Honasa Consumer Limited (HONASA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '25 Earnings Conference Call of Honasa Consumer Limited hosted by JM Financial Institution 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, I'll welcome you all to Honasa Consumer Limited 2Q FY '25 Conference Call. From the management side, we have Mr. Varun Alagh, Co-Founder and Chairman and CEO of the company; Mr. Ghazal Alagh, Co-Founder and Chief Operating Officer; and Mr. Ramanpreet Sohi, Chief Financial Officer. I'll hand over the call to the management for their opening remarks and a quick presentation, post which we can open the call for Q&A. Over to you, sir.

Thank you, Mehul. Hello everyone, and welcome to the quarter on [ this call ] regarding the results of Q2. I just had some context and highlights. We have released, of course, the results of the presentation of on website. Quickly recap some of the pieces that we have mentioned in the presentations and post which we will open up for our question and answer, but [ that will be clear ]. I say that we have -- I think if you look at the presentation, we've started by sharing the fact that we acknowledge the fact that the [ mandates ], consumer behavior and distribution are changing quite fast, especially in the Indian context. Some of these trends were already happening and some of these trends like the way our media landscape [ has situated ] the way consumers' profitability and propositions have changed or how the commerce is impacting things. I think that we are also seen as relatively new changes to which values more than [indiscernible] would, of course, need to evolve. And in light of this, we also talked about the 4 or 5 key areas which are areas that we are focusing on where we believe to rethink some of the strategies in calibrate and evolve in line with how we've seen the landscape evolves. Of course, the first one is this whole amazing [ tabetic ] prebook that we give out. And while the branded playbook has done really well asset on the steering brands from INR 0 crore to INR 1000 crores you're seeing that happen for the other brands that we bring as well. But the INR 1,000 to INR 2,000 crores journey, it seems that we were -- we were trying to deploy the same 3 books. And there over the last few quarters, on our sort of data set pointed to the fact that we need to evolve those playbooks in line with how it the consumer who's buying offline and the kind of who [ want something to add ] and the kind of distribution that is required for that. And the [indiscernible] book is happening on that front. And other learning that we've had, which is something that we've already started in Q2 this year also is that [indiscernible], which is a complex sort of landscape of over 24 sub-categories and will happen a few categories that are coming, right? And you need to dominate in those categories and then regarding more categories where we become [indiscernible]. And the whole strategy of Honasa brand will help us do that, but that would also be to focus investment innovation, R&D, et cetera, are on those categories [indiscernible] approach, look at some of the [ subcategories and how they're doing ]. A third area of learning which we are also implementing as part of project has been on the entire area of offline GTM. I think this is an area where we have clearly recognized that this is something which needs to be relooked at the need and scale of our business over time changes. I think even if I was to go back, I don't we will be able to start with a different kind of a distribution system because at that point, with a [ 0 ] business and no regional supply chain availability, that was the best system that worked for us. But clearly, now when we look at it from the next 4- to 5-year horizon, where multiple of our brands to this on which we all see that the distribution system required for that is actually, that is the area where we'll bring dedicated work on. And as we build this out, as we evolve probably another 4 years down the line, again, we look at this from a next-5-year business infrastructure. I think that is something which is a way to build muscles up in a time [indiscernible]. The other area, which we clearly have learned and are executing is brands need to remain sharp to what is [ done ] for us. But our investments in the brand premium on the referral consumer cycles should be in a good range. As we speak, for example, in timing like online, the profitability to [ women's ] active in demand is high compared to [indiscernible] and we have different values to clean on to those different positions and the investor community to build in the category and to make sure that we're able to gain share in the [ most ] subcategories. Some might be sort of the [indiscernible], but at no point of time, we hold all our brands to start speaking the same line. As we want to be sharp on [ available] propositions. But in-line with consumer preferabilities, change investment strategies to win in the category. I think that is something that we've also sort of laid out. Another area that we've been consistently working on is product superiority, and we have been actively investing in R&D capabilities, partnerships. And our objective here would be that we build capabilities that all our categories, our Hero products actually beat the competition in blind testing, with key area we are in, our [ Hero ] products are already there. So but it's an onstream journey through derivative investments that we are going to continue [ investing ] in from an organization perspective. From quarter 2 and half 1 perspective, could I think the 2 areas that our outcomes have not sort of gone in line with our expectations. One, of course, is the impact of sales returns and inventory corrections that has come through, which is higher than what we had imagined it to be because as we begin to executing in that [indiscernible]. And that there were different [ offers ] of [indiscernible] of market players which we [ had not taken into ] account, and we've announced [ only ] final partner exercises. The impact has turned out to be higher than what we had imagined it produce, but we did not want to sort of do it half only, we wanted it to be keen execution. And hence, we've been aggressive as well as [ communicative ] in our approach towards that to take a higher impact. I think the second area which our assumptions have not come down in line has been the growth for Mamaearth. We have been analyzing that, like I said, I think the [ model ] that we were trying to execute was very similar to what has worked for our brand in the past. We have recognized that there are a few strong tweaks that we need to make across the mix, from product mix perspective in terms of [ identifying ] what needs to be sort of related to communication perspective, where we had become [indiscernible]. Most importantly, on investment allocation, there are been that we've gone too wide and we need to narrow our focus on growth to EBITDA yield and go deep [indiscernible] in the age SKU scanner. And there is a very strong and active charter of value of work, which is as we speak, we're all sort of part of. And this is actually the #1 priority for us to recognize what all changes need to be made and the action is in form of [indiscernible] absolutely on a category level and this is on speed of scale-up strategy to bring Mamaearth onto a strong growth path. For some time, we kept mentioned this was more because of the base effect particularly in that there are structural changes to our execution plan that we need to do to actually make things work. And with that work, hopefully the brand will actually be able to grow stronger than what we had done in the past. I think we're going to approach it from that perspective. Of course, outside of these 2 things, the young brands continue to demonstrate very heavy growth. Each one of them at H1 and quarter 2 level also have grown at 30% plus, which is a great sign for the company as the scaling become much larger. These are also brands which are not as impacted by the offline transition. That is also sort of need to [ build up ]. In other parts, again, something which is clear issue for us is our focus category strategy because focus categories typically that have actually done very well, our 3 strongest categories where we have the best share in is Meesho also is the strongest in those 2, 3 categories, which is [indiscernible] has actually demonstrated 28% growth in the half year. And we want to make sure that this focus category approach, we are able to extend that to 5, 6 categories over the next 3 or 4 quarters, which we will be able to showcase healthy strong growth across a much larger [ vision profile ] revenue portfolio where our ambition, again, will be become sizeable market share gain. Because I think that's -- [ Rahip ], that's the highlight that we had from our side. We'll be very happy to answer your questions.

