Honasa Consumer Limited (HONASA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Honasa Consumer Limited Q2 FY '27 Earnings Conference Call hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Pooja Kubadia from JM Financial. Thank you, and over to you.

Hello. Good evening, everybody, and welcome to the 2Q FY '27 Earnings Conference Call of Honasa Consumer Limited. From the management team today, we have 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. We will start the call with opening remarks from Mr. Varun and then proceed with the Q&A session. Over to you, Mr. Varun.

Hi. Thank you. Hi. Good afternoon, everyone. Welcome to the quarterly call for Honasa Consumers. It's been a very good quarter for the company. I'll take you through a few highlights, and then we will open the call for your questions, which we'd love to answer. To start off, I think one of the sections that we have been talking about for the last 10-odd quarters has been the section of I-Beauty. And this quarter, I would like to bring your attention to the category of hair color. We find it to be a very interesting category because this is a category which is undergoing a transition. Hair color for the longest time in India has existed in the dye format. We have seen a very active transitioning which is happening in this category to creme format, which is longer-lasting, less damaging, more conditioning formats that is -- that globally exist in types. In India, penetration of overall hair colors and plus dye segment is actually very low, right, compared to global, where it is 5% plus. We're also a relatively younger population, but that's where the penetration of this category in India is not just growing for the aging population, but what we are clearly seeing is the category is growing also on the back of non-black colors. And hence, a lot of styling colors is something that the category is shaping through. And we also as a company see an angle where consumers are specifically looking for safer toxin-free colors, which in the long term gives opportunity to provide more natural toxin-free options within the category as well. Currently, as Honasa, we play in this category, BBlunt hair color, which is doing really well for us. In the future, we keenly watch the category and see how we can further participate and take share of this category. But yes, this is more from educational purposes. I'll move on to the quarterly results, which is our financial snapshot. Quarter 2 FY '27 is the highest growth quarter since we have gone public in the last 12 quarters. Honasa has grown the net sales at 36% while doubling our EBITDA and holding a solid 12.7% EBITDA profile. Even with the cost pressures of crude, we have been able to manage our gross margin profile at 70% by right kind of cost management as well as price increase measures that we have taken. Most of this growth if you see is driven by volume. Our UVG is at 31.3% and very strong cash generation accompanies all of this growth. In terms of EBITDA improvement, as we have called out in the past and we continue to see that as per plan, and the delta on EBITDA improvement is driven by 2 large components. One is A&P and Mix Efficiencies, where about 250 to 270 basis points delta has come over last year same period. This has come on account of favorable mix towards more profitable channels like offline, QC, et cetera, that we continue to see happening as brands grow. Second is A&P efficiency, be it in our bigger brands like Mamaearth and Derma Co., as well as in our younger brands, we consistently see them becoming more effective in terms of the amount of A&P needed for growth. And of course, operating leverages where we've seen about 110 to 130 basis points EBITDA getting unlocked. This is something which we had planned for and we continue to see shaping in our P&L. The other healthy news also is the quality of this growth. We have clearly talked about almost 6 to 7 quarters back when we had started executing the focus category agenda, that there is a bit of mathematics at play here. There are certain focus categories which at that point contributed to about 70% of our revenue. And they are going to grow faster and the balance 30% are not sort of -- and that math is clearly -- as it is playing up, right, the quality of company growth is also looking better. Now the focus categories contribute to 80% plus. And just focus categories themselves grew more than 40% for the organization. So the strategy that we had deployed continues to pay off. And also the good thing that we see is if you look at the focus categories market, it's still INR 50,000 crores in terms of size. And we are about 5% share within the focus categories market. So a lot more headroom to grow just by focusing on focus categories and continuing to premiumize and gain share is what we can see happening over the next 3 to 5 years. We are gaining traction across channels, right? It's a fairly wide growth. E-commerce has grown 20% plus, general trade, modern trade, both have grown 40% plus. So pretty healthy trajectory of growth leading to the delta that we have generated. Mamaearth continues its high-teens growth trajectory in Q2 as well, and all our efforts in terms of focusing the right kind of media mix, focusing on the right kind of categories as well as the product superiority has actually paid off. And we are seeing this growth translate into market share gains as well. And 140 basis points gain in face wash, 50 basis points gain in shampoo, and these are the core categories where we measure through Nielsen. And hence consumer love continues to improve. We've also seen along with it, our SAH, et cetera, going up. So we know there is more potential to gain share as we improve distribution. Our younger brands accelerated to 45% plus Y-o-Y growth. All our younger brands are present in different additive partitions for us. Aqualogica is focused on Gen Zs with sunscreen moisturizers and mist. Dr. Sheth is focusing on evolved active customers. BBlunt is leading from hair color and styling as a category related to this. Staze is building color cosmetics for Gen Zs, and Reginald Men is now building the men's grooming play for Honasa. And put together, all of these brands continue to demonstrate solid growth trajectory adding to the top line. Derma Co. of course, our second INR 1,000 crore plus brand continues its strong profitable growth trajectory. Consumer love measured by index searches is almost at its ever highest. Now offline is also responding very well to the brand. Nielsen measured market share is already about 1.2%. In face washes, outlet reach has become 65,000. Mamaearth, for your reference is at about 300,000. So good traction seen in just 4 quarters of our focus on offline for this brand and we continue to focus strongly on the brand. We know that this can become a very large outlet for our organization. Honasa continue to build these categories as well as the new categories that we have entered. Offline momentum continues. Our new model, our sharper execution in GT as well as our stronger distribution in MT is clearly showing in terms of results. Our same-store are growing at almost 30% plus same-store growth with more for partition additions within Mamaearth as well as Derma Co. are getting into these stores, right, and gaining the delta. We are also deepening our outlet reach. Overall now, Mamaearth is available at 3.2 lakh outlets, 26% Y-o-Y growth in terms of [ ND ] that we've been able to achieve. And 40% plus Y-o-Y offtake growth in modern trade, which has led to strong share gains as well, both in facewash and in shampoo for our brands across the modern trade players. So overall, all the investments that we've done in structure and team are clearly paying off. And we continue to be an innovation powerhouse. We are understanding what Gen Zs are looking for, what the new generation wants from our brands and innovating in line with that. We did a new collaboration on Mamaearth with Chaayos on Kulhad Chai Tinted Lip Balm, which created a lot of buzz for the brand. We have entered into body washes category with Derma Co. Aqualogica launched Tinted Sun Serums as well as a new mist. BBlunt is focusing on Curl Care, which is a large partition that is getting developed, right, and so on and so forth? We continue to find newer avenues to excite the consumer and remain relevant to them as our brands grow. And while during the mission, we also continue to renovate our current products and strengthen them through product superiority. Before the winter season, we have worked on our moisturizers where especially the rice moisturizer in Mamaearth has come up as a strong winner versus competition in terms of likability and blind testing scores. We have got strong clinicals on our products in Derma Co. as well as Aqualogica. These are communications that we will take out to the consumer to show them how our products are superior to the other products available out there. And by doing all of this, we continue to contribute back to the communities that we operate in. Mamaearth continues to plant trees. Derma Co. continues to add back to kids. BBlunt is teaching more women around hairstyling and skills right? And Dr. Sheth is doing more health checks to these parents, right? And we recently also opened schools for preschoolers where we are helping communities get better future by making a stronger foundation for them in the foundational years and providing better nutrition [indiscernible]. So with that, I would like to thank you for listening to us. Would be more than delighted to answer any questions that you have for us.

