Honasa Consumer Limited (HONASA) Earnings Call Transcript & Summary

Good day and welcome to Q3 and 9 months 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. Mehul Desai from JM Financial Institutional Securities. Thank you and over to you.

Thank you. Good evening, everyone. On behalf of JM Financial Institutional Securities, I would like to welcome you all for 3Q FY '24 Earnings Call of Honasa Consumer Limited. From the management side, we have Mr. Varun Alagh, the Co-Founder, Chairman and CEO of the Company; Mr. Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Mr. Ramanpreet Sohi, Chief Financial Officer. I'd like to hand over the call to the management for its opening remarks, and then we can start the Q&A session. Over to you, sir.

Hi. Hello everyone. A very good evening to all of you. Thank you so much for joining the call. I think I'm going to briefly share an update on our quarterly performance, and we will then open it up for your questions. Overall, as a company, we have continued our growth momentum with a 28% year-on-year revenue growth. Especially in this environment, this is something that we believe is significantly disproportionate compared to the industry. Like for like, if you look at our products business, we've grown by 31%. Our operating performance also continues to be robust, and we've delivered an EBITDA of 7.1%, which is almost 400 basis points up year-on-year. Our 9-month EBITDA has also crossed INR 100 crores in terms of the 9 months that we have pitched. In terms of PAT, again, in line with what we have been sort of talking about. So INR 26 crores in this quarter, and for the 9 months, it's about INR 80 crores. Business continues to be capital efficient. We have continued to be a negative working capital cycle operation with minus 6 days of working capital. All of this has been possible because of our focus on our 3 strong core levers. First, of course, we need to focus on brand building. Mamaearth continues to get consumer love. Over the last 2 years, Mamaearth has been into 2 main categories, which is face washes and shampoos. We have gained strong household penetration by 280 basis points in face washes and 110 basis points in shampoos. This is urban plus rural data [indiscernible]. Mamaearth has also shown very strong versatility by entering and making a dent in a new category, color cosmetics, where we had entered close to about 1.5 years back. And in that period, we've actually reached an ARR of INR 150 crores in just the color cosmetics business. Just in quarter 3, we have sold 10 lakh units. This not only demonstrates versatility of the brand, but also demonstrates company's ability to build new categories, which require newer capability building R&D, innovation, et cetera. I think we're happy we've been able to achieve this feat. We continue to scale our younger brands strongly. And in fact, the great news is that our second brand, The Derma Co., has actually become EBITDA profitable. Now at the 9-month level, the brand continues to be EBITDA positive. And that just gives us a lot more confidence as we grow that our playbooks on brand building and, as these brands scale, they will start contributing to the profit pool of the company as well, and the investment allocation strategy that we have is clearly paying off. Of course, the second and very important lever has been innovation. We take pride in our ability to innovate and our ability to use data science-based trends in capturing what the consumers are looking for. We have launched almost 122 products in this calendar year. And an example of our innovation -- data-led innovation approach has been our Rosemary haircare range, where we recognized the trend before the start of this year. We launched the range towards April before the hair fall and monsoon season. And actually, in just 6 months, we've been able to take it to a INR 50 crore plus ARR and that gives us a lot of joy. We, of course, continued to strengthen and expand our omnichannel distribution in the offline space basis Nielsen, now, we are present in about 1.7 lakh outlets, which is an increase of 37% year on year. In modern trade, we are present in almost 8,000-plus stores now across 31 chains. And we also opened our 100th EBO store, which not only helps drive imagery, but also helps us drive range execution in the physical world. So the 3 boring levers of building brands, providing innovative products and driving distribution have been fundamental to delivering the growth plans that we have had. And we have done this keeping our purpose-based philosophy in mind. All our plans around planting more trees, providing more safe drinking water, recycling more plastic, we continue to add to those feats. And we in fact very soon will come with our sustainability report as well in terms of impact that some of these plans are making. And we continue to strongly focus on governance with our strong internal and external audit partners. We take pride in the fact that we have a diverse organization, 53% of the employees are women. And we were also recognized as a great place to work fourth year in a row with our focus on engaging employees in the right way and providing them the right development and learning opportunities. So that's basically the highlights of what we want to capture in our quarterly results. We'd love to answer the questions that you might have. Thank you so much.

[Operator Instructions] We have a first question from the line of Vivek M. from Jefferies.

