Honasa Consumer Limited (HONASA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '24 Earnings Conference Call of Honasa Consumer Limited hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Richard Liu from JM Financial Institutional Securities Limited. Thank you, and over to you.

Thank you. A big welcome to all of you and hope everyone is doing great. It's a pleasure for us at JM Financial to be hosting the first conference call of Honasa Consumer as a listed company. And I'm delighted to have with us Varun Alagh, Co-Founder, Chairman and CEO of the company; Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Ramanpreet Sohi, Chief Financial Officer. Without taking more time, let me hand over to Varun for his presentation, and then we can follow up with a Q&A. Over to you, Varun.

Thank you, Richard. Thank you so much for hosting us. We are super excited and elated to do our first analyst call as a published publicly listed company and this is also exciting because we get to talk about what we really love, which is our business. We've already talked to the team, but we have Ghazal, my co-Founder and Chief Innovation Officer; and Raman, our CFO with us. And for the purpose of simplicity, I will take you all through the presentation, and then we will all be here to answer the questions that you have. I would also like to thank everyone who's attending this call taking your time out, I appreciate the time that you're spending with us. Moving on quickly into the presentation, and I hope you can see the presentation in here. We'll move on from the first slide. And the agenda for today is going to be covering the business results, spending some time on sharing, again, the business overview with you because we are young and we would love to tell you what our business is all about, and then sharing some hits about our ESG focus and overall P&L summary. Without further ado, let me jump on to talking about the most interesting part of a quarter itself, which is numbers. From a quarter 2 perspective, we have delivered INR 496 crores in terms of our net sales volume revenue from operations. This is about 21% growth year-on-year on Q2 FY '23. And if you look at it from a like-for-like perspective, which is if we look at the businesses which we have scaled down and remove them, which is the services part of the business, and then this is about 24% on our branch business. And the other piece to note is the fact that in quarter 1 of last year, we had an ERP implementation towards June, which led to a slight depression in the quarter 1 base and has led to sort of the quarter 1 growth looking slightly higher and quarter 1 growth is looking slightly lower. So the better way to look at the business performance would be at a half 1 level, which is where after sharing the quarter 2 numbers, we'll also share the half 1 numbers with you. On quarter 2, continuing, we continue to maintain industrial leading gross profits of close to 70%. And our EBITDA for quarter 2 is about 8% at about INR 40 crores. Our PAT is INR 29 crores, which is 5.9%. This is a significant growth over last year. And our growth is actually driven by volume, whereas compared to the industry growth, which is largely driven by price, and while doing this, we have continued to maintain capital efficiency in terms of working capital and where we continue to be negative. We are minus 5 days of working capital. And hence, while our PAT is INR 29 crores, we have actually generated INR 41 crores in terms of free cash. Coming to half 1. And like I said, half 1 is a better indicator of the company's business performance. And this is the -- these are the metrics spaces, which you can also understand and look at how the company will perform in short term in the future as well. So from a half 1 growth perspective, we have delivered 33% growth like-for-like, this is 36%. I mean the gross margins are 70%. And the EBITDA is 7.2%, INR 70 crores. This is almost 500-plus basis points improvement in EBITDA. PAT is about INR 54 crores. And this is almost 14x on the PAT of last year, half 1. This is a volume-driven growth like we have mentioned. And in terms of cash generation, we've actually generated INR 89 crores in cash compared to INR 54 crores of PAT. Double-clicking a bit on where this EBITDA improvement is coming from. And actually, before I move on to that, I'd like to compare how these numbers compared to industry are significantly higher. We have, even in the last sort of conversations, talked about the fact that we will aim to deliver market-leading growth. We have delivered almost, if you look at a half 1 level, 33% growth, which is 3.8x the average growth that the industry has delivered during the same period, which is FMCG company peers who are in the BPC business. And that's the motive and motto which we'll continue to operate. And while doing that and delivering significantly better growth, we have actually become operationally better and we continue to see leverage kicking in in the business. I mean from a half 1 perspective, if you look at our EBITDA, we have improved by 531 points. Our PAT, we have improved by 513 points with strong growth. And these have been driven from the 1.9% of H1 to a 7.2% of H1 '24. And the 3 big drivers of the EBITDA improvement are, firstly, a leverage in marketing and advertising expenses. We have talked about this in the past that as our brands grow, as they improve in their awareness, the marketing bucket becomes more of a value number, and in terms of percentage, continues to go down and which is where we are seeing a lot of leverage coming in. And I would like to call out that this -- while this leverage is coming, we continue to invest in building brands and continue to deliver growth because of that. The other area where we've seen leverage kicking in is employee benefit expenses and OpEx, where we have seen -- the business seen leverage as we have scaled up. And some other parts are procurement synergies, where we've seen leverage when -- as and when we scaled. So those 3 are the largest buckets which have driven these benefits on the bottom line perspective. And in the future also, we'll continue to focus on these areas to drive efficiency. Coming to a business overview. Like I said, we are a young company and we would like to, at the cost of repeating, keep sharing with you what we are building. And we are India's largest digital-first beauty and personal care company with a diverse portfolio of 6 brands. Our journey started with Mamaearth, which is a clean label toxin-free, natural personal care brand. This brand was launched in 2016. And it is yet to turn 7 years. It will turn 7 years on 5th December this year. And in less than 7 years, and this is the fastest to 1,000 crore brand. And we are very happy to inform that it