[Operator Instructions] We'll take our first question from the line of Videesha Sheth from AMBIT Capital.

Yes. My first question was on the younger brands portfolio. Excluding Derma Co., what would be the growth in the younger brands portfolio? Because when I see the e-com channel, that is -- the growth over there has been restricted to 20-odd percent, and I'm asking because the non-Mamaearth and non-TVC is essentially 100% offline -- online. So what will lift the growth momentum here? And what specifically are you doing on the channel and the 4, 5 brands which exist in this space?

So even excluding Derma Co., the -- all the other younger brands are at 40% plus growth. So quite healthy. We don't necessarily capture all the channel growth, right? There is, of course, D2C channels, which the young brands grow on, which is captured and not an online. Here the growth that we show are just for e-commerce channels and some of that might not be there, right? So -- but excluding Derma Co. also, the young brands are growing at 40% plus.

Okay. Got it. Second, in case of Mamaearth, the base gets higher in the second half. So what gives you the confidence, if not high-teens, then mid-teens growth can hold up here? And how would you attribute that between growth from focus categories or from distribution gains and innovation?

So honestly, Mamaearth growth is coming because of the consumer love and franchise sort of getting stronger. These high-teen growth are actually equally there on both online and offline. It's not offline-driven growth only, right, that we are seeing. Even e-commerce is growing in high-teens for the brand. So that is one thing that gives us confidence, right? Second, of course, what gives us confidence is all the consumer measures that we are measuring, be it in terms of [indiscernible], be it in terms of the brand affinity and brand power, which we showed last time as well, or in terms of the SAH, PDO brand -- for the brand. And all of them are in healthy spaces. In fact, SAH has gone up more than the market share, and which is where there is more opportunity to enhance distribution as well as go stronger within the current store. The Nielsen measured inventory turns have also improved, so stock price have actually gone down further. So even in our current stores, we need to focus more. And most of the delta honestly is right now coming from our current distribution universe, be it in e-commerce or in MT/GT. Distribution delta is there but that's not the driver which is the core driver. 80% of the growth delta is from current stores which is what gives us even more confidence that this will continue in H2 as well.

