Honasa Consumer Limited (HONASA) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Honasa Consumer Limited Q1 FY '27 Earnings Conference Call hosted by JM Financial. [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, ma'am.

Hello. Good evening, everyone. Welcome to 1Q FY '27 Earnings Conference Call of Honasa Consumer Limited. Today on the call, we have Mr. Varun Alagh, Co-Founder, Chairman and CEO; Ms. Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Mr. Ramanpreet Sohi, Chief Financial Officer. We will start the conference with prepared remarks from the management, after which we will open the floor for question and answers. Over to you, Mr. Varun.

Hello, everyone. Welcome to the quarterly call for Honasa Consumer for quarter 1 FY '27. We have our team, Raman, Ghazal and team with us, but I'll take you through the performance update quickly, and then we will open the house for question and answers. So, moving forward... Yes. So, starting with the section, which is crystal gazing into the future of Indian beauty. This time, the theme that we have captured is the of fragrances as a category. Fragrance is a very interesting category. Globally, as we speak, fragrance is the largest delta driver as a category in beauty and personal care. It's also one of the largest categories and especially a category which has premiumized very effectively over the last couple of decades. Currently, if you look at India, it is one of the fastest growing categories amongst beauty and personal care. Indian currently penetration for fragrances is just 3% versus 11% globally, which is why if you look at in terms of the BPC market share in India, it's just 3% market share versus 11% for U.S. by penetration. It's also a category which is moving towards e-commerce. 7 years ago, one of the things which was being highlighted was that this category is very about experiences and hence might not move to e-commerce, but we've seen strong move towards e-commerce because of trial packs that have come in this category as well as understanding of notes which have grown amongst consumers. If you look at Indian market also, we have seen a very strong transition from deodorants to fragrances, also over the next decade this is going to be a very interesting category to participate in for BPC players. Which is why in our 5-year journey we had talked about this being one of the category that Honasa will be interested in unlocking as Horizon 2 categories. Moving from the future to present, which is our financial snapshot for quarter 1. We are glad to announce that this has been a great quarter for the organization. The team has done brilliantly well in delivering 32% growth with an EBITDA of almost INR 110 crores and a PAT of INR 90 crores. This has also been driven with volumes 13.5% volume growth is what we have seen, and we continue to be negative working capital and generating almost INR 83 crores of cash this quarter. And it's a quarter which has seen significant improvement in our EBITDA profile over the same quarter last year. As we have mentioned in the past and we continue to hold the 2 large buckets through which we see our business improving our EBITDA profile is the bucket of GP, which improves with higher mix of profitable B2B channels and growth momentum of our core brands as well as our younger brands becoming more profitable. And while all of this happens, absolute A&P spend still continue to grow and which is helping deliver strong growth for the company. So that model that we have talked about is clearly consistently playing out for the company. The second bucket that we have talked about is operating leverage as we scale, we also see OpEx leverage coming in. And in this quarter, we have seen almost 300 to 350 basis points, which is because of mix impact and 100-odd basis points because of operating leverage, but there's also 50 basis points because of seasonality within this quarter for us. Q1 being summer quarter and some of our core categories being face wash and sunscreen, which are also high-margin categories. This quarter usually also is a relatively healthier quarter, so that also is circling there. Of course, thirdly, there is a non-recurring one-time OpEx benefit that we have seen within this quarter. But all in all, the commitment that we have made from a 5-year, which is that we will continue to expand EBITDA margin by 100 to 150 basis points each year to get to that 15% EBITDA margin in 5 years, is something that we are moving towards and something that we stick to. And we have -- of course, 5 quarters, it will vary but we've seen a good movement as we have grown in this model. This is a slide that we have shown in the past 3 quarters as well after the Flipkart settlement process came in. And this is actually the last quarter we'll be sharing this because from next quarter onwards, the base of settlement will become clean, and then we'll be able to -- our reported growth and our like-to-like growth will actually become same then. Currently, there is a slight difference that you see which happens because of the settlement issue. But we have explained this in the past as well, we continue to see this. Next quarter onwards, it should get even. The healthy thing is about us being able to deliver this growth on the back of the stated strategy. The stated strategy was that we will be sharply investing in a few focus categories. And those focus categories will help us drive strong growth. We have seen that focus categories actually have grown 