A few questions first, and in fact, a request to Varun and Raman, if presentation can include a bit more data on, let's say, online, offline; a bit more data on, let's say, the brands, that will be really helpful to analyze the performance, if you can take that suggestion on board.

We will evaluate that.

Sure. Now, coming to the questions. First is, online-offline, can you just give some insights into how the quarter had been for both these channels?

I think both the [Technical Difficulty].

I'm sorry, sir, you're not audible.

Quarter has been good. Online -- sorry, can you hear me, Vivek, and everyone else?

We can hear you now, sir. Please go ahead.

Yes. So to answer the question, one, both the channels has grown well. But online has grown stronger -- faster than offline for the company. In terms of brands, younger brands have driven -- grown strongly in the online space, while growth for Mamaearth continues to be driven from the offline space. So that's the status.

Okay. And in terms of growth rates for the key brands, Varun?

So from our growth rates on key brands, our younger brands, of course, are -- have a lower base and are growing much more strongly, which we talked about last time as well. But Mamaearth also continues to lead the pack from a perspective of larger brands. It is in double-digit value and in mid-teens volume growth.

Perfect. Got it. Second, because you are still a very young company from a market perspective. Sequentially, how is the seasonality? So if I look at this quarter, there is a quarter-on-quarter decline. The base also, there's a quarter-on-quarter decline. Does that mean the second quarter is bigger than the third quarter? I would have imagined, given the winter portfolio...

Yes. Actually, we do have some bit of seasonality in the business because our largest categories continue to be face wash, sunscreens followed by shampoo. And in order of seasonality, sunscreens shows the highest seasonality, followed by face wash, followed by shampoo and which is why usually Half 1 is where, for us, the seasonality is higher compared to Half 2 where winter sort of kicks in. And this time, the winter portfolio itself also wasn't as exciting in terms of the winter demand. The winter was delayed and some of that impact was there. But in general, given the contribution of our categories, we do have some seasonality, and it's best to look at it from a year-on-year perspective.

Got it. A couple of more questions, if I may. One is the gross margins, which have contracted both on a Y-o-Y and Q-o-Q basis, can you just give insights? Other than channel mix, is there anything else? And where should this settle at in the foreseeable future?

Actually, channel mix is not the core reason, Vivek. Good you asked this question, gives us a chance to clarify. So the gross margin contraction is more -- so for example, there are 2 reasons. One, at a YTD level, if you see, we have the impact of Momspresso, which used to be because it was largely a people-oriented business and high OpEx, but high gross margin as well. So that is there in the base. And that, if you remove the impact of it, from a 9-month perspective, there is only about 15 basis points difference in gross margin, right, on the products business. Even there, one of the things which has specifically happened in this quarter, which we will, of course, learn and be better at as we move on, is that while we were taking provisions for our expiry, et cetera, in every quarter, we chose to do the destruction of the same for the last 3 quarters in this quarter itself. Because of which, all of that sort of came into just this quarter, which should have ideally been divided into the last 3 quarters. So this quarter is a little more depressed because of that. So I think if you look at the YTD levels, that's really the gross margin level which we are at, and that is what you should expect from us as we move forward.

Okay, got it. And Varun, I noticed, on the volume growth side, so let's say Mamaearth has 200 milliliters of shampoo bottle and let's say 3.5, 4 grams of lipstick. When you report volume growth, does that mean that one shampoo bottle is the same as one lipstick, for example, because your volume growth says that it is on the number of packs? Is that correct?

Yes, you're absolutely right. We treat volume growth as transactions growth, which is the number of units. Because in the beauty and personal care business, like you have absolutely rightly pointed, not even 3, 2.5 grams of lipstick can be more expensive than a 250 ml shampoo. And hence, tonnage and kg is not the right way to measure and add them all up to see, especially if you're building skincare and color cosmetics as a business. So we see transactions growth as the right measure of volume. And there, we've actually grown faster than ever.

Interesting. Okay. Got it. And last question, Varun, since we have the opportunity to hear it from you. There have been obviously investor concerns around this issue of inventories in the channel, et cetera, et cetera, and I'm sure investors and analysts would have reached out to you. But can you just give your views as to, on the distribution side, how comfortable things are on the ground and whatever the reports came about? Any clarification on that will be useful. That's my last one.