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

If it's okay, I have quite a few questions. Can I go ahead and if you can allow me to go for some time. Is that okay?

Sure. Sure.

Sorry. So one thing on Mamaearth as a brand. I heard what you said on the call and we have been transparent today -- my question to you is, is Mamaearth, the problem is, is it the size which is an issue for Mamaearth, you think? Because when you started Mamaearth as a brand, on the other brands, there are some problems in whichever form and shape FMCG companies are also facing. Do you think Mamaearth also the brand has hit a scale which is -- which have become sizable? And because of which the Mamaearth faces the same problem that, let's say, as some of the larger FMCG company brands also face?

Vivek, honestly, I think at least our approach to what it has been not to externalize it and actually we generally believe that as a brand, given the kind of shares that the brand has in some of the subcategories of operations, it still has a long way to go. In this potentially good pace of growth be 57% just is probably a [indiscernible] sustainable growth. I mean, from a long-term perspective, we still believe there's a long way to go for the brand to hit us here. While short-term demand pieces could be there, but we wanted to look at it more structurally and that's the exercise that we've been doing over the last few months in terms of understanding structurally, where will be sort of missing the check, right? And for example, one of the [indiscernible] investment allocation and we realized that we were -- we are allocating an investor, our investments over 10 different categories in Mamaearth, and that was too wide a dispersal of investment which was happening. And our season that we were actually getting suboptimal investments because of that. And -- that's a clear recognition that we have had. And even, we talked last time that from an offline playbook-building perspective, we've got [indiscernible] plus share some of the loadings and help us to see it through that [ film ] or perspective. And we are clearly seeing some of these areas where we could do significantly better and growth is back on track, right? So in my view, I -- we don't want to add all the [indiscernible] that the brand has hit the ceiling. And we are very, very clear and confident that this will become the #1 skin care line in the country or next by 7 years. And we just need to get our game, like to sort of get in there and that's the body of work which we are we actively doing.

Okay. Okay. And on the same lines, your own presentation slide mentioned that Indian consumers shifting from family-oriented to individual-centric consumption, which also means that there is a fragmentation happening in the market and platforms are evolving, et cetera, et cetera. Do you think that -- do you think that because the entry barriers are low Mamaearth as a brand is, in some ways, you've answered partly, but the entry into this category we will keep happening from new tiers, from new brands over time. Does that mean that you'll always be on treadmill and you'll have to keep running and keep launching new products? Or is there also a risk of a bolt-on with the brand because there is something else which has come in the market on the online side, for example?

