Honasa Consumer Limited (HONASA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Honasa Consumer Limited Q4 FY '24 Earnings Conference Call hosted by Kotak Securities Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Jay Doshi from Kotak Securities Limited. Thank you and over to you, sir.

Thanks, Rico. Good evening, everyone. On behalf of Kotak Institutional Equities, I welcome you all to 4Q FY '24 Earnings Conference Call of Honasa Consumer. We had with us Mr. Varun Alagh, Co-Founder, Chairman and CEO; Ms. Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Mr. Raman Preet Sohi, Chief Financial Officer. I'll now hand over the call to Varun for opening remarks. Over to you, Varun. Thank you.

Thank you, Jay. Hello, everyone. Good evening to all of you. We welcome you to the quarterly performance update and FY '24 update as well for Honasa Consumer. Like Jay mentioned, we have with us Ghazal, Raman as well as Mohit, who leads the Investor Relations from our team as part of this call. The way we have structured this is, we have a quick presentation in which, for the purpose of simplicity, I will take you through what has been the highlights for the quarter. And we will open up for questions post that. So without further ado, let me just jump in and talk about the highlights for the quarter. To start with, of course, the quarter has been -- the quarter shaped up really well. While there has been a lot of conversation of consumption slowdown, Honasa Consumer continues to deliver strong growth. We have delivered 23% like-for-like growth with a underlying volume growth of 27% and with a EBITDA of 7% and the highest ever quarterly profit of INR 30 crores. We have also generated INR 80 crores of free cash in this quarter. At a FY'24 level, we have grown at about 31.5% like-for-like and our EBITDA is about 7.1%. For the full year, we have generated INR 111 crores in PAT and from a UVG perspective, we have grown 41%, which is significantly ahead of our value growth. And we have generated free cash of INR 224 crores this year. And this year, like we have mentioned in the past, we have demonstrated significant improvement over last year in terms of our bottom line. Last year Q4, we had a negative EBITDA and from there, we have moved to a 7% EBITDA this quarter. Last year, for full year, we had a 1.5% EBITDA from which we have moved to a 7.1% for full year this year. And our -- this is driven by combination of efficiencies in A&P, OpEx leverage and other costs, which we continue to work on and to make our business more efficient by not compromising on building our brands and taking share. Coming to the core business updates, I think let me start by talking about a project which we have been executing and talking about in the last couple of quarters as well. We clearly realize that omnichannel distribution and offline distribution is going to be a critical part of how we build this company and capture the beauty and personal care market share. And in that regard, we started the journey of building this channel about 4 years back. When we started this, we were largely an online company, whereby we only had 2 locations for distributing our products to warehouses. And we did not have any offline business because of which we had to go in for a distribution infrastructure where we had super stockists which acted as bulk breakers. And then the super stockists appointed distributors whose quality was not as good as we would have liked them to be from a FMCG perspective. And hence, we have taken this project to create a stronger direct distribution infrastructure with strong visibility and technology implementation as a part of which there are 3 pillars that we have been executing. One is a transition from super stockist to direct distributors, especially in top 50 cities, onboarding high-quality FMCG distributors with strong direct distribution reach who -- as well as implementing a customized version of DMS and SFA, which is distribution management system and sales force automation system that we have built over the last 1 year along with our partners across all of these distributors. We started this journey in Q3 of FY'24. In Q4 FY'24, we have expedited this journey and made sure that the execution is up and live across the top 10 cities. And over the next 3 quarters, we will continue to execute this project. This has had a primary impact in -- on our sort of growth for last quarter by about 200 basis points. And we do expect some of that impact to continue over the next few quarters. But given it is the right move from a long-term perspective as well as a financially proven move given super stockists do contribute to a 5% extra cost of distribution in this, we are actively transitioning. But the good thing is that from a consumption and offtakes perspective, our brands continue to do very well. And this, Mamaearth, if you look at the Euromonitor 2023 data now, for the calendar year '23, it has grown amongst the -- as the fastest brand amongst the top 15 BPC brands in the country, where average -- the top 15 BPC brands have grown by 7%, while Mamaearth has grown at 21% according to the Euromonitor retail data. This is also visible in the AC Nielsen shares that we capture. According to Nielsen, we have gained 120 basis points in face wash category last year. And we have gained 40 basis points in the shampoo category last year. And even heartening is, in the same stores where we are present, the share amongst handlers has actually gone up even faster, so 150 basis points increase in share amongst handlers for face wash and 65 basis points increased in shampoo, with a gain in distribution as well. So Mamaearth continues to be loved by consumers and continues to drive those transactions in core categories across core markets. And of course, this year, we've been also able to demonstrate our ability to build large size brands outside of Mamaearth. And The Derma Co. has hit ARR of INR 500 crores