Sure. So Vivek, I think to talk about it, I will need to set some context for everyone out there. So we started operating in this channel about 3.5 years ago, when we started going offline, especially GT. And when you're building a new business in GT, you're really going to partners with no ongoing business. And that led to the kind of partners that we were able to attract at that point of time and it was not the best quality partners. The second thing that of course happened was when we were doing that, when we were a largely an online company, and hence, our distribution center was largely one mother warehouse from which we were operating. While to service the general trade distribution system, you need far more number of distribution points, which we could not just open up directly. And hence, what we did was we went in for a super stockist model, whereby we appointed super stockists as bulk breakers who would then service our sub-distributors. And they also solve the problem of supplying to smaller, lower quality distribution partners who might have had credit risk. That said, over time, as our business size increased, that layer has led to significant, relatively higher inventory compared to others FMCGs that we operate because they really are inventory bulk breakers. And the contribution of that also increased. And of course, there is a cost associated with it. We pay 5% extra to a super stockist to manage this. As we speak, I think we are undergoing that transition, where, one, we want to improve the quality of our distributors. Given this is a channel for growth for us and hence, there is financial infusion, which will be required by our partners, as well as they need to have stronger capabilities on deploying the technology products that we want to deploy for significantly better visibility of assortment, sales, et cetera. Now, that whole attempt of changing and tuning some of this did cause some pain, whereby certain associations did raise concerns. And we are actively addressing and working with the system. That said, we believe it’s structurally the right thing to do, which is finding the right partners over time and actually deploying them with better manpower, capital, as well as better technology capabilities. And over the next 3 to 4 quarters, we will continue to engage and work with the system whereby we will make sure that both the quality of partners as well as the inventory levels in the system continue to move in the right direction.

We have our next question from the line of Latika Chopra from JPMorgan.

My first question was, if you could share the ARRs for The Derma Co. and Aqualogica? I think you shared it in the prior quarter at about INR 380 crores and INR 180 crores, respectively. Any updates on that, please?

Yes, those were the numbers that we had shared last, Latika. As we make material gains in these, I think we will surely come back and share. Because ARR’s benchmarks, ideally, we would like them to be materially different when we actually come back and share with you. So currently they have grown sequentially, but there is no material difference from what was shared earlier, and hence, we would surely, as they hit newer benchmarks, we will come back and share.

Sure. The second was, I know you mentioned in your response to gross margins that there was an adjustment for 9 months that you made in this quarter, right, in terms of stock write-offs probably. So should we now look at the 9-month gross margin as a realistic gross margin of 69.7% or is it going to be the third quarter of 68.5% which is more realistic? And do you see any risks to this from a product mix perspective or the offline-online channel mix or brand mix going forward?

Yes, so I will take that, Latika. So like you said, I think the first 9-month gross margin profile is representative. Having said that, of course, the big implication going forward could be a significant change in the channel mix, which, of course, as we speak, I think the online-offline growth mix will balance it. So I think at least in the medium term, we don't see any major change in how our gross margin profile will look.

And from a 9-month perspective, the only bit of adjustment is that 20 basis points-odd which is an account of the office space. So I think outside of that, that 69% is the gross margin that you should expect us to deliver as we move forward.

All right. And any flavor on how should we think about brand advertisement expenses on a Y-o-Y basis as a percentage of revenue? It's been pretty stable at 34-ish percent. There is some benefit of 40 basis points-odd, as I can see on your deck. But where do you think this is going to settle at basis the plans that you have? And lastly, would it be possible for you to share the offline-online mix? I understood that online grew faster, but any rough sense on whether the Mamaearth portfolio or on an aggregate basis any rough sense on online-offline mix?

Yes, so Latika, firstly, to the first question, I'm sorry, I lost the first question. Could you repeat that?

So this is on the advertisement spends as a percentage of revenue...

Yes, got it. Sorry. Thanks for reminding me. So Latika, we build an annual plan. And like I said, there is a bit of seasonality in the business. There are areas where we want to invest and we invest. So I think from a P&L perspective, we look at it more as a year and we build an annual plan where we look at how and when we're going to activate which brand. And according to that, we execute it. We've been delivering the gains that we've delivered. Again, you should look at more from a 9 months perspective because we've delivered it in line with what we had planned them to be. As we move forward, again, we've called out and we continue to support the fact that A&P is the bucket from which we will get the maximum leverage as we grow. And we've called out that every year we will continue to improve on our bottom line performance by using that leverage where we not only are becoming more efficient, but also the awareness levels are getting driven to a certain level. So I think what I would say is our objective would be that every year in the medium term, we continue to become better on the bottom lines by leveraging on the A&P piece.