Vivek, what we are clearly realizing and recognizing is that online and offline are going to be very different volumes, and one-fit-all strategy will not work. To your specific what is the entry barrier, it is the competitive and [indiscernible] industry is higher and which is visible more in the online world and hence, innovation is important when it comes to online business. But when you look at the offline business, which is what we are clearly utilizing and realizing that's still a very heavy [ Hero ] product business. Where most softer players have [ 0 ] product in portfolios in specific partitions and which continue to have large share segments has not happened in the offline space as much as it is happening in the online space. And for Mamaearth where a large part of the group's delta is now supposed to come to the offline consumers, getting that greenlight is very critical as we move forward. And this is where optimal investments on Hero products, getting them the right size, just [ putting ] them in there and focusing very strongly on that is something that we need to dial up. I think we've talked about this in past as well, innovation is something which is table stakes as we move forward in the online ecosystem. I think companies which are not able to do it will not be able to win the online inasmuch. And that is something that we consider our strength and will continue to do that well. The only thing that we talked about and utilized is that the way we want to look at this business is from category-out perspective rather than brand-out perspective. The objective aims to become top 3 share in face washes, #1 in sunscreen, #1 in serums, and getting the top 3 in another couple of categories that we define for ourselves and nationally and largest in online. But in that category, between brands at different points of time might have different sort of roles to play. Like I said, at this point of time, active as the proposition has been in favorable to online [ paying ] consumers, right? And hence using Derma Co and Dr. Sheth's to get share increase of the category, while Mamaearth might be at hold and it might be a more beneficial strategy. But as long as we are gaining category share is what the investment should be allowed to, right, is what we are learning from that whole approach. But innovation to a certain extent in all categories is [ domestic policy ].

Got it. Got it. Pardon me for asking this question directly to you, but because you mentioned about offline, you mentioned about playbook, INR 1,000 crores to INR 2,000 crores and all, you need a different playbook, et cetera. If I just ask you what is your right to win in the offline space where there are FMCG companies which have been around for decades or century. So how would you respond to that?

We are finally almost a couple of decades in almost every category, there is a generation shift that sort of happens from consumers, right? And that generation shift is actual opportunities for brands to sort or take over certain shares in the [indiscernible] generation side. I think, first keep on, there is clearly a lack of brand choice, which has been there in the country in the past. And that is not just for the online consumers, but across the consumer base itself, right? It's the entire consumer landscape where there has been, oh, those are my options, right? And in my view, the right kind of [indiscernible] propositions is something where the [ brand ] do have the right to sort of also build it, and that is one area. Second is, of course, we need to provide products and propositions which are [ emotionally ] and functionally superior compared to what the consumer is using. In [indiscernible] that could be going to be specifically crafting for the Indian consumer. For example, the right to win for [indiscernible] face wash is because it is cleared a small [indiscernible] that a consumer has with the DIY recipe that has existed for centuries in India. And now there is a brand which is offering that and really reduce from a [indiscernible] something that no other international brands is able to offer from the old DNA. And this is something that our values [ break up ]. Hence, we offer that and have the right to win from a product perspective. And yes, similarly in other areas, we believe from a product perspective, we need to have a concept which is a winning concept and not a me-too concept. But also in that concept, deliver a product, like I said, which is a blind test winner in terms of product liability. I think you will see the brand, the product that means the competition actually does better, right? And that is something that you can [ usually ] work out. Of course, the third area would be from a GTN perspective, in which case, at least in the short term, we will need to use a combination of velocity and higher trade margins to get customers to get used to selling in the same the brands. Because for the customer, there is -- it is the retailer in this case, there are 2 key benefits here. One, of course, as a remind the category in [indiscernible], almost all categories are higher by 42%, 45% and then give the customer higher the value per transaction to retain them. And if your margins are higher compared to what we have been selling in the past, for the retailer, there is a much higher opportunity to sort of make better money and especially in this kind of an environment where the overall business is under duress, we are a brand which is able to offer them much better return in terms of sales is something that they would like to prefer. So I think combination of these 3 is what I believe will give us the right to win. And we are not even trying to become another deep distribution retailer [indiscernible]. We just need to get 200,000 direct outlets, right? If we're able to get that, this is where a 3% of sales retail distribution agreements being placed, and that is where almost all of the [ most value ] proposition consumers are going to buy. So for us, we don't need to get millions of stores, we just need to get to 200,000, right? And which, in my view, a focused approach towards the 200,000 that we should be able to demonstrate and build [ up] and might be much higher compared to where somebody is looking at a much deeper, wider in [indiscernible] or distribution. So I think those are the things which we want to work on to make sure that we have a right to win compared to the existing distribution systems.

Got it. That is detailed. And just a couple of more. One is where you are in that cleanup cycle right now. So do you think the bulk of the clean-up is done and now from here on, it is the buildup phase? Or there is still a fear of unknown that we still that we may still have as investors?

With the bulk of the clean-up is done, and this is also a structural change. So I don't know if we should call it clean-up. But we just removed the layer from the distribution, right, in that layer, whatever stock that was holding, we have had to force the impact of that. But from a distribution system perspective and the bulk of the cleanup that we need to do has already been done in quarter 3. And of course, the ramp-up from here onwards is going to be slightly gradual and will take a few quarters because wherever we have, for example, you would define distribution in geographical [indiscernible] cells, right even a set you might have 6 to 8 [indiscernible] cells depending on the size of the city and number of outlets that you're trying to cover. And currently, in about 70% of them, we have been able to deploy distributors. But there are actually 30% of the ward cells where we are still deploying [ distributors ] and that will happen over the next 3 to 4 months. And basis, which then coveraging those operations for a direct coverage we sort of get up. So all of that scale-up will be something that will happen from now onwards. Actually, but all of that scale-up is going to be fairly structural, direct distribution scale-up with a much better quality and consistency of execution.