also joined the Top 15 BPC Brands Club, which we'll talk more about. This brand has seen a lot of consumer's love because of the cultural nuance-based innovation that we have done where we have crafted for the Indian consumer by understanding the Indian habits and bringing ranges like Onion, Ubtan, Multani Mitti, which have been loved by consumers. And while building this brand into a strong success story. And what we also built was an organization that had different capabilities across brand building distribution, innovation, sourcing, R&D, which could be applied to the other consumer white spaces that we were seeing. And in line with that, in 2020, we launched The Derma company, which is a science-based active brand that also has done extremely well. We'll talk about it. And we launched Aqualogica, which is a hydration based skin care brand. Again, a brand, which is targeted at Gen Z segment and has been doing extremely well. We also acquired 2 brands, BBlunt and Dr. Sheth's in 2022, which have -- where we've been able to demonstrate strong growth and also demonstrate the fact that we have muscle to build acquired brands and not just build craft brands. And we also have Ayuga, which is a Ayurveda and natural-ingredient oriented masstige brand for Indian millennials. And with this diverse portfolio of brands, we are playing to capture the hearts and wallets of consumers in the BPC market. And we genuinely are very excited about the growth that BPC will see in India over the next couple of decades. And even in the medium term, we believe this will continue to be the fastest-growing FMCG category, with an expected CAGR of about 11%, which is going to be driven largely by rising disposable incomes, and very importantly, women joining workforce as a mega trend, which is going to shape this category. I think we are equally excited by the subsegments, which are driving growth in this category. We believe premiumization is going to be a core driver of growth in this category and hence, masstige and mass premium are going to grow much faster than mass, and all our brands play in that segment. And we believe, online and digital penetration will be growth drivers of BPC, and that's where almost 60% plus of our business comes from. And we also believe that skin and color cosmetics is going to be the strong driver of growth for BPC, and that's where 60% of our revenue comes from. So that just makes Honasa really well placed to capture strong shares in this category and we have demonstrated that in the past as well. And we have had strong CAGR in terms of our last year growth, so we continue to demonstrate market-leading growth in this year as well at 33% for H1. And our gross margins continue to remain amongst the highest in the industry for the last 4 years. We've been adjusted EBITDA positive for the last 3 years. But this year, we have been able to demonstrate further improvement on that metric in half 1, and we've continued to demonstrate that in Q2 as well. And we have done this in a very capital-efficient manner, whereby our working capital has remained negative for the last 3 years and for this year, half 1 as well, even after scaling the business in offline, which now contributes to almost 35% of the business. And we've been able to do this because of certain core strengths, which we have developed as a company and brand-building playbooks, on-trend data-based innovation, strong omnichannel distribution, right? And purpose-based brands with a strong ESG framework are the 4 core strengths that I would say have been responsible for us being able to deliver this kind of disruptive growth. I'll be covering a bit on each one of them as we move forward. And starting with the first one, which is our brands. Mamaearth, we are elated to see has entered the coveted Top 15 Brands Club in the BPC space. I mean this is -- this is a large, mega achievement for a brand which is just less than 7 years young. And it is competing with brands which have existed for multi decades, in fact, some of them possibly centuries as well. And in terms of retail sales, this is the data that we have taken for a reference. We actually are standing at 13th largest BPC brand in the country where we are also taking into account oral care and personal wash brands, and that just shows the kind of strength Mamaearth has as a brand. And it's also a brand which has showcased the ability to capture share across categories rather than in 1 category. And because of our why-based and purpose-based position, which is also one of the reasons why it has been able to scale to this level so quickly and which is why we believe it will continue to scale and become much larger in terms of its franchise in the future as well. This, of course, has happened on the back of strengthening brand metrics. Mamaearth continues to be India's most searched beauty and personal care brand. Our brand searches have actually gone up by 16% google. This is higher than any other BPC brand in terms of the overall number of searches out there. And this has been driven by our focus on, like I said, certain Indianized innovations, which we have crafted and developed. Onion shampoo, the campaign on that saw almost 21 crore views. Shadiwala Glow, which is a campaign around our Ubtan face wash has seen -- it's an award-winning campaign which has seen over 24 crores views. And our property, which is a purposeful property, beautiful Indians, and which we executed in half 1 and has seen over 11 crores views of the content that was generated from this property. I think all of these things and the increasing brand strength is leading to not only Mamaearth growing significantly faster than other large-scale brands, but also gaining market share in the offline space, whereas in shampoos, we have gained 50 basis points. In face washes, we've gained 100 basis points. And we'll continue to focus and gain in other categories as well as we move forward. In other news, of course, The Derma Co., which is our second brand, continues to deliver strongly. It now has hit an annual run rate of INR 380 crores. This has been driven by its core categories like face serums, sunscreens and moisturizers, and our focus on acne based activation in Q2, which is a season that sees spike in acne-based concern actually has led to a lot of benefit for the brand. The brand also saw there is some gains in brand searches. And we continue to hold a very strong belief that this brand will continue to grow very strongly in the future as well, and we'll continue to invest in it. The next brand, which has, again, seen phenomenal growth is Aqualogica. This is a brand which is less than 2 years old. And in just 19 months, it's actually hit a scale of INR 180 crores ARR. This is much faster than what The Derma Co. and Mamaearth have