And I think just to add to that. Latika, if you actually look at 9 months, it's a 250 bps-plus optimization on the A&P side. So like Varun was mentioning, it's about planned budgets and how we sort of invest behind brands, and this despite, as we're building younger brands as well, we've been able to optimize the A&P spend during the year.

Sure. And any flavor on online-offline mix?

So from an online-offline mix perspective, like we said last time, it continues to be similar to what we mentioned last time. So about more than 1/3 continues to come from the overall business from offline while the balance is online. But for a brand like Mamaearth, it's mostly 50-50 and that is where we see it.

All right. And one thing, sorry for one more question. I was going through the slides and I noticed that you've mentioned that the online growth has been driven by platforms with strong Tier 2-plus presence. Any read-across the Tier 1 platforms like Nykaa or Amazon or anything that you wanted to say about them?

Actually, that point on the online growth is also far more driven from Mamaearth's online growth where we've seen that for Mamaearth now the growth is coming more from platforms which have stronger Tier 2 and beyond presence like Meesho, Purplle and Flipkart. That's been a learning at least in the last 9 months. For younger brands, we've seen it to be actually more driven by platforms like Nykaa, Amazon, et cetera. But at a company level, of course, we're gaining share on each of those platforms.

We have our next question from the line of Manoj Menon from ICICI Securities.

Just heard a little earlier about the formula which you use for volumes. Just curious why not use the underlying volume growth formula? Varun, I'm sure you know this template, right? So just trying to understand why not use UVG because it kind of normalizes most of the noise?

Manoj, we'll take that as a feedback. I think we're fairly young and some of these pieces are things that we are still to take into account and ensure we're able to build it. UVG is a good concept but it's also slightly complicated in terms of execution. Currently, our objective was to understand if our consumer transactions are growing and that's the first point we wanted to keep a stronghold of, especially as we also get into B2B businesses. We wanted to know if the number of times a consumer is engaging with our products is growing. And this current method actually is a very good demonstrator of that. So it gives us a very healthy picture of how our brands are doing in terms of driving the consumer interactions and transactions. But we'll take this into account and evaluate how we can move towards that.

Sure. Only reason I asked is because of -- I have observed in the last 10 years, many Indian companies, listed ones, had actually adopted UVG because they felt, depending on how much they are interested in this phase of evolution because it kind of normalizes the volumetric aspects, right? So the point here is given the stage of growth which you are currently, you started as, let's say, a very a high ticket product-driven company to now kind of having democratically priced product. So that's the only context I was trying to ask that, and we will come back in a few months, few quarters on how this evolves. Secondly, from seasonality 2Q versus 3Q, the skincare portfolio should have benefited from seasonality or is it not material in the portfolio currently?

So in fact, even under skincare, it depends on what part of skincare forms the largest chunk. So if we were a creams-oriented company, you are right that part of skincare does see positive gains. But even there in fact at least our learning has been, it is not daily creams but cold creams, moisturizers which sees a larger sort of skew towards seasonality, but for us actually, that's the third segment in skin. The top 2 segments are face wash and sunscreen, which actually see entire seasonality in Q3.

Very clear. Very clear. Loud and clear. And last year's retail, some updates on the retail -- more than the update actually, just help us understand how do you look at retail internally? Is it, let's say, the funding for retail ramp up comes from your cash sort of budget or you are looking at a separate channel or any evolution, let's say, over the last 6 months on your thoughts on retail?

Manoj, I am assuming you are referring to the EBOs when you are talking about retail?

Exactly, offline EBOs. That's right. Yes.

Offline EBOs, right? So I don't think we -- and you mentioned cash budget. I did not understand that point if you can just clarify that.

[indiscernible] allow me to give an example [indiscernible] working on a Lipton tea powder project in Unilever long back where the internal thought process was that these are actually market expenditure, and we would obviously look at this as from a profit ROCE point of view. So are you looking at retail more from a brand building point of view or is it something -- I know these things evolve. That's why I am trying to understand where are you in the journey at this point?