Okay. And last one, do you think FY '26 is where you start with a clean slate and second half FY '25 still will be somewhat volatile, somewhat weakish? Also in the context of given urban consumption is slowing down, do you think that also adds to the headwind?

Yes, it's not been the best time to sort of from so the general and experiments of good perspective, they clearly seem to be some form or change in terms of consumers buying in tracking which are visible. But we genuinely want to see that as -- and understand that the structural change where we want to figure out what kind of schemes will work in that new environment, what do we focus on and build up. That said, I would agree with you that build up from here on would be slightly more gradual. And during the next exercise, and we will be far more confident of all the [ extensions ] and changes that we are executing as we see.

We'll take our next question from the line of Percy Panthaki from IIFL.

I just wanted to know one data point, if you can give me. For the GT distribution, so you have a DMS, so you know exactly how much the distributor is actually selling onwards to a wholesaler or retailer. So that secondary sales, so to say, what is the growth in that secondary sales for GT this quarter on a Y-o-Y basis?

Percy, honestly, the Y-o-Y number and is not a number that we are still able to also fully track because last year, DMS did not exist in the system. I mean, it's only this calendar year that DMS execution started and has fully shaped at end-of-Q1 basis, which we were able to do some of these actions in Q2. And so actually, that we are from a [ security ] is not available. What is available and what we can share with you is the [ mainstream ] data which continues to be the same data which is listed. And if you look at the mainstream data, in the core categories, which is face wash and shampoo, the brand actually is doing fairly well, it's growing ahead of the other brands, which we are competing with and which is where the brand is actually gaining share as well. So both face wash and shampoo Y-o-Y as well as sequentially, we have gained share. And I think that is probably a better indicator of Y-o-Y secondary group share.

Got it. Sir, in Mamaearth, you said that is the main sort of area of concern in terms of the slowdown. So just wanted to understand, within Mamaearth again, what is the area of concern? So 2, 3 options here. Is it that one particular channel is an issue, whatever be the products being sold through that channel? So I mean, your own digital assets, you have anyway been defocusing and that has been happening for a few quarters now. But despite that, the numbers were not as bad in the previous quarters. So is it a channel issue, either your own digital assets or even aggregators like a Nykaa, Amazon where you are seeing a slowdown? So that is one option. Or as you said, there are some categories like face wash, et cetera, where you're doing very well. So is it that the Mamaearth brand is not resonating in some of the other categories, and those categories are seeing a big decline, bringing down the brand? Or is it some other issue altogether? So within Mamaearth, what is the problem area?

Firstly, let me sort of try and answer the one. So firstly, of course, GT is the biggest sort of contributor to the [ chain ] because that's a case where we've been going under structural transition and the primary bases are of a very different sort of kind. And we now need to, with the [ consumption ], we've not been able to grow over those basis. So that's the biggest delta drop. And the Mamaearth line...

If I may just get some clarification here. This GT is an issue even after you remove the INR 63 crores of sales return or it is because of the INR 63 crores that it is pressuring? Because I'm keeping that as a one-off. So if I even, will that even...

So even after we remove it, GT, of course, the issue reduces significantly but GT still continues to be an issue even after you remove it, right? MT is not, but GT is. And there -- because GT is a sort of inch-by-inch, step-by-step, ounce-by-ounce gains. And if your core distribution infrastructure is not fully in place and that's an area where we've not been able to hence grow the brand. Even in online are from a -- even if you remove B2C, the brands become more flattish now and largely what we have experienced is that there is a proposition skewed more towards actives, which is kind of impacted back to some extent, which we believe might be a more shorter wave over time. Of course, most countries and [ B2Bs ] are [indiscernible] naturals turn out to be a very long-term consistent proposition. The other area which you specifically also touched upon. And actually, there are certain categories which are declining much deeper, which are more focused categories for the brand and which, again, will be a turn that will happen that might happen negatively in the short term. But as we strengthen our investments in some of the focus categories and the growth rate of focus categories become even better. And I think we should be able to net-net overtake any drop that comes from non-focused categories currently because we have not changed our investment allocation as much. That's something that is not showing up.

Got it. Got it. And see, the other brands, excluding Mamaearth, is there any slowdown in the growth rate for those brands this quarter versus what we have seen over the last 3 to 4 quarters? Or those brands are growing at the same rate as what they have been growing over the recent past?