taken to hit. I think as we are growing, applying the same playbooks of innovation through which we develop products, which consumers love and the brand mixes that consumers love and marketing to millennials, I think as a company, we understand how to use content community and the right kind of mediums to win over Gen Z and millennials as well as our purpose-based marketing. And the combination of these 3 levers, of course, supported by our distribution playbooks have helped us hit this kind of a revenue mark so early, and we continue to believe that this brand, again, has a lot of potential in the future in the way it's going to shape and is being loved, especially by the Gen Z out there. Another great news is we have Dr. Sheth's, which has entered the INR 150 crore ARR club. And this is the fourth brand from Honasa's portfolio to enter the INR 150 crores ARR club after The Derma Co. and Aqualogica. In just less than 7 years, the company has now crafted and scaled 4 brands to that level. This is specifically heartening for us because they acquired Dr. Sheth's early of 2022. And we have grown it 30x to take it to this number. It just gives us confidence that not only do we have the capability to apply our playbooks to brands that we launch in bit, but also to mixes that we acquire. I mean, this gives us a lot of confidence from that perspective. And we'll continue to focus on scaling this brand and capturing share of the active market to this. The other brand that we had acquired was BBLUNT. We focused on building the styling and care portfolio in this brand, and we are very bullish on professional hair care market and a salon-like hair at home kind of a proposition. I mean, this is the brand which is playing in that proposition and helping us capture the share of hair care market through that. In quarter 2, of course, because of context of hair fall being high, we focused on that, and that campaign has done really well. We also continue to focus on both innovation as well as expanding the distribution footprint for the salons, where we have opened 4 new salons in half 1 and taking the overall count to 14 salons now. The salon business is helping build the brand equity for the products business and where the product business alone has grown by 300% since acquisitions. The second large strength for the company continues to be innovation. We are a database innovation company where we capture a lot of data and trends from various sources and applied that to figure out what is the kind of right innovation that the consumers are looking for. And in line with that, all of our brands have seen amazing innovations in this calendar year as well. And that innovation has led to 13% contribution of H1 FY '24 revenue. Some of the core innovations that I would like to talk about is Mamaearth. We launched Multani Mitti, which is an ingredient which we have been using for hundreds of years, but consumers find it difficult sort of mix and use, and now that's readily available and they are loving that. Rosemary range that we have launched, entering into color cosmetics, lipstick kind of launch. The Derma Co launched new formats of sunscreen, like the sunscreen stick, and we've launched a new range of variants in the Detan range for Aqualogica. In BBLUNT, we are launching very innovative hair care products like the Intense Moisture Heat Hair Spa Mask, which does self-heating without using any electronic equipment and creates much better conditioning because of that. And in Dr. Sheth's, we continue to find the right bioactive combination to capture spaces like pigmentation. So all in all, some amazing innovation done to drive growth for the brands. The third area where we continue to focus on was strengthening our distribution. We have been building physical distribution and strengthening our offline scale. This quarter also, we are happy to share that we have actually reached 1.65 lakh outlets on our core category, face washes, which is an increase in 47% in terms of distribution over last year. We've also expanded our EBOs. Now we have 97 Mamaearth exclusive stores, which are out there, not just to build imagery, but more importantly, to showcase and sell our overall assortment to our consumers. And we have been deepening our relationships in modern trade channel and have built strong relationships across our customers. And we've also continued to strengthen our leadership and team on the offline side and looking at the future potential of that business. Even on the online side, we continue to focus on not only our core channels, but also our emerging channels. We have seen quick commerce emerging as a great growth driver, which has grown by 100% plus Y-o-Y growth. And we've also forged new partnerships with Tira at Reliance Retail, which is helping us grow. The fourth trend, of course, we continue to focus on ESG. We are a company which strongly believes in building brands with strong purposes, where Mamaearth has a plant goodness initiative. And we have planted almost 5,10,000 trees under this initiative. And the beauty is that we've actually built a technology through which when you place an order on our website, and we actually send you a mail with a picture of the tree, the actual geolocation of the tree that we have planted and connected it back to your orders for you to see as a consumer, the contribution that you're making by buying our brands. We also, of course, continue to remain a plastic positive organization. We have recycled 7,591 metric tons of plastics since FY '21. And we also have other purpose programs where we've impacted over 10,000-plus students in the Young Scientist Program for The Derma Co. Over 500 families through freshwater plants initiative in Aqualogica. And along with this, of course, the corporate governance framework is also something which is a strong focus area for us. We genuinely believe that the only lasting businesses are the ones which are sustainable and run in a strong governance manner. And in that light, we have a 50% independent Board, strong gender diversity being a beauty company, 58% of female workforce. We are externally audited by S R. Batliboi, which is a member firm of EY. And we have an internal auditor [indiscernible] where we continuously review and strengthen our processes. We've also implemented ERP systems like SAP and DMS and SFA systems like Botree, through which we want to enhance the data visibility around and control visibility around the business. With this, we would like to end the presentation. We have a P&L summary. This has been shared as a part of our remarks and I have already captured, most of the heads of the summary as a part of my presentation. And thank you so much for listening to us. We would love to answer the questions that you have for us. Thank you.