last quarter, while being profitable and this is a net sales value ARR. In terms of GMV, this will be close to INR 900 crores. And this is just in 4 years, we launched the brand in March '20. And this is also a brand which is shaping a new proposition, which is the active proposition that we were able to recognize very early and launch the right categories with the right mix, which has been loved by consumers and demonstrates our potential to build large scale brands in newer evolving propositions as well. And looking at the portfolio, clearly the house of brands that we have, we are very excited to see the opportunities and possibilities in those brands. And over the next 3 to 5 years, we do believe Derma Co. will enter INR 1,000 crore club, Aqualogica and Dr. Sheth's will enter INR 500 crore clubs and BBlunt should enter a INR 250 crore club. And this whole house of brands strategy is also helping us dominate a few categories. And I would like to take an example of category like sunscreen, which is a category which is also growing really fast. And -- but as Honasa, we have been able to use the power of house of brands strength to provide different kind of differentiated propositions in this category and whereby there is a MadeSafe natural proposition in Mamaearth, an active based proposition in Derma Co, a hydrating lightweight proposition in Aqualogica and a bioactive proposition in Dr. Sheth's. And a combination of this has led to us being able to gain more than 30% market share in Honasa across the ecommerce platforms that we are present in. And now we're going to use the same strategy to get into modern trade and then offline to capture this market. And this is evident in the ranks that you see on most of the channels like Amazon and Nykaa, where amongst the top 5, at least 3 ranks are held by our brands and that's something which we're going to demonstrate in different categories over time, as well. And our focus on R&D and innovation, of course, continues to be loved by consumers. This is at the heart of the organization, being able to understand the consumer needs and using our understanding of the Indian skin, Indian weather, being able to craft the right kind of products and which then are loved by consumers. We continued to be on that path last quarter as well and launched some very exciting launches, which includes hibiscus range for Mamaearth, a new sunscreen VIS for Mamaearth and a new technology in sunscreens, whereby long-lasting sunscreens, which have 6 hours stay, which is clinically proven, are a few of the things that we've launched last year -- last quarter. And NPD has contributed about 18% to the FY '24 revenue from operations. And we've also used this strength then to get into newer categories and hence, enhance the TAM that is available to the company. With Mamaearth, we have entered into personal wash with a differentiating product, which is moisturizing lotion soaps, a Grade 1 MadeSafe certified formula, which is something that we are executing this summer. And also looking at the opportunity in color cosmetic space, we have entered into that area with a different brand called Staze, which is focused at Gen Z. And again, providing innovative products. We have 3-in-1 lipstick that we have launched under Staze, which actually has 3 shades in 1 lipstick. This is actually a new-to-world innovation that we've brought to India, knowing that Indian consumers seek value in products that they look at. And we've also launched tubing mascara, which is another innovation that we have brought in this category. And to further strengthen our R&D and our product development expertise, we're glad to announce the acquisition of Cosmogenesis Labs. This acquisition brings in the expertise of Ms. Rohini Manoj, who has been the founder of this company for the last 25 years and brings in very strong industry experience in cosmetic formulations. She and her team has -- have built more than 5,000 formulations in the beauty and personal category over the last few decades. And as a part of the transaction, we'll also be acquiring, apart from the formulation expertise, the R&D labs, as well as nano manufacturing facility. This is something that further strengthens our ability to innovate and bring the right kind of products to the consumers. And Rohini will be joining us as VP of R&D, reporting to Ghazal. This deal is likely to be closed in the next 4 to 6 weeks. And of course, while the business has been good, we've also been spreading a lot of goodness. And we have released our first impact assessment report, whereby all the brands and the impact that their purpose programs have had has been captured. For example, for Mamaearth, over 600,000 trees have been planted across 3,800 acres of land, which has been greened. And these are all fruit trees, which we plant alongside farmers. So these will generate 12,000 tons of fruit over the next decade and about INR 20 crores in income for these farmers. And of course, 500,000 tons of oxygen to the environment will be generated because of this. Our Derma Co. runs a young scientist program, whereby we have run multiple science classes in schools across Bangalore and Chennai. More than 20,000 students have been engaged in this. Based on quiz we have understood that their knowledge has been improved by 42%. In Aqualogica, it is a younger brand but we're deploying freshwater plants across villages. And we have now deployed it across 500 plus households who have access to this. And are saving 400 hours daily for women who had to travel hours to get access to fresh, clean drinking water. And under BBlunt Shine Academy, we've now certified over 10,000 women in salon and styling courses across 11 states. And this is something very close to our heart. And as our brands grow, our impact also grows. With this, I would come to the close of our presentation. Thank you so much for listening in. We would love to answer the questions that you have.