Slight slowdown, relatively flat. But in my mind, apart from potentially the demand play, the other factor is that our largest category is sunscreen. And there is a very high correlation that, that category has with the humidity and range, right, a negative correlation, of course. And that is specifically one category where we've seen last quarter to be not shaping in line with what we sort of imagine it to be a bit better. But otherwise, the overall growth rates are fairly similar, there is a slight impact, 1 or 2 things in Q2 compared to Q1.

Got it. So one last question, if I might be allowed. You said you need different playbook. Do you need a different playbook for media as well? Because as you said, now you have to look at the online and offline business separately. So for driving the offline sales, do you think that you need to pivot media also to offline? Or you think that online advertising can still sort of help with the offline sales as well?

That's a very, very relevant question. It is, again, a body of work, which we've been actively doing. So 2 points. Firstly, yes, we do -- that's one on which should come out of volume that we have done that our media deployment strategy needs to change. The changes are not only towards the type of media but also how we deploy media. Where we were very important seasonality focus instead of which we need to be far more always-on in terms of our kind of beyond these focus categories. But also on media [ very precise ] is where there is a detail where the next morning work that we are doing with our internal data panel as well as NMM data find export agency which is working to get as what part of our media is thesis revenue sales as well as prime consideration. And if such a combination of that will help us come up with a much more effective media strategy that we want to deploy the next few years.

We'll take our next question from the line of Latika Chopra from JPMorgan.

I think a lot of questions were already asked. I want to probably check with you, is there any rethink on your margin admissions of reaching double digits as it seems you need to invest back into reviving growth from Mamaearth?

Latika, in the short term from a quarter to quarter to experiment and get some of the media mix in funnels right. And you might need to skew things a little in there, but are you all being able to get to a high double-digit sales in the medium term for a new [indiscernible] strongly. In fact, another that we also learned from the tech side is that if we're able to build even stronger confidence in a few categories, our ability to generate higher margins in those categories also become stronger and is able to unlock some of these [ Hero ] products and [indiscernible] and that should actually further help the margin goals. So I don't think from a medium-term perspective, that [ really ] changes. Of course, to get to that, the part that we were expecting in earlier, was just continuing on the same path, we'll be able to get there. That path we will need to sort of imagine and work on, which is the work that we're doing, but the destination still continues to remain.

Sure. The second bit was, could you share some color on the most recent brand that we launched stage on the cosmetics side? Is this something which is still in test phase for you? Any thoughts there?

Latika, early days on [indiscernible] brand, right? And there are the big difference between any of our other brands and that brand this is absolutely new categories that we are playing in. So hence, the learnings that we are -- and not just the category but also a different price point, to be honest, is likely in the [indiscernible] kind of price area, not a [ mainstream ] kind of area. I mean and hence, we will actually bring learning a lot in terms of supply chain management, category innovation, media deployment and how that for that brand, that is the brand that scaled in line with our sort of expectations and it's actually is already at a INR 25 crore plus run rate and we believe we can [ completely learn ] [indiscernible] and basically feel stronger in that category and early days, but we have good signs.

That's good to know. And the last bit was on the emerging brands, which grew 30% in the first half. What kind of growth expectations do you anticipate for them over the next 2, 3 years? We did hear you mentioning Mamaearth did see some entire from actives. So it seems like the work you have been doing showed fairly well. Any thoughts on the [ Mamaearth ] portfolio [indiscernible] and maintain a 20%, 30% growth [ back ] given our investment plan...

Ma'am, your voice is breaking. Can you just repeat, please?

Sorry about that.

So Latika, I did -- I got the question. Okay -- or partly. Are you saying what we have on the investing believe we'll be able to grow at least at 20% plus kind of a pace. And actually, we're very confident, right? From a proposition, categories, channels and all of that perspective, not only are the brands growing, but they're also gaining share in their own categories, [ I think that ] The Derma Co especially has been doing phenomenally well and again, has a lot of scope to further growth. And we just entered the face wash category last year and it is doing exceptionally well for a brand, and that's actually where we can see it becoming much larger as a player, but we will sort of work on that. And similarly, for other brands, and there is clearly success that has been seen on 1 or 2 categories for [ intro ] to this and we continue to work on further strengthening and bringing those categories. But as we grow, there are also other some categories which will open up for those brands, which will continue to fuel the growth. So as we stand, feeling fairly confident of being able to grow all of them very well.

We'll take the next question from the line of Manoj Menon from ICICI Securities.

Quite a few clarifications, hopefully, nuanced ones. Just on the playbook, where you said [indiscernible], is it fair to make a statement of hypothesis that, look, you are absolutely clear about what doesn't work, but at the same time, not pretty sure about what will.

You're right, right? I mean, in terms of we know that at least the last sort of investment in mix model was not generated the kind of growth that we needed it to generate. Now what we're trying to do as part of pilots is taking cells like a one state or one subcategory and implementing a very recent kind of a playbook on the same, getting into -- all of that is what is planned starting now into Q4. And then seeing if we generate disproportionate results in that sense. And there are 8 to 10 such pieces, which we want to activate in actions, to actually learn which sells or -- and hence, what kind of strategy works in which part. And like I mentioned, I think we've been working closely with [ Bane ] on this, right? And getting some really insightful hypothesis on the basis of this, which is the best [ route ].