[Operator Instructions] We'll take the next question from the line of Percy Panthaki from IIFL Securities.

My first question is on the Mamaearth brand. So if I look at your sales growth for this quarter, it's 21% year-on-year and 7% versus the previous quarter. If you can give some idea on what the Mamaearth growth was for the same period because these numbers are at a total company level. I just wanted to know how the Mamaearth brand is performing?

Yes, so Mamaearth brand, at a half 1 level, continues to grow much faster than the large sized brands out there that we have showcased as comparatives. I think we are happy to see that the investments that we're making in the brand building are showing and delivering much faster growth than the industry peers. That's the level of detailing that we'd be able to share.

Understood. Understood. Also, if you could share some color on the channel-wise growth between your own e-com channel, the third-party aggregators on e-com and the general or modern trade?

So actually, at a company level, both online and offline continue to grow very strongly. At brand level, of course, offline continues to drive growth for larger, more mature brands like Mamaearth, while online is driving growth for younger brands, which are The Derma Co. and Aqualogica, et cetera.

So Percy, if I may add. I think from an H1 perspective, online delivered a 40% growth and offline, 33%.

Okay. Okay. Very helpful. And just one follow-up on the previous question if I might be permitted. On the brand-wise growth, so it's great to know that Mamaearth is growing faster than overall industry. But right now, the industry growth itself is very, very subdued. So that really is not giving us much information. I mean, is it even a double-digit growth on a Y-o-Y basis? Or you would not be sort of comfortable sharing that kind of information?

Percy, that assumption is correct. It is in double digits.

We have our next question from the line of Akshen Thakkar from Fidelity International.

Congratulations on your first results. There's a couple of questions. One was on margins. So very healthy margins here at 8% in the second quarter. Could we just talk through sustainability of margins either at 8% or 7% that you've done at H1 levels because there has been some reduction in manpower cost, channel spend, A&P have been lower. How much of this is scale? How much of it is timing? Because it's a new company for us so pardon such basic question, but we're just trying to build our understanding. That's question one. Question two, I think you've disclosed in H1, what is the online-offline growth split. Could you just break that out in Q2 as well because I think like you called out, Q1 was impacted last year. So growth rates could be misleading just on a going basis. On Q2, if you could, just help break up that number of growth between online and offline, that would be great.

I think on the first one, what we are seeing is all of that we are seeing is not timing, but scale and structural impact on the business because of which we are seeing this improved profitability and the half 1 level profitability that you see is something which we believe is fairly sustainable. And in fact, in the future, in the medium term, our objective would be to see how we can find more areas of leverage and how we can continue to demonstrate such performance in terms of improvement. I think on your second question, actually, it is much better to look at half 1 because see, what also happens is because of the ERP disturbances as the business gets more impacted, channel level SKUs does get impacted, right? Because it's the B2B billing which can move from one quarter to the other and hence, our view would be to look at quarter 1 and at quarter 1, like Raman said, 40% in online and 33% in offline, H1 sorry, 40% in online and 33% on offline should give you a good flavor as to overall how business is sort of shaping in both channels.

And just to complete the point on the margins, like Varun mentioned, of course, the sustainable level margins are more the H1 margins. And in Q2, we have a one-off ESOP reversal on account of scaling down of operations of Momspresso, which is, hence are 50 bps, which is on an H1 basis, 50 bps. So I think excluding that, that balances, of course, the structural margin movement.

We have a next question from the line of Tejash Shah from Spark Capital.

So Varun, you are interacting with the analyst community for the first time where you are allowed to share guidance. So just wanted to understand how do you look at the current growth rate of 20%? Is it in line with the expectation or below or we can do better? Or looking at macro, you will be happy with the current growth run rate?

Like we mentioned, Tejas, I think it's better to look at half 1 where we have delivered about 30% plus growth. And that's at least in the short term, the kind of benchmarks that we would want to deliver.

And considering that we are in a distribution expansion mode and the runway is used, and as you highlighted that in offline alone, we had some 47% plus growth. So how do you measure the like-to-like growth in terms of repeat purchase? And if you can share some qualitative or quantitative insights on how are we doing on offline in terms of repeat purchase?