Got it. And just the last one, focus categories, you mentioned that the contribution has risen by 350, 400-odd basis points. So which of the 6 to 7-odd focus categories are contributing most to the gain? Because the reason I ask this question is that in case of Mamaearth, the face wash and shampoo market shares are rising by, say, 100 or 50-odd basis points, respectively. So is it even the smaller categories that are growing at a similar momentum? That's all from my side.

Yes. Sorry, I don't think the comparison of contribution increase of focus categories versus market share gains is a relevant comparison. But yes, in general, face wash and shampoo are amongst our largest categories. Face wash being the largest, followed by sunscreen, shampoo are the largest categories for the company. In last quarter, face wash is the fastest growing category for us, followed by shampoo, followed by sunscreen and moisturizers, which has also all grown in more than 20%, all of these categories. And so I think overall, it's not that only one category is pulling the weight. It's all four of these categories have had an extremely healthy growth for the company.

[Operator Instructions] We have our next question from the line of [ Naman ] from Shanghvi Family Office.

Hope, I'm audible?

Yes, please go ahead.

So just quickly more from a broader and a macro perspective, right? Just wanted to gain some understanding that how this beauty and personal care market would continue its growth. Like we've had a very healthy run up until from last year to this year, and we've also taken micro steps to be better than the industry. But then how quick or how far do you think that this growth could sustain? And what are the levers that we are tracking incrementally to be sure that the quality of growth is much more robust as compared to what we already witnessed so far. So if you could just throw some light more from a macro perspective.

So we're -- as a country, our per capita beauty spend is in fact one of the lowest in the Asian population. In fact it's lower than Bangladesh also. And there is only one way the per capita spend on this category will go, which is up. And 19:33 workforce is a very large delta that this category seems, right? And we've been seeing clear tailwinds of that also happening. And men's wear just on the category increasing is another large macro adoption trend because of which the category is growing. So honestly, the category growth for the next whole decade, we're extremely confident that it will continue to grow very strongly, given where we are at and given where the rest of the world is, right? Just like, even within similar GDP countries, Indonesia, for example, is 4x per capita BPC consumption compared to India. So forget Korea and U.S., which might be much higher over the world. And even within ASEAN, there are markets which are far ahead of us. So I think there is a lot of inherent growth that we'll continue to see in BPC side. And in our view, quality of growth is measured by brand strength, how you continue to become stronger and preferred choice of consumers, which is something that we track very actively through multiple independent research avenues as well as North Stars like Google searches and some of the other pieces, which gives us confidence that the quality of growth is actually very healthy and transparent. So as long as our brands continue to become stronger and they become the first choice of consumers, we continue to enjoy the benefits of BPC growing as well as gaining share within that.

Next question is from the line of Nihal Mahesh Jham from HSBC.

Congratulations on the strong performance. I was just looking for a couple of data points to start with that, if you could give the growth of the younger brands ex of Reginald, so just looking at the core growth. And second is the ARR for Derma Co. to start with.

Yes. Ex of Reginald, younger brands are also 40% plus growth. ARR of Derma Co., we disclosed last time, it continues to be in that INR 1,000 crore plus...

Understood. Want to understand better on the margin bit. Our A&P spends are sort of similar as a percentage of sales versus last year. So is it that the sales commission, which is generally paid on third-party platforms that is reducing because we are seeing a higher share of sales through the B2B quick commerce and offline trade and that is sort of the key driver of the margin improvement that it's a shift towards better channel mix rather than necessarily calling it operating leverage?

Yes. A part of the A&P improvement leverage that we've talked about is on account of what you just mentioned, so, which is where the channel mix change and it is showing in other expenses.

Got that. Just one final thing, Varun, is that obviously, for this year, you've kept mentioning about the fact that you keep targeting 150 to 200 basis points. I know Q1 had certain one-offs, but Q2 that way is sort of a clean improvement, and it is obviously trending much higher than that. As you look into the second half, I mean, is there any reason to remain cautious to still maintain that guidance? Or maybe there is a case that you are being conservative and you can look at operating that?

I mean I have not seen any benefits of being too aggressive. Conservative probably is the better place to be. But yes, structurally, business has done better. And what you're seeing now that level for us seems to be a foundation that we are very comfortable in maintaining.