Understood. And moving on to Mamaearth brand, when you think about, let's say, the 3 brand scheme which you have for the brand, look at it. Is it a case you did alluded to, but I just want to double-click on one aspect that just from a marketing point of view, not from a spend point of view or a support point of view which you did allude to. Is it a case of extendability, let's say, all of [ the reasons ] that suggest you went a little too far with the brand? The reason I'm asking this because a I can't think of too many brands which have successfully straddled body, face, hair, et cetera, et cetera.

So that is, of course, one hypothesis, but I don't think we are taking it in the dimension of brand versatility and extendability of [ all ]. What we are taking back in the dilution of that versatility has come at the cost of underfunding core categories and which is something that at this early stage of brand evolution and penetration shouldn't the [ IBD ] have been done, it should have been getting to a certain optimal screen one category side and only then sort of looking at investing in others, right? So while the acceptance in terms of versatility we felt was higher to the team, something like [indiscernible] logistic [ custom ] with INR 5 crores monthly space. So the visibility was there, but the visibility did come at the cost of land in terms of investments. And that has not clearly worked. Visibility cannot sort of come at cost of some of the funding your core and focus categories with the [ beginning of it ]. And in the long term, would the brand be able to demonstrate versatility, and I think we still remain confident on that. But we want to get there only after we have fully funded for and there are multiple examples, and [ Dove skin care ] is an example and a brand which [indiscernible], which have straddled across 5 to 7 subcategories well. But the learning around opening one of the frontiers when you sort of hopefully capture another [indiscernible] revenue for us, and that's what we got.

Understood. Just one last thing on the brand. let's say, versus Mamaearth, which has been a high-growth brand or rather, I would say, in a high-growth phase, even other even -- I mean, excluding the incident this quarter, cetera versus, let's say, a reasonably mature brand of similar size or any other that you want to take. What is the difference, let's say, as a proportion of -- let's say, 100 is a denominator, what is the proportion of, let's say, Hero brand's products -- or other Hero SKUs rather, I stand corrected, for a Mamaearth versus some of the mature ones. I mean, how much gap that would be currently?

So significant, I would say. Most of most other stock SKUs would probably -- especially in the offline kind of environment contributed to 75%, 80% by for Mamaearth, it would be about 40% to 45%. And that's -- and hence, there is that -- that's the opportunity that we see the [ brand reach ].

Understood. And one last thing on the offline piece. Look, I think at least I was addressing investors that, look, when a company moves from online to offline, it is fair to assume that since you start on a zero-based for some incidents to happen. And in a high gross margin industry or a category, it's always better to overstock rather than understock and lose the lifetime value. So that much is clear in my mind that demand planning you learned, right? I mean kind of you started on zero-based and as each year goes but you learn. The only question which came to my mind was, let's say, conversations we had a year or two back about, let's say, you have reasonable online data, which would have probably helped you to get the demand I could forsee far better than somebody starting in offline for the first time.

Sorry, Manoj, we lost you -- sorry?

Am I completely audible?

Yes.

Okay. No, no, what I'm saying was -- I mean, in my chats with investors has been that lets say, demand planning when you are going for the first time into offline, it is natural to have some incidents, et cetera. And again, because you started on a 0 base, right? I mean it's obviously, as each year goes the you learn the offline demand planning, accuracy will improve. The only question there was the assumption, let's say, we had a year or two back was that since you had a reasonable amount of online data, I would have assumed that the, let's say, the demand planning accuracy is far better than, let's say, what actually happened?

Yes, Manoj, that's been an area of learning for us is right. now the when we sort of at least a year back and after that, we course-corrected on our catalog. We did not -- while we had a clear, conscious what-do-we-want-to-focus-on strategy, but we did not limit our distributors of the system from ordering any kind of sort of products which were there in the system in which were listed online. And for a long time, we -- finally, the retailer is also looking at Instagram, the retailer is also sort of checking on things on Amazon and seeing what is it that the brand is right now promoting and what is selling online and they all sort of realize that, that's a competition. And still things kept getting sort of that feedback from retails now that this product is not there, you should stop listing this in my shop as well and this product comes in an ad on it. And that led to [ proliferation ] of the catalog compared to what we planned the catalog to be. And over time, of course, we clearly learned that offline is not going to be a search-and-buy kind of a shopper journey, but it is going to be a journey where the shopper already has some consideration of what they want to buy, they will come in and shop and buy. And hence, [ our theory ] and focus on a few absolutely delivering new displaces and [indiscernible] is a far more effective strategy compared to having many but not being [ delivered in on ]. So I think that's also sort of been a learning, and we've already from system to curtailed our ordering assortment excels now and makes sense some of the [indiscernible].