So there are qualitative indicators, of course, especially in our modern trade businesses, and in basis, some of the Nielsen data that we get. And we are actually seeing a very healthy same-store growth numbers, be it in our EBO, be it in our modern trade, be it basis, the Nielsen same-store growth that we track.

Got it. And last one, with the capital inclusion and obviously, visibility from an industry perspective also has improved materially. What are the key priority areas to kind of next 3 years, 5 years, that you would like to invest on here on to kind of achieve your near-term or long-term milestones?

I think as a business, we are in the business of building brands. And hence, the first priority area is going to be brand building, right, which is delivered through driving awareness and consideration for our brands. So I think that's the first area where the company will continue to invest today. We have seen that investment leading to much better growth outcomes for the company compared to industry and share gains that we have delivered. So I think the first area where we will continue to invest is in brand building. The second area where we'll continue to focus on is distribution expansion, like you rightly mentioned, be it in terms of expanding GT distribution, deepening our modern trade, tie-ups and even improving shares and presence on the online platform. So we'll continue to sort of do that. The third area of investment will continue to be product and proposition innovation. We believe product in R&D has been a strong strength. We'll continue to innovate in line with the consumer trends that we are seeing and that is going to be the third area of investment. Fourth, I think, we'll selectively look at either new geographies or newer category acquisition opportunities that come our way over the next 3 to 5 years, which also potentially could be an area of investment.

Anything on human capital?

Of course, all of this is underlined by human capital itself. That said, we did invest ahead of the curve over the last 2 years in building the right leadership team, building the right kind of organization structures. But as a growing company, we continue to deliberate on what's the right organization design to serve the growth that we need to deliver in the basis that we will take the right strategic calls on the human capital front.

We have our next question from the line of Aditya Soman from CLSA.

All the best for your journey as well as your company. Two questions from me. Firstly, in terms of the innovation, can you give us a sense of what proportion of your sales came through from organic innovation? And second question around channels. You indicated obviously that e-com and in particular, the convenience-based e-com has grown very fast. Can you give us a sense of how the channel economics differ from sort of your own e-com, third party e-com and then offline?

And the first question on innovation, we have called it out in the past, and we continue to call it out. Innovation is a core growth driver for the company and that we genuinely believe that consumers love brands, which bring the right kind of on-trend innovations and categories to them before others and we want to be the company that does that. In the first half of FY '24, innovation, organic innovations, in fact, has contributed to 13% of the company's revenues and continues to be a strong growth driver for us. On your second question, I think from an e-commerce perspective, I think we are seeing growth across all channels and platforms, be it vertical beauty platforms like Nykaa, Purplle, Tira, et cetera or horizontal platforms like Amazon and Flipkart. We called out quick commerce because that's an area which has grown much faster than others, and hence, that was a call out. And while that area was expected to grow for categories like grocery, but it also is doing really well for categories like beauty in our business.

Very clear. I think my question was also around in terms of economics for you from different channels. Is there a meaningful difference in the economics in terms of margins or profitability or working capital side?

Yes. So, Aditya, Raman here. So I think on the channel front between, let's say, online and offline, at a contribution level, per unit, the margins are very similar. And so that's from a inherent margin provided perspective, there's not too much of a difference in the similar range.

We have a next question from the line of Abneesh Roy from Nuvama Institutional Equities.

My first question is on pricing, which seems negative 6%, 7%. So could you explain which categories are seeing this? And is there a mix deterioration also? And how do you see this negative pricing in the second half?

I think, Abneesh, I think you're referring to this basis, the fact that volume growth is faster than value growth. So it's actually not because of price deterioration, but it is because of the channel mix change, right? So in a B2B channel, which is where offline and some of the other channels like that lie, which is what is increasing as a contribution share, those channels have a lower per unit realization compared to B2C channels, where the per unit realization is higher. And as a contribution of those channels increasing is where you're seeing the volume growth to be being higher than value. It is not a price deterioration.

And I think, Abneesh, just to add, if you see the numbers, our first half like-for-like growth is 36%, the volume growth is similar. So yes, what Varun mentioned does impact the volume growth. But in H1, it's absolutely 100% volume net. So if there is not too much of an impact on business mix as well, but it does sort of play a role.

So just to clarify, in terms of pricing and the discount and mix, there is no like-to-like deterioration in your business?

No, no major change.

Now coming back to the question, which has been asked again and again. My question here is, a lot of the urban discretionary categories have been explaining slowdown for many quarters now, QSR, apparel, innerwear for 3 quarters. And first time, United Spirits also highlighted that initial signs of slowdown are there. Obviously, every form of consumption, directly, indirectly, some correlation will be there. So I wanted to understand how much is the impact of ERP? Because ERP impact normally, we see retail companies really highlight that impact. Consumer companies or D2C companies don't really impact -- highlight the impact of ERP. So if you could explain, ERP was the main reason for 1:2 kind of a difference because your Q1 growth seems to be almost double of Q2? Second is when I see Q3, there are 35 lakh weddings happening from tomorrow. Second is festivals full benefit is there. In your kind of a business, my sense is festival and marriages should have a good positive impact. So would you expect acceleration versus a 33% growth, which you are saying should be the number we should monitor. So would you expect acceleration because festival and marriage will impact full benefit is there in Q3?

