same, we will surely share with you. But it's a space which we're very closely watching, understanding, and building hypothesis around.

And lastly, around this oral care, again, like we have taken a 25% stake in this brand. So like would you like to keep your exposure in oral care like this or like you can -- you are open for any further M&A in the oral care space?

Ideally, I don't think we would like to have multiple sort of brands of play in this space. And we genuinely believe there are a few partition spaces, especially clean label and whitening, which are the core partition spaces which we believe will get built over the next decade. And this brand already plays in that partition space, right? So we would rather build this into a stronger outcome than get into multiple sort of entries, because it's not like we are seeing multiple partitions actually take shape. So this is in line with the hypothesis that we have. And hence, we would rather focus and build this into a much stronger outcome for the brand.

So just a follow-up like as for the contract, is there any options we have down the line 3 or 5 years, we can increase our stake in this [indiscernible]?

Yes, we have the right, but not an obligation. And we would honestly love that if the brand does well and we're able to further partner with the brand by gaining more sort of ownership and investing into the company to -- for it to grow stronger. And I think that will be the ideal scenario.

Our next question comes from the line of Sucrit D Patil from Eyesight Fintrade Private Limited.

I have 2 specific questions. The first question is to Ms. Ghazal. Just looking beyond the quarter's numbers, what are the long-term plan for Honasa from an innovation point of view as consumers' preferences shift towards more science-backed sustainable and premium products? How are you shaping the innovation pipeline to stay ahead of your competitors? Beyond just new launches, is there a deeper approach that you are building or you will be building in the future, which will make the brand stronger and hard for your competitors to copy you? This is my first question. I'll ask my second question later.

So I think on innovation, we've been talking about it, about the focus that we have as a company on 2, 3 areas. One is product superiority. So ensuring that across all of our focus categories, we have products measured through blind test to be superior than the competition out there. That is something that we have showed in the past, we'll continue to show as we move forward. The second area of focus for us is to bring in new concepts, newer ingredients which are first to India. I think Varun also spoke about it briefly. For example, premium serums and Dr. Sheth's has brought in ingredients like PDRN or Argireline, which are first to India kind of ingredients and concepts. We're also working on technologies like deep penetration technology, which is our own trademark technology, which ensures the efficacy of the product, its uses, and also something new which no other competitor has. I think on the third tranche, our focus is also on building a prestige portfolio, which you can see in Derma Co, in Dr. Sheth's, and now with the launch of Lumineve, that also is something that Honasa will continue to enhance.

My second question is to Mr. Raman Preet. Again, a forward-looking one. When cost rise, whether it's in marketing, distribution or raw materials, how do you make sure the margins stay steady without the growth hampering? Is there any system you have built that may be like price discipline or smarter sourcing, that is helping you stay -- keep the profits in line whenever things are getting -- whenever certain unforeseen conditions may arise? Just want to hear your point of view on this particular point.

Sure. Thank you so much for that. I think 2, 3 things. Firstly, if you see our gross margin profile, like Varun mentioned, I think we're now averaging 71% plus gross margin consistently. A couple of factors are playing in our favor as we've scaled our business. Of course, given the scale we are buying better, our procurement efficiencies are showing. Our product mix, especially led by face categories and also with the entry into prestige categories is helping pump up our gross margin profile. And as we move along as we -- and our younger brands, especially Derma Co, Aqualogica, Dr. Sheth's, all of them are face-driven brands, skin brands. And hence our gross margin profile has been moving in the right direction, given the mix of those brands and as the scale improve, we continue to move in the right direction. And of course, as we've showcased this in the first half, as the business continues to scale, we also continue to see operating leverage play out and a big lever for that has been our marketing efficiencies. And as our younger brands continue to scale more, we will continue to see efficiencies across our marketing investments. And we've indicated that every year, we target to unlock 50 to 100 bps of operating margin profile, which will be a mix of all these initiatives.

The next question comes from the line of Nihal Mahesh Jham from HSBC.

Yes, I had 3 questions. First was on Mamaearth. Would it be fair to say that the primary sales are similar to what we would have reported in Q2 FY '24 that now the brand is back to what it was, say, delivering 2 years back, leaving apart the impact of last year?

Yes. We will need to sort of look at that number and come back to you. But over the last year base, it's now in the single-digit growth in primary, even adjusting for the [indiscernible].