Understood. One last thing on the distribution. You started with, let's say, substock is sort of a model if you recall correctly, 3 years back. At least anecdotally would have found that probably now you have a lot of [indiscernible] distributors. What I mean by is that people have been in the distribution off-line for a long period family of all the distributors. Let's say of your overall, let's say, distributor base today, how would you say -- I mean, you already achieved where you want to be or that journey still on in terms of the quality of distributor?

That journey is still [ ongoing ] and I think all the new partners that we are deploying our effort, of course, has been that in all the places, really should work with someone who's existing [ path ] to be a distributor, who is doing the right kind of coverage, going to stores and hence good relationship as well as logistics with something which is very natural to them. 8 out of 10, those are the partners that we are finding and working with. And 2 out of 10 we still -- because it's still under company, because a lot of the [ world's ] revenue size is lesser, and we're still in a case where we have to work with probably a Class B for now and get to a better business size, which will attract other classes to work with us. So I think that's a journey that we are on.

And really lastly, and I'll come back in the queue. I saw in the market in August, some INR 100 price points, INR 99, INR 79, INR 49 which is the, let's say, the LUP equivalent for you, right, which you had called out some time back as an opportunity. And also recently, there was a release in exchange about the [ canteen ] stores department. Does these results bake in already -- these are already there? Or these are incremental? I don't think all will grow, but at least the first cut, let's say, this quarter already have gone into the market?

Well, the small-size packs is something that we've started executing since, I think, 2 months back is in when they have are actively gone in the market. And we, of course, need to drive awareness as well on the same. So on November [ open-source ] media, we created an edit, which specifically calls out that pack also and then I would say, the action has started, but very early in terms of the billings.

[Operator Instructions] We'll take our next question from the line of Shrenik B. from PGIM.

My first question was...

Will you pick up your handset please? The audio is not very clear.

Sure. Is it better now?

A little better.

Yes. So just wanted to understand, you highlighted the bulk of the inventory reduction is done. Can we expect the normal growth part to return from 3Q onwards?

Shrenik, I think it will take us a few quarters to get the scale-up of offline going as well as to learn from the experience in sales that we talked about on Mamaearth and execute the same. And like I said, the rest of the portfolio continues to do well, but these two and turning them around over the next few quarters, will be a little bit critical from a long-term growth perspective. Our entire focus is in that. That said, we expect because it will be gradual and not [ stable ] when it comes to sort of getting back on the growth path.

Sure. And also, Varun, can you throw some light on the Dubai case that is ongoing and getting some updates on that? So what is the status as of now on that?

So the case is ongoing. We have a favorable judgment in Indian High Court, but in the first court of first appeal in Dubai, and the judgment has not been as favorable. That said, our lawyers are very confident on the construct of at least it's a simple parting with a distribution partner with the deal notices that has been done. And even the -- in terms of the [ quality ] of our business was not as much as the use has been entities and our documentation is also strong there. So at least from our lawyers, we still continue to get strong confidence that the final decision should be in our favor. We have filed for an appeal in the higher court in Dubai by the high court appeal is already in our favor, and we continue to sort of [ get our confidence there ].

We'll take our next question from the line of Yash from Stallion Asset.

I just wanted to understand on your Slide #13, where you have given the bridge for our inventory correction impact of INR 63 crores. Now I see that because of this, there's almost like a negative 10% EBITDA margin, right? So I mean I'm just trying to understand like how has just about INR 63 crores, which is like about 12% of your Q2 FY '24 revenues, because in Q2 FY '24, you were INR 496 crores and your reported EBITDA margin was 8.1%. But because of this inventory correction impact, I think that whole margin has gone. So why is there such a big loss? I'm just trying to understand that.

Yash, this is Ramanpreet Sohi. So the INR 63 crore inventory impact means this is a [ balance ] running back to the company. So there is an effect, which impacted our primary sales for an extent and hence, we make 70% gross margins. So we used that 70% gross margin on the return on entry. And along with that, given the inventory is coming from the trade, we also provided for certain inventory-related provisions. So that is the inventory, which is coming by a settlement condition, we are adequately provided for. And hence, there's a lot of gross margin, there's a [indiscernible] settlement, since they [ trade post vision ], which is impacting this close to 10.7% impact. probably, from our perspective on EBITDA margin. So that's far as...

I would like to further add to that, like we have shown even if this hadn't happened, the adjusted EBITDA is also lower compared to what our plan was, and that's largely on account of the -- while the overall OpEx planning and some of the other costs, et cetera, I mean on account of the soft supply chain relation, et cetera, has been there. The revenue in the scale that we expected has not shaped up. So that is also one of the reasons why it has been more severe than it should have been. And some of that sort of stabilizing over the next quarters as well, we should be back to the norm and then start growing from there as brand loads come in [indiscernible].

We have participants in the queue, please. We'll take our next question from the line of Manish Poddar from Invesco Asset Management.