Yes. So I think what I would like to call out is that in the quarter 1 of FY '23 is where we had done ERP implementation. And the most impacted month was actually June. What happens is because of that implementation, and for some part, let's say, the last 7 to 8 days, our billing got impacted, and that billing usually is the B2B billing which happens for our offline distributors, our monetary customers, et cetera, which moved to the first week of next month. Because of which, the base of quarter 1 is slightly lower and the base of quarter 1 is slightly higher. And hence, that H1 level is where we are asking, it looks it's largely that impact otherwise, like-to-like, if you see the H1 numbers is what, like I said, we would like you to focus on. From a perspective of festivals and weddings, I think, every year they happen. So to some level, they are also there in basis. And our businesses does not see as much seasonality on account of either occasions or on account of seasons because they are a multi-category business. So while one category might see some seasonality in some quarters, the other might be seeing something opposite, so they take care of each other. And hence, we don't see any disruptive impact of some of these occasions.

So if you see the punching up of marriages is differently there, and we see this happening every 4 years. Second is, again, festivals, if you really see, this time, it's delayed, the Diwali was delayed. And so every company is saying Q3 will see that benefit. So I leave that. My second question is on the BBLUNT. So when you say 21% growth was there in Q2, what was the growth ex of BBLUNT? And BBLUNT obviously has seen a change of the promoter in the last 10 years twice. So I wanted to understand how do we see this business now because we have been running it now for some quarters? And how has the business done in Q2?

So overall, from a Honasa perspective, BBLUNT continues to be about less than 6% contribution in terms of the overall business, right? So I don't think you would see any major difference sort of putting it out or keeping it in. And as a business itself, I think like we called out, while for a long time, it was not growing disruptively. After we have acquired it, we've actually been able to grow the product business almost 3x, as stated in my presentation. And we are seeing our playbooks of innovation, online distribution actually bringing the brand to a very strong buzz. In fact, even in terms of Google searches, the brand has almost doubled Google searches over the last 4 quarters. And so I think we are very happy with the way the brand has shaped and we continue to see strong growth momentum in the brand.

We have a next question from the line of Kunal Shah from Jefferies.

So two questions from my side. First one is on the stand-alone P&L. If I look at the margins there, that is somewhere around 10% or so. So would it be fair to say that the top 4 brands, I mean, The Derma Co., Aqualogica and BBLUNT products business would be at that margin and the losses are coming from the salons business and BBLUNT and the other brand, Dr. Sheth's? Would it be fair to look at it this way?

Yes. So I'll take that. So for all, BBLUNT is profitable and some of the salon business is profitable and doing really well. It is a 20% kind of an EBITDA business for us. I think in the September quarter, there is a onetime impact only in the stand-alone financials for reversal of our derivative liability. This is regarding the Momspresso scaling down of operations. There's a INR 10 crore reversal in fair value derivative liabilities there because now that we've acquired that business 100%, there is a reversal of a certain amount, which is equaling INR 10 crores, which is happening in first quarter, and that is making the overall margins of standalone higher than consolidated. So ideally, we should look at consolidated numbers as the price representation of our business.

To further add on to it, Kunal, I think even on a standalone business, Mamaearth, of course, as a mature brand, is at much higher profitability compared to the average profitability that the company or standalone business has. And the other brands that are still younger are in invest mode. But as they're shaping, we clearly see the same chart that Mamaearth has crafted, those brands will also craft over the next few years.

Understood, that's very clear. The second question was just a follow-up. So you talked about the ERP implementation in June. So the impact of that on the offline revenues would be much higher, right, compared to the online revenue? Would that be a fair understanding?

You're correct. You're correct. Yes. That will be a fair understanding.

We have our next question from the line of Yash Gandhi from Stallion Asset.

My question was -- in the first half, we've grown like-to-like 36%, and given a smaller revenue base as well as expanding distribution network, if you compare it to some of our larger FMCG peers. So can you sort of aspire to go a bit higher than that, let's say, 40% for the next 2 years? I mean what's your opinion on that?

I mean we would we would like to continue to focus on building brands in the right manner. I think we're also being cognizant of the fact that as we grow in this, we need to see windows of efficiency and continue to become better. So that's also a priority now as an organization. And I would rather want to play the long-term strong compounding growth story and continue to build this, deliver marketing leading growth for years to come rather than just look at the next 2 years is how I would sort of position us.

Okay. So I mean, you -- I mean, what I understand is that we can expect about at least first half growth, right? And in the short term, if I understand you right, similar to the first half?

Yes, that should be there.

And my second question was, this quarter, your advertising expense is about [ 35% ] of your sales. And given the operating leverage and economies of scale as you grow, how should we see that number? Do you think it can go down significantly in the next coming quarters or stay at this level?