[Operator Instructions]. The first question is from the line of Dhiraj Mistry from Antique Stockbroking.

Hi and very congratulations on good sets of number and improvement in profitability. So my first question is on distribution expansion, which you are -- a distribution expansion strategy what you have implemented. What kind of impact we are seeing in the short term? And what are the likely benefits, like what kind of margin accretive it can be over the long term period, let's say from 2 to 3 years period?

So firstly, I think in the short term, the impact that we are seeing is in our primary sales, which is what I talked about, for example, last quarter, about 200 basis points in primary sales is the impact. Over the next 3 quarters, we believe 50 to 100 basis points every quarter will be the impact on this, right, because the transition involves reducing inventory, which is there in the system, given the super stockists hold a higher level of inventory compared to direct stockists. From a long term perspective, it is, of course, beneficial from 3 ways. And one, like you rightly said, the super stockists charges about 5% incrementally in distribution. It is currently at about 50% level that we end this quarter. And our objective will be to take it down to 30% levels over the next 3 quarters. And hence, that's the financial benefit. But more importantly, the benefit is in increasing direct distribution and quality of execution in the market. Any store which is covered well by a direct distributor, their frequency of visit and also proper -- leads to a even better share gain compared to what is captured by indirect distribution. And that's the business benefit that we are expecting to see over time because of going direct and building these direct distribution platforms.

Got it. Got it. And as per your current sales, this 50 cities would be contributing what percentage of your sales?

About 2/3 of the GT sales is contributed by 50 cities.

Okay. And yes, second question is, what will be the contribution of offline channel and online channel during the quarter and for the year -- full year?

Yes. So, at an overall level, offline contribution is about 25% and online, of course, is the balance.

25%. I heard correctly?

No, again, 1/3 would be offline.

Got it. Got it. And this is same for the full year as well?

Yes, yes. This is full year.

Okay. And how do we see that the margin trajectory in terms of A&P spend is definitely one of the lever which we can always play for the margin expansion. How do we see that the A&P spend when we are focusing much more aggressive growth for Aqualogica, the Derma Co. and all, as a percentage of sales what -- when you would like to start playing lever of reducing A&P spend for margin improvement?

We've already been doing that actively over the last 3 years. And -- so for example, in case of Mamaearth it is significantly lower compared to what it was for younger brands. Now, this year for example, for a Derma Co. it has come down as the brand has scaled and every year the objective will be to get better efficiencies while continuing to grow and build the younger brands.

The next question is from the line of Vivek Maheshwari from Jefferies.