I had a couple of question that were already taken care of, given this [ 1Q ] thing. So just the first is, if you look at the last quarter commentary, I think called out was the intake of INR 40 crore impact from this inventory correction and the number is significantly higher. So can you help me understand what is changed that? And the second thing is let's say, the call happened sometime August mid, the last quarter call. And that time I thought we were quite disappointed with this inventory correction, and we were wanting to put steps in place in terms of this project in other interventions. And that time, you were guiding for 20% growth for the rest of the year or just in for this sort of inventory correction. So what really has changed in the last, let's say, 3 months give or take, in terms of -- I've heard the commentary, but I'm still not able to gather what really has gone dramatically wrong or what is really the big concern. And if possible, can you really call out around the brand in Mamaearth, you say if there was a INR 100 crores brand, which has just gone down to like INR 10 crores. Are they capable of that level, that I'm able to I understand and appreciate the situation much better. But otherwise, if you look at the commentary of Q4 and Q1 and now, every quarter, there's a different commentary. So I'm just trying to trying to understand it better. I'm not trying to push you towards a [indiscernible].

Manish, so let's call out the inventory impact of INR 40 crores to INR 50 crores and as you were sort of planning for this. Like I said, the actual impact has been higher largely because all of these, most of our understanding was from the system inventory, which we were seeing just for the super stockers but during the same period. And then we have actually executed this. The -- they've also taken inventory from substockers, which owed them money as well as, to some extent, in certain [ industries ]. And all of that has resulted in a higher net inventory takeback compared to what we had estimated it to be. And from a planning [ implementation ] perspective, and we -- after sort of the communication of this and we realize that the current system was -- had gotten very aware of us wanting to make this transition. And then we started to see significant friction and then wanting to execute the agenda that we needed to execute because of which we were seeing almost a stalemate kind of situation. And earlier we plan, we'll be able to probably save it out and [indiscernible], but we clearly realized that we will need to do this with a certain sense of urgency and otherwise, we will be in those stalemate positions longer than we are expected to be. And I think from a brands perspective, of course, our objective was to first to execute the plans that we had said and hope was that the full plans should result in a different outcome that leads to any growth. And there's been clear recognition and acceptance on the fact that, okay, this is not working and rather than trying to do the same thing and expect different results, we probably need to step back, sharper the saw, look at doing different things because we -- our long-term expectations continue to remain the same. And to get there, you must sort get that. And in line with that, we've made some of those, actually, what we just mentioned. Our view, like I said, still is that for the medium to long term, the path -- the destination continues to remain the same. And this is just sort of a slingshot to course-correct and evolve in line with how things are sort of changing. And things do seem to be changing faster than what we [ assumed ] and [ beat ] in terms of an auction landscape or distribution landscape from TC perspective and the more profitabilities and that we want to make sure that we look at them all together, do the right kind of hypothesis estimate and sort of build a model which will be able to deliver growth, even on a brand like the size of Mamaearth's [ inventory reduction ].

Okay. Yes. So just to understand this is, let's say Mamaearth is INR 100, of this, let's look on half-year basis just to get some sense on its [ charting ] trading, [indiscernible] I'm fine with that also. Just to get some sense in this INR 100, there are bits and pieces which will be growing, right? But the pieces which it would be [indiscernible]. But just to get some clarity, sir, let's say, let's say, if you have to provide the book for, let's say, 4 or 5 broad categories or [ pieces ] in the portfolio, which would be growing versus declining? Just I'm just trying to understand, are there pockets which you need to course-correct or this is broad-based at the brand level? Because I think in the earlier part, you mentioned some bit of intervention in the channel level. I'm just trying to look at more so, let's say, [indiscernible] product level.

Manish, my view on that would be like I'd rather let us look at it and figure out a [ solid ] where we need to solve [ the thing ] to generate the right kind of output, which will help brand growth in both. And I don't think shaving back that level of [ rate ] is going to help with the [indiscernible]. We understand that you're frustrated with the issues there are. But we are, like I said, taking the concentrated approach to figure out how we will resolve these issues and turn around. And in a couple of quarters, I think we are fairly confident we will be able to share in what all are the big changes that we are making and if you make them at scale, to inject to [ waiving ] into it. Let us set it out how to launch it or let's say, the intervention fees are taking and, let's say, the into post at the quarter has come up. So that's the other question was from, but [indiscernible] thank you.

There are no further questions. I now hand the call over to management team for closing comments. Over to you.

So thank you. Thank you so much for asking these questions. I hope we're able to provide clarity on the interventions and changes that we are sort of looking at. And I -- Ghazal and I still continue to be super excited and confident about the opportunity that is ahead of us. And our receivability is a [indiscernible] to actually capture that opportunity here. This is a lot of sharpening the saw kind of a movement for us, where we are clearly correcting certain structural pieces to make sure that we will structurally and sustainably in this space. And we will have them and that we come out with the right kind of answers in the best manner possible to get [ to them ].

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