Great. On one hand, you would like us to grow even faster. On the other hand, you would like to see that number fall. Finally, it's investment in brand building and driving awareness that gets us that growth, right? That said, we clearly have showcased as we scale, that percentage has continued to go down for the business. In fact, that percentage even today is a sum of parts for Mamaearth, which is much lower than this number, and for the other brands, which are much younger and in invest mode, which is much higher than this number. And of course, over time, we do see opportunity and efficiency to bring more leverage onto that as we grow.

We have a next question from the line of Vishal Khandelwal from Bajaj Allianz Life Insurance.

I hope I'm clear now. So my question was related to your employee expenses. So employee expenses this quarter is around INR 37 crores, INR 37.1 crores. And you have mentioned a reversal of around INR 4.7 crores on account of Momspresso. So if I include that, your employee expense comes to around [ INR 41.86 ] crores. So just wanted to understand how has it declined from last quarter? So last quarter, the number was around [ INR 44.5 ] crores. So this reduction was because of share-based expenses reduction or there was a reduction in your core employee expenses also?

Yes. So this is Raman. So see, you're absolutely right. So the reduction is on account of the INR 4.7 crores, the onetime we saw reversal that has happened in this quarter. And in terms of sequential pay out the payroll number, that's the range that we're looking at in terms of at an absolute level. So I think that's how one should look at it. And also, we should also look at the other aspect which is impacted, when you say it has come down, is apart from we saw reversal, the onetime impact, there is also scaling down of operations of Momspresso, which were there at last year, which is along those lines, that's also leading to this number coming down on a year-on-year basis. And which was the people's heavy services business. So that is an impact that you will structurally see.

Okay. Understood. Would it be possible for you to share the ESOP-related expenses excluding the reversal number of 4.7%. What was -- if that would not have happened, like what would have been the ESOP expenses?

Sorry, the ESOP expenses that we're referring to is only related to the Momspresso ESOP reversal. There is, of course, the ESOP expenses, which are regular ESOP expenses as part of our quarterly payroll costs. On average, they range between 0.7% to 0.8% of our sales.

Okay. Okay. So one more thing as in was there any reduction in your expenses like your freight forwarding charges, sales commission Q-on-Q, or was it more or less flat as in Q-on-Q those numbers?

Yes. So these are part of our other expenses and these are variable in nature and hence, in line with how we've grown the business. Some efficiencies we have been able to driven -- drive because of scale as well as because of improving regional utilization business on that front.

Okay. Because I remember you're mentioning like advertising spend being a lever, but I'm just comparing your second quarter of FY '23 versus second quarter of FY '24, and as a percentage of revenues, this kind of agreement similar at around 35% or so. So I'm just unable to like link, especially your commentary.

Yes. Like we said, better to look at H1. And at the H1 level, you will be able to see that because like we said, right, Q2 has, in a base, has slightly higher sort of revenue, while -- because of the Q1, Q2 ERP implementation. So at the H1 level, if you will see, we'll actually find that impact.

[Operator Instructions] The next question is from the line of Chintan Sheth from Girik Capital.

Congrats on a good first quarter, post-testing results. A couple of questions into new SKU launches and all. If I look at the slide, within The Derma Co., Aqualogica and Dr. Sheth's, the brand is towards -- obviously, there will be n number of launches we must have done during the quarter. The brand is towards summer products like sunscreens and all. So if you can highlight what kind of new launches we have done this quarter? And what is in the pipeline going forward because that piece is kind of contributing more. If I look at Q1 of the current year, the new SKU launches have contributed almost 9% as per DRHP. That has moved for the first half to 13%, right? So if you can provide some color on the pipeline products, which we are planning to launch. And the concern on the -- we are setting into the winter, and we are looking at more some of these products on the pipeline, if you can add anything on the product side, yes, it would be helpful.

So actually, I'll talk about 2 things. One, I think the good thing is India continues to be a tropical country, where we don't have extreme seasonality. While you ride, we are getting into winters, we'll probably have 2 years of winter -- 2 months of winter impact -- impact too only in North, and at rest of the places, it's much smaller in terms of seasonality. And hence, some of the categories like face washes or even for that matter now, sunscreens, continue to see, throughout the year, usage from our consumers. And they're not as seasonal as some of the categories earlier, like talc, et cetera, it used to be so seasonal towards summer. And hence, we are not -- as well on the other front, actually, you pointed out rightly. So our innovation calendar is in line with consumer context. This is the reason why from an H1 perspective, we are talking about the launches that we activated in H1. We were -- which were more contextual towards the season in half 1. And hence, a lot of sunscreen, a lot of acne-oriented products or hair fall-oriented products. And accordingly, in our innovation pipeline, we ensure that the innovation or the ingredient of the categories that we are innovating in is in line with the context that the consumer is looking for. So moisturization, for example, would be -- is what we'll focus on, in the season where the consumer is looking for moisturization. So in line with that, and this is not something which we have done just this year. Over the last 5 years, every year, every quarter, innovation has been a strong driver and it has been in line with our understanding of consumer needs and which is why it is able to get as much consumer.