A few questions. First is, Varun, what is the outlook on FY '25, let's say, both on growth and margins?

So, Vivek, as we have also mentioned in the past wherein our objective will be to continue to grow at 20% plus CAGR over the next 3 years and that's the growth that we would want to hit in FY '25 as well and that's the plan that we have in place. And from a margin perspective our objective will be to improve compared to last year, at least by 150 basis points is what we are aiming in FY '25 in terms of improvement over FY '24.

Got it. And in that context, we're hearing a lot about -- so I think D2C competition, digital-first competition was always there but we are hearing even the traditional companies are focusing quite a bit on the online side of things. Have you seen competitive activity picking up quite a bit in the last 3, 4 months? And how does that impact both from a growth and margin standpoint at least in the near term?

So, Vivek, we actually had talked about this last time as well that we have seen incumbents being more competitive, more competition from incumbents on the online space and it is largely in the form of significantly higher discounting that we have been noticing. And that said, this is a category where the consumer beyond a certain level chooses brands that they love and you cannot skew too much beyond a certain level based on price because of which we feel confident that even in face of the competition, we will be able to deliver the goals that we have set for ourselves.

Interesting. The other question is on Staze. So, look you are entering into new categories and this one is along with the brand. So, category wise I'm guessing that you will keep exploring more white spaces but from a brand standpoint do you think the architecture is in place that whichever category that you want to get into you have the architecture or you still think that there are white spaces and you may have to have a couple of more brands? How do you think about that?

Vivek, I think the way we are thinking about this is the market in our Indian consumer is evolving very quickly. In the past, we used to talk about that something that happens in U.S. or other countries, it takes about 5 years for it to sort of come to India and hence the category evolution in India is slower. Now with digital evolution, Indian consumer is becoming very connected and they're also looking at what's happening outside the world, they're getting educated far more quickly compared to what used to be the scenario in the past, where category education used to take a lot of time. Now with influencers and digital availability, the category education is also becoming quick and trends are getting captured very quickly. And Derma Co. is a great example of that, that nothing existed and now there is so much action happening in the active base brand. So I think as a company, we would want to keep a very close watch on our consumers. And we would want to clearly see what kind of trends are emerging, what kind of needs are emerging and how they are looking at different categories or spaces. And if there is an opportunity to disrupt and that disruption cannot be done by one of our existing brands because of the -- because of the sharpness or architecture required to do it, then we would surely look at newer brands to cater to that because we have proven our ability to create value by building a newer brand franchise.

Okay. Got it. Got it. And if I may, couple of more. One is on the acquisition, this R&D capability, Cosmogenesis. Can you just elaborate, you mentioned but the comments were a bit brief, can you just elaborate, Varun, what is -- from a capability standpoint, what is the outcome that you are looking at with this acquisition?

So, Vivek, as we have mentioned innovation is critical to the company and one of the things that we take pride in is the fact that we're a company which is crafting for Indian consumers, for Indian weather and we were seeking to further strengthen our product development expertise and we, of course, currently have a team of over 50 members in our innovation and R&D function. But we wanted to further strengthen our expertise in the crafting for India domain by bringing in a team who has been developing formulations for Indian consumers and Indian brands for some time. So I think the expectation is to further improve and work on the products that we have to, to increase the acceptance and love amongst consumers, to further enhance our understanding of how to craft for India even better across our newer brands, as well as the purpose would be to further increase the pace and quality at which the company is able to aim.

Okay, got it. And the last one, Varun, is this direct distribution changeover, you have quantified its impact on top line. Does it also have any impact on that -- at the EBITDA level?

No significant impact, Vivek. We have taken some increased provisions for inventory based on the return stock that comes, in case of transition and -- but the impact is in -- less than 50 basis points.

Yes, in fact, just to add there, Vivek, like Varun mentioned earlier, as we move more towards direct distribution, we'll unlock some bit of -- from super stockist margins. So it will balance for year. So we don't see any incremental impact to our targets of incremental margins for the year.