No, our -- we are looking not just at retail from a brand building or imagery point of view. In fact, the reason for us to get into the exclusive brand store format was one, of course, the imagery piece that you talked about, but 2, very importantly is the fact that general trade and modern trade do not allow you to execute your overall assortment, right? They are more of hero product kind of channels and a lot of our consumers were asking for our overall assortment to be seen in one place where they can actually experience and buy more categories. That was the reason why we started this. For us, we are seeing that as a clear business, the way we evaluate all channels from a profitability perspective. That's how we look at this channel. In fact, the overall channel, already in very nascent stages is store-level profitable and we follow that very strongly and we believe that, as it grows, the older stores are actually showing much better store-level profitability compared to younger stores. So as a store gets more mature, it starts to show better sort of bottom line. So I think that's how we are looking at the channel.

Just one last one. All the DPS are owned, right? No franchise as of now?

No. All of them are owned. No franchise DPS.

We have a next question from the line of Manish Poddar from Invesco Asset Management.

Varun, just 2 questions. So first is on the competitive intensity. Could you probably talk about let's say competition both from incumbents and new-age brands for the core brand, let's say, Mamaearth?

This can be a long answer. But...

No, no, on a relative basis, let's say. Because of the entire...

Yes. I think in the last 3 months, we have seen significantly enhanced competitive intensity. I think till about 3, 4 months back, there wasn't any urban growth concerns that companies were looking at or talking about, but it started with the festive not going as well for the e-commerce players in terms of the overall traffic and growth. It was then sort of followed by a bleaker winter in the last quarter. And then also parallelly followed by GT not growing as fast for most companies, right, and consumption in GT slowing down, and hence, inventory increasing, et cetera. That has been the scenario wherein -- which has led to actually a very high discounting that we have seen from most players, be it incumbents or the younger players in terms of number of days of discounts or the steepness of discounts which have gone up. Now, our view is this shouldn't last as long and hopefully post-elections, this environment should completely change and focus on the basic penetration gains and growth should sort of come back, and hence, this need wouldn't be there. But in the short term, we have seen this, and it does have impact on the consumer and competitive intensity and how one needs to react to some of this. So I think that would be the long answer to it.

So then it is interesting to see the entire growth and the margin perspective. So just one more thing, could you probably talk about, let's say, distribution expansion for The Derma Co. and, let's say, the other brands? Because the first leg, you had to build the pipeline and both, let's say, own stores and the GT channel, but what are your thoughts of taking these brands across the channel given that some of these have started breaking even?

Yes, so Manish, I think the plan for us is that next year for example, Derma Co., we do see has come to a stage where we are seeing demand in offline stores. We are more demand-oriented in our approach here, and hence, taking it slow because, while you can put stock in, if there is no demand, then it won't move out, right? But now for last 4, 5 months, we have seen active demand coming, especially in pharma channel or in modern trade, right? So I think this year the objective would be to have a targeted store strategy getting into hypers, getting into the right kind of pharma stores for Derma Co. and expanding that presence for it. And similarly for other brands, we might go very tactically, like, let's say, one category which is very strong for that brand and take that into selective stores and see how the demand in offline stores shapes and accordingly expand it.

Just one clarity, if I can. So would it be right, let's say, for new products under Derma or any of the other new brands, you take the feedback loop from the BA channel which you have for your co-brand?

I did not understand. So you mean that is the first port of distribution are BA channels for Mamaearth?

Yes, for the new brands. I'm just trying to understand, let's say, from a feedback loop...

Yes, you're right. You're absolutely right. Those are -- we have almost a 1,000 points where we have BAs and these BAs feeding data every day to us around what's moving, what's not moving. So these are the places where we do pilots and understand for the new brands what's moving and how it's moving.

And sorry, just to understand it. So for this -- the entire Derma products company products would have already started getting, let's say, rolled out across this BA distribution channel or that's just on NPD basis?

No, no. Actually, we never take NPDs into offline, Manish. We only would take our core products of a brand in offline where we are seeing significant traction and which have become large in the online space. For example, Derma Co., face serums, salicylic, kojic, vitamin C, niacinamide have become large in the online space or the sunscreen which is the 1% hyaluronic has become large in the online space. And those would be the products that -- face washes, again. So that would be the products that we would lead our offline distribution with and that we would do in the BA channels as well, that we would do in the right imagery modern trade stores as well. But like I said, we always start with a certain universe, see the response there, and then expand in that channels.

We have our next question from the line of Mudit M. from M3 Investments.