35% plus. And we have also seen growth coming across channels, e-commerce channels, 40% plus growth, general trade and modern trade, all the work that we have put in redesigning our distribution system, the hiring of the right kind of GT teams has actually really helped us in terms of on-ground GT growth, which are now at 40% plus for secondary growth. And in parallel, the strong brand strength and traction that we have been developing is showcased in modern trade offtakes, where we have 40% plus growth in terms of offtakes. And now the contribution of focus categories has also increased to almost 85%, which is in FY 2027. Mamaearth, our core, again, another area which has been an area of focus for us to make sure that our core continues to grow strongly, and this is where the large brand playbook that we have built has been tested. And clearly, every quarter, we have demonstrated it to become better. This is in line with that. Mamaearth accelerated to high teens growth in Q1 FY '27 driven by focus categories. In fact, even within focus categories driven by our hero SKUs, which we have been focusing on. Tea Tree has become our #1 face wash now. Ubtan is again growing in strong double digits. Shampoo is -- Rosemary shampoo is growing in strong double digits and has become INR 100 crores plus ARR ingredient now. And sun care also grew very strongly this season for Mamaearth. So, continuously whatever we are focusing on is where our growths are also coming from. And that just gives us confidence that this is an input-driven growth model. And as long as we keep those inputs intact, it will continue to do well. Of course, this growth would not come in if the consumer love backing the brand would not exist. So, we have worked strongly on product enhancement and communication relevance and that is visible now in growth in brand search. It is visible in our share amongst hand raisers increase. It is visible in our entire brand power score, which is at its ever highest. So, I think all in all, consumer love is visible both in output metrics like revenue and market share, but also input metrics, which are measured from consumer acts. Apart from this, the core is growing strong, but the new is growing stronger. And I think for us, that's in line with both parts of the business are growing strongly. Young brands continue their strong growth at 40% plus. Aqualogica, Dr. Sheth's, BBlunt, Staze, Reginald, all of them have their own niche, their own sort of categories, their own TGs that they're talking to. And we are using them to take higher share of BPC as a category and executing them well, which is visible in the outcome of those. Specifically, the good news is that we now have the second INR 1,000 crore brand within our portfolio. This is a very heartening moment in news for us because we've been able to take our second brand which gives us more confidence that in future, we'll be able to build more INR 1,000 crore brands within this company. The brand recorded its highest-ever brand searches. The Derma Co. has also seen strong traction in offline and modern trades, which is visible in units and shares now. Face cleansers has become a relevant category, more than INR 200 crore run rate now. And the EBITDA profile as the brand grows continues to become better. It's entered teens EBITDA club now. That's a healthy dimension that we continue to see for the brand. BTM Ventures, which we acquired in January, it continues to do well. It has reached an ARR of INR 150 crores in the last quarter. Since we acquired, we've actually grown it almost 100%, and we've also been able to expand the franchise of the brand to Maharashtra, open a new category as well as unlock new channels, which is what our bases of acquisition growth modeling was, and we've actually been able to deliver it. This again shows that the company has the muscle to do inorganic acquisitions and actually scale them faster, which in the long term will continue to be growth driver for Honasa. We have seen strong growth in both general trade and modern trade again in area where we strongly focused, improved our distribution model, improved our execution, got higher quality distributors, reduced our DOH, and all of that is visible in healthy convenience growth, which are coming in retail and as well as the brand strength, like I said, is visible in the modern trade growth. And this has come by gaining share. So almost 350 basis points gain in share in face washes, 160 basis points gain in share in shampoos. All in all, a pretty healthy execution by the offline team, leading to outstanding results. E-commerce channel grows strongly. We have a strong focus continue, and we continue to focus on three areas. We continue to build our focus categories, which are actually grown over 25% in e-commerce. We continue to focus on gaining share in quick commerce. And we continue to focus strongly on gaining share in Tier 2 and beyond markets channels, which are strong there, and which is visible in our overall growth. Our innovation capabilities continues to strengthen our portfolio across brands wherever we are seeing opportunities to serve the consumers better through newer ingredients, newer science, as well as newer formats. The company continues to innovate and bring products that consumers are giving love to. And we will continue to do that. Innovation has been one of our strong edges, and we will make sure that it continues to be. I talked about fragrance at the beginning of this presentation, and