Right. So, Raman, my question was for this quarter, does this have any one off to call out in this quarter from a margin standpoint?

Sorry, so for the current quarter I think we would have expected a little more leverage to begin given that we had some impact on the primary like, you mentioned earlier. So, there were some leverage impacts given, as a percentage of sales of the business because we had a lower primary as compared to what we could have actually delivered.

The next question is from the line of Percy from IIFL.

My first question is on Mamaearth. So if I do some back calculation, it seems that Mamaearth brand at a net sales level has probably grown in single digits this year, partially because of your primary reduction or say, any other reasons. Just wanted to know your sort of realistic estimates for growth on this brand next year and in FY '26? Do you feel that it is a realistic target for us analysts and investors to sort of build in a double digit growth in the Mamaearth brand? And if so, what are the pluses and minuses to the number versus what we have done this quarter, sorry, this year? So, what will accelerate it from this year? What are the factors for the acceleration? And if there are any sort of decelerating factors which were not there this year and will come through next year, if you can enumerate that also, the pluses and minuses?

So you're correct, there has been -- the primary impact that has been there. And this is all on Mamaearth because that's the brand which is distributed offline, over the last 2 quarters. Now, from a last year perspective, the UVG growth we talked about, last year till Y-T-D we were in double digit growth, right. From a last -- full year perspective, the brand is at a mid-teens UVG growth in FY '24. And FY '25 - FY '26, our plan is to make sure that the brand grows in double-digit in terms of value growth as the company growth is about 20% in general.

So just help me understand if the UVG growth is around [ 15 ], what is the reason that the value growth this year is probably a little shy of [ 10 ]?

So between UVG and value growth, again, the one big driver is because of the transition between B2B and B2C channels. In B2B -- B2C channels, the per unit revenue recognition is far higher. While in B2B channels, because of the margin et cetera, on top, the per unit revenue recognition is relatively lower. And hence, as the brand is moving towards B2B and the growth is coming from GT and modern trade. And there is more number of units which are required as well to deliver the same amount of revenue growth, so which is the biggest reason between the gap in UVG and value growth, UVG being higher.

Understood but won't this headwind continue into next year as well? And would you see a scenario where even next year you have a double digit UVG but then the value growth again falls short of [ 10 ]?

The other thing that you mentioned, for example, the impact of deceleration in primaries, right, which is there in the distribution piece, almost 50% of that is done in the last 2 quarters. And over the next 3 quarters, the balance should come in, right. But once that is done, then that deceleration impact should move away and which gives us confidence that over the next 2 years, we should be able to do a double-digit value CAGR.

Got it, got it. Another question I had was on margin. So, you mentioned that you would be targeting somewhere maybe around 8.5% to 9% for FY '25. My question is and sorry if I'm splitting hairs here but do you think it will sort of gradually ramp up over the 4 quarters? Or do you think that for all the 4 quarters, the 8.5% to 9% target would be roughly sort of there across all 4 quarters? Or do you like start off at 7% and end up at like 10% and therefore the average comes at somewhere around 8.5% to 9%?

I do agree on the splitting hairs bit. But no, so my view would be that we would be in a range and we would address these 50 basis points here and there in terms of quarterly sort of averages. There are quarters in our case which are more seasonal quarters and hence our media plans are skewed slightly more on those quarters. And we like to also start strong because of summer season and before summer categories. But overall, from a year perspective, I believe the variance would be in that 50-70 basis points mark.

Got it, got it. And last question, if I may, on Derma Co. So how do you measure the relevant market share for Derma Co.? See, the overall skincare space is really huge, right? But that's not your relevant target. So, maybe the relevant market share would be that, out of all the brands which are active-based brands, what is your market share there? So do you look at it that way? And if so, can you give us some idea how big you are relative to that relevant market and also that relevant market which is active-based sort of solutions, what is the industry growth of that sub-segment of skincare?