And any number or a number of products or schemes we launched during the quarter or first half?

No, it's actually continuous business as usual. So I mean, nothing which will disruptively change. We'll continue to do what we have been doing.

Okay. And if you can just call out what is our recent revenue for the first half? It would be helpful.

Sorry, what is?

Services revenue.

Revenue from services, yes.

That's -- it is about INR 18.5 crores.

So 2% of the company revenue.

We have a next question from the line of Nirav Rajiv from Aditya Birla Sun Life Insurance.

Just on the margins front. I mean, we have already seen the clocking around in the first half around 7.2% in EBITDA margin and around 8% for this quarter. So just wanted to know directionally, can we see -- like continue to see improvement, at least on an annual basis around 100 bps going forward? Just directionally, any sense on that?

So from an annual basis, every year we will have endeavor to find leverage opportunities the way we have to look at the levels at which you talked about or probably even better than that as we grow.

We have our next question from the line of Mihir P. Shah from Nomura.

I was also going to ask on margins. But the other question I wanted to ask you was on -- was on your manufacturing capability. While I understand your innovation and R&D pipeline and efforts are quite consumer-centric, can you please talk a little bit about your manufacturing capability and any plans to strengthen it? Would you -- do you see that as any risk that you may face in the future as you scale higher?

So on the manufacturing side, actually, it's important to understand how our innovation engine works, right. Of course, the conceptualization, as I said, is very data-oriented basis, which we recognize trends and opportunities. That is then picked up by our internal innovation and R&D team, where we have 50-odd members team with labs and facilities in both Gurgaon and Bombay. And along with that, we have an ecosystem of R&D partners, more than 10 to 20 different partners, who also work with us on providing solutions to different problem statements happening. So all R&D happens in-house and the prototypes that we develop out of those R&D, we do extensive consumer testing. It's almost like a collaborative effort with consumers that we develop these products on. And once we are confident of a certain formulation, then we have a network of almost 30-plus different manufacturing partners, who have expertise in different kind of manufacturing processes and categories. And of course, some of them are far more pareto with us. The top 4 partners actually contribute to more than 60% of our sourcing, and some of them have independent units fully deployed for Honasa's business. But actually, instead of risk, it's a flexibility that we have. And where we are able to, at any point of time, scale manufacturing by taking the formula to manufacturing -- multiple manufacturing partners as well as our ability to open up and work on any new category is very high because we are able to find the right partner and run the process with them. And of course, we have very strong QC standards. Most of our partners, our own QC teams work with them to ensure strong quality controls, which is, of course, evident in the love that we've got from consumers.

Got it. The other question, again, on margins, sorry [ it was half ] about it. But here, any direction if you can give us. I understand that your endeavor will be to improve and get cost efficiency. But what is the level of ad spend that you may think which would be on a constant basis, on a steady-state basis for you, which can still allow you to grow at the rate at which you grew in the first half at about 35-odd percent. Any number maybe that you may -- or the range that you may have in mind that will continue to allow you that rate with that kind of ad spend?

So I think how I would want you to look at things is, it's not like even this year we have reduced our ad spend in value. And actually, we have spent more marketing dollars, right, to build our brands. And that's a space of investment, which we generally feel is the right pace of investment because that's what helps us build and grow our brands. And so in actual value terms, we have actually grown it, but because our revenues grow faster, in percentage terms, it is lower. And that's for a trend line that we continue and we hope to see over years to come as well, because over time, there are 2 things that happen. One, our understanding of media mix efficiency improves because we have more data, after doing so much media on the brand, we know which part of the media mix works harder. Because of which, we are able to sort of keep the brand spend at that a certain value number and deliver same kind of growth with that. And as we deliver that growth percentage-wise, it actually goes down, okay? So I think that's how you need to see it. We will continue to invest in brand building, but become more efficient and deliver faster than market growth because of that.

Got it. Can you share what is the mix of ad spend that you're spending on Mamaearth versus the other brands? The other brands that you have currently?

So at least in the -- from a Mama perspective, we would say it is almost 500 basis points lower compared to the average company.

Ladies and gentlemen, that was the last question for today. I now request the management team to answer the text questions posted through webcast.

Yes. So I think as we see the questions, we've probably answered most of them during the questions that were asked on the call itself. There are -- probably I'll take 1 or 2 theme-based questions, which are more data-led, which is basically -- there are people asking questions around what is part of the other expenses, the marketplace commission and is fulfillment cost part of other expenses. So the answer to that is yes. I think most of our supply chain, logistics fulfillment expenses are part of other expenses. I think apart from that, very similar repetitive questions. So we have probably -- most of them have been answered clearly.

Any closing comments?

So, thank you. This was very exciting to have this conversation with you and share more light on our business. And your questions also help us become sharper and I think from a first principles perspective. And so we'll love to continue these conversations, both during these calls as well as offline. And thank you so much for taking time out and joining our first call and giving your wishes to us as well.

Thank you, members of the management team. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.