Really appreciate the consumer brands that you're building. So my first question is, can you help us understand what's the growth on the base business by the -- ex new launches? So I just want to understand ex new launches, while we appreciate the nimbleness coming up with new products, but is the base also getting built and there is traction there?

Yes, the base has also seen good growth. So we've seen double-digit volume growth on base as well for us.

Right. So if -- to drill down that even further, how many of the -- because you're expanding your store network very fast. So for an outside investor, it's very difficult to understand how much is coming from the new stores getting added and how much is from the repeat orders from the distributors. So could you help us qualitatively understand, is there a growth in the repeat salience of the business functions in GT?

Yes. In GT, it's a bit difficult to track at this kind of size in terms of -- for example, our BA stores continue to grow at a same store level, right? As well as if you look at Nielsen data, it is also telling us that same store growth is there as well as distribution growth is there. So finally, the growth that is coming for us in offline is combination of both. It is not that one is at the cost of other. Both same store is growing as well as distribution expansion is adding to the growth.

Just last 2 small questions. Can you help us explain the percentage of repeat orders on your own website because that you have put in your RHP, so what's the traction like in 9 months?

So honestly, I think we've talked about this in the past as well. [Technical Difficulty] brands, where our products are on our website and -- hello? May I continue?

Yes, yes. Please, sir.

Yes. So I'm saying that the cross-channel brand, where our products are present not just in our own D2C, but also on Amazon, Nykaa or in a DMart, Apollo or in a GT store near [indiscernible] we've always talked about the fact that the same consumer ends up buying from cross channels, and hence, we are not able to truly triangulate what the repeat sale of that consumer is, but we have disclosed that almost 55% of our sales is coming from repeat consumers on our D2C platform. That has actually gone up to about 58% now and so -- but continues to be in that zone.

Just a question -- one small last question. Do you get any differential pricing from e-commerce channel or is it the same that everyone else enjoys?

In fact, we would be the most commonly treated in terms of players because we operate as sellers on these websites. And when you operate as seller, you are basically operating with the same framework that Amazon has put out for any seller in the country. Of course, that framework has slabs where, as you increase in size, you can get better sort of logistic costs or better move. But finally, we are going by that same framework that Amazon or Flipkart have created for any seller in the country. Most other companies operate in a B2B model where there is less transparency, but in our model, it is actually very transparent in terms of the costs that they apply.

That's great. Could you also elaborate -- sorry, operator, if I can squeeze one more. Can you also suggest how much in the marketing goes in performance and qualitative aspect, how much goes in performance marketing and vis-a-vis as the other brand building activities?

Mudit, what I would say is, while we are calling it performance marketing, it finally is consumer marketing. Just because I serve the consumer from Facebook with the advertisement where I am trying to capture what kind of sales it generated, we call it measured marketing rather than performance marketing. And that's the form of marketing probably 10 years down the line will only exist. And hence, it's just a form of digital tool and marketing available. We focus more on the content, the messaging, what we are sort of communicating with the consumer. Otherwise, all of this marketing is also consumer marketing and that's how we at least like to look at it.

We have a next question from the line of Latika Chopra from JPMorgan.

Varun, I heard your comments, you talked about some pressure coming on urban discretionary. It could as well be cyclical. But just wondering, we have this aspiration of 30% growth year-over-year. Obviously you are tracking so far around those numbers. But if you have to crystal gaze over the next 2 or 3 years, where would you peg the revenue growth potential for the aggregate business? I also heard comments around you are looking for a more tactical expansion into other channels for your new brands. So any rough sense on whether the revenue growth trajectory is more going to be like 20% to 25% or 25% to 30%? Where do you think at this point the next 3 years, revenue growth potential for the business looks like?

Latika, we have -- whenever we have talked about this in the past, we've talked about the fact that we will continue to grow significantly ahead of the industry peers. We would still retain that as our goal. We've talked about the fact that we would be at a 2x to 2.5x of where the market growth would be and that's where we will continue to be. In the very near term, we do expect consumption slow down. We are seeing some of that where you can see industry is also reporting fairly slow sort of volume value growth numbers. And that is now happening in urban as well, not just in the rural area. So from a short-term perspective, the growth benchmark might itself be on the lower side and that might impact us in the short term as well. From a medium-term perspective, which is over the next 3 years, I think that goal of remaining 2x to 2.5x of the market continues to be there, where I think we would look at around that 20% CAGR mark because that's the way we'd see market shaping as well.

Sure. And any thoughts on further brand launches or you will first want to scale up the existing portfolio that you have and then look at a new brand launch into any of the white spaces that you see in the BPC space?

Latika, it's an ongoing process for us where we identify opportunities which are white spaces. We action pilots and POCs in that opportunity and wherever we see that our view and hunch was right, we double down on that opportunity. So I think -- and we've also created an organization which can easily support that. Because we have a separate brand factory team which works on only new brand creation and scale up, while the COE focusing was on the old brands. So I think in that line, we will continue to look at newer spaces coming up with the right mixes to take on those spaces and build newer engines of growth for future through those trends in spaces.

So one of the things that is flagged off was color cosmetics, right? It's already INR 150 crores ARR under Mamaearth brand. So you want to tap into this category via Mamaearth brand itself or the success of this specific portfolio within Mamaearth allows you to look at a bigger target audience at different price points using another brand? Is that something that could be on plate?

Yes. The experience with the category has clearly given us more confidence to be able to look at it in a standalone manner. And we know that globally as well as in India, Naturals is a very small part of color cosmetics as a category performances where the category really lies. But this early success has clearly helped us build capabilities and given us confidence that we can play aggressively in that category in the medium term.

Sure. And one check on margins. EBITDA margins hovering around 7%, 7.3%, 9 months even in the quarter. Given we talked you to -- you alluded to higher competitive intensity in general, how should one think about the time frame for you to reach double-digit kind of a margin profile?

Again, Latika, we will stick -- from a 2 to 3 years perspective, we will stick to what we have said in the past: we will continue to gain every year, and hopefully over the next 3 years, we should be in the double-digit space.

All right. And last one for me was, any -- is new NPD share to revenue ratio stable at 13% that you saw in first half? And you've talked about market shares of face washes and shampoos, are they also trending up on a Q-o-Q basis? I know you shared Y-o-Y they have expanded. So any flavor on that will be useful.

So, yes, on the first point, largely, yes, stable. Mostly, it should be looked at from a quarter based perspective, because there is cumulative gains that we usually get. But yes, stable from an NPD perspective. On the market share front, again I would say, better to see it from a Y-o-Y perspective, although we sequentially also gain. But better to see it from a Y-o-Y perspective because that's really the benchmark. So that's the data that we've provided. But it's actually healthy compared to what we have reported in the past in sequential as well.

We have a next question from the line of Chintan Sheth from Girik Capital.

Just to understand better the gross margin, you say 20 bps on the 9 month basis is the impact on the inventory front, right? Just a clarification?

No. We'll try to explain this. Raman, if you can...

Yes. So I think the -- Raman this side. So what we are trying to say is that if you look at a 9-month year-on-year comparison from a gross margin perspective and if you exclude the impact of discontinued business of Momspresso in the base, then the impact of gross margin Y-o-Y is only 15 to 20 bps. And that's primarily coming in from certain category mix or a channel mix changes. So that's what we're trying to explain then.

Just on the Q3 perspective, the same number on a Y-o-Y, even after removing the impact of Momspresso, is 120 bps.

Yes. So I think the impact of -- that one accumulated inventory impact that we took in Q3 is about 1.2-odd percent for the quarter, and ideally, it should be spread across the first 3 quarters. So you can probably assume that it's 0.3, 0.4 impact here. So that's how one should look at it.

Okay. That's ex of Momspresso, right, that we need to...

That's ex of Momspresso. So there is no Momspresso impact in the current quarter. Whatever is the impact is in the base quarter. Hence, if we remove that from the base quarter, like for like, year-on-year 9 months, it is only 15 to 20 bps impact. And specifically for Q3, it's the inventory one time accumulated impact that we have taken in Q3. So that's...

Sure. And in terms of the employee cost, last quarter was favorable, and this quarter, we have kind of normalized. What we can expect going forward? Are we continue to see some trend up in that or there will be some leverage we can expect, at least on an absolute basis, whether we can expect the run rate to continue or grow at a near inflation or lower than the [indiscernible] that we should expect?

Yes, just to clarify. So I think when you look at like for like, here also given Momspresso over the service business and higher implication and former employee payroll costs, the like for like impact is only 1% year-on-year. And in fact, that's -- in Q3, that's also similar, close to 100 bps impact. So that's how you should see it. I think we are about 9% and we, I think going forward also, we should remain around the same as a percentage of sales in terms of our payroll costs.

Okay. It will grow in line with the revenue growth. If you consider 9%, it means the employee cost will grow in tandem with the sales growth. That's the expectation over here?

In the -- over the next couple of years that is, yes -- in the near term.

Right. And lastly, on the depreciation and interest cost this quarter, I believe the ramp-up which we have seen, largely because of the EBOs ramping up and impacting the P&L or is there any specifics you need to call out?

No. It's just the EBOs. There is -- we don't have any other capital-intensive...

Mostly lease accounting getting impacted there.

Absolutely. It's exactly that.

And that trend will continue, the absolute will grow in tandem with the number of EBOs will continue to open?

Yes.

Okay. Got it. And if you can just call out, you said the Mamaearth brand as a whole grew double-digits, right? That's the number -- in terms of revenue -- value growth and mid-teens in terms of volume growth, correct?

Yes. That is for 9 months.

For the 9 months?

YTD, yes.

We have a next question from the line of Sahil Chotalia from Mount Bliss Capital.

Yes. So all my questions are answered. Thank you. Thank you so much.

The next question is from the line of Mudit M. from M3 Investment.

Could you also take this as a note or maybe give some highlights? Like you must have categorized some hero products. And what's the growth of those hero products if you could highlight those in subsequent quarters? It would be good to understand the longevity of franchise and I would like to know the comments on the same? Then I will ask [indiscernible].

Mudit, at least as we stand today, and we realize the way market is shaping, beauty and personal care as a market is a very innovation driven trend-oriented market, where especially in online which is the large majority of our business and fresh innovations and launches is what fuels consumer's excitement and gets you the consumer franchise going. So in that sense, for a 90% offline business, it actually makes far more sense to just talk about and focus on hero products. But for our kind of business, which is far more online-heavy, innovation and how innovation continues to add and drive growth is a far more important metric that we track. Of course, we have hero product franchises like Ubton, Onion, which are all fairly large franchises and the GT growth that we're talking about or the market share gains that we're talking about are driven by these franchises. But we still feel innovation is a far more important [indiscernible] and that's how the categories are organized.

I really appreciate that, but just to get a sense to also understand your GT strategy and the quality of GT networks, how many of the distributors that you have enrolled are already existing distributors of large franchises? Maybe the adjacent categories are same. So that gives the confidence that they have a financial benefit and customer touch points?

Mudit, as I talked about earlier, we're a young business in GT, and when initially you go to find a partner and you don't have any business, you do not attract the highest quality partners in the market and that's what sort of earlier happened to us as well where we were working with a lot of local cosmetics [indiscernible] FMCG players, baby products sort of distributors. It's only over the last one year where business has become sizable is when we have actively started moving towards the FMCG distributors, as we would call them, and who've been working with larger FMCG companies and are now interested in working with us and that's an active transition that we're going through. I think over the next 4 to 5 quarters, our objective is that 80% to 85% of our distribution partners should be of that variety as you call it, and that's the ongoing strategy that we are [indiscernible].

Maybe last one to my side. How many SKUs will you carry in the modern trade -- large modern trade businesses -- marketplaces? Because that's where the real mass consumption could drive for your business. Just want to get a sense of what's the SKU that you could carry in modern trade?

Yes. Again, differs, but in general, like a DMart would have probably 20-odd SKUs for us, or even Apollo would have a similar number. But then possibly in a hyper store of Reliance where we have a partnership to do a stronger brand block along with assisted sales, we might have 70 to 80 SKUs in that kind of a store. So depending upon the format, the customer and the intervention that we've been able to align, it varies. But in general, about 20 is what you should expect.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments. Over to you.

Thank you so much, everyone, for joining in. We're a young company. We're really happy to sort of answer some of these questions and engage with you on different times to further strengthen how we will build this business going forward. And we are super kicked and excited with the beauty and personal care opportunity as it exists and will shape over the next decade. We continue to very strongly believe that it is going to be the strongest and fastest growing FMCG segment with the highest profit, and especially driven by women joining workforce and more women going to college is a trend. And we believe we genuinely excel at building for Gen Z and millennials and that excellence on innovation and brand building in that sense, which continue to drive strong gains for the company in the long term. Thank you so much for patiently listening to us.

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