So, actually, we'll be able to give you a directional response on that because there is no third party which measures these propositions on these brands. And given most of this growth of the proposition, almost in fact 90% contribution of this proposition, which is active-based, is actually lying in online. There is no share-based [indiscernible] comes for it. But giving you a directional view, our view is that this subcategory is already about INR 2000-odd crores in ARR and of which Derma Co. and Dr. Sheth, between the 2 of them, we have about 33% to 35% odd share, which largely lies in 2 core categories, that is face serums and face sunscreens. And now we are also seeing face washes and moisturizers grow very strongly in this proposition. So that will be another driver. I think overall, this proposition has gone largely from zero to INR 2000 crores between the year 2000 and 2024. And the growth continue to be very strong for this proposition in the category that they operate.

The next question is from the line of Nitin Gupta from Emkay Global.

Just wanted to check, like, will you be able to share revenue split across brands?

Sorry, Nitin, we don't share the revenue split across brands.

Okay, okay. That's perfectly fine. I just wanted to check, another question is with respect to the BPC category, sort of, we have a fair presence across most categories. So, in terms of any new category, like how the thought will evolve, like how you want to expand across categories? Will you be open to get into categories like oral care, where we see healthy margin profile, or getting into home care category ahead?

So BPC is the core category that we have. We have chosen to focus on, from a medium term perspective, that's the category where we are building organizational strengths, be it in terms of understanding the consumer and their skin, hair needs far better. And as well as in strengthening our R&D and marketing playbooks, as a company. Now, within that, we -- there is, there are still, some subcategories, where we are not present in. We would probably evaluate them in the future. But outside of that categories, like home care, is not something that we would look at. Even categories like oral care, at least in the short term, we are not looking at. But from a medium term perspective, even if we look at that category, we would look at it from an angle of beauty, which is, finally your smile is what makes you beautiful. So, if that sort of -- that's how we would look at possibly the category in the long term but not in the short term.

Thank you. And the last question, with respect to the baby products, so like you have put out an excellent ad yesterday. So, just wanted to know, how is the salience for baby products?

So, baby product category continues to grow well for us and continues to be a strong driver of equity for Mamaearth as a brand. That's the, that's the brand in which baby care is present. And for Mamaearth, the salience continues to be about close to 10%.

Can you repeat the last line?

For Mamaearth, baby care continues to have a salience of about 10%.

[Operator Instructions] The next question is from the line of Latika Chopra from JPMorgan.

Thank you for the opportunity. My first question was on the margin expansion of 150 basis points that you talked about for FY '25. Could you walk us through, the key levers for this? Are we, how are you looking at gross margins? Would they remain stable at 70%? In FY '24, we saw employee costs were up, just 3%, 4% and A&P was up about 25%. So do you think employee costs will continue to grow very modestly, even in FY '25? And any incremental thoughts on, what kind of growth you anticipate in A&P given, the new brand investments that you plan to do? That's the first question.

Yes, Latika, so like we mentioned, the combination of all of these levers is what would help us get to that 150 basis points improvement. There is slight improvement, which we expect in gross margins as well, because given younger brands are growing faster, younger brands have actually got better gross margin profile. And that mix change, as well as sort of, contributing towards [ GP and GM ] expansion. And then the second lever, of course, is A&P. While we do continue to invest strongly in our brands but as the brands scale and we have clearly seen that the percentage A&P on that brand sort of continues to come down. We have seen that now in Mamaearth and in Derma Co. and we expect to see that in other brands as well. And so that's the second unlock. And of course, the third unlock is leverage, where we expect, be it in terms of OpEx and other costs to grow slower than where the company is growing. So I think combination of those 3 will help us get that.

Okay. The second bit was just clarifying on, your underlying volume growth definition. They were referring to tonnage growth or you're referring to number of units growth and...

Sorry, complete your question. Sorry, Latika, please go on.

And the other thing I wanted to check was, are you adjusting this for mix, so?

So our, UVG basically is tonnage growth on previous base periods' realization. So it sort of calculates constant turnover based on previous years' realization, which is the typical way of calculating UVG. And hence, the price is taken off, it's pure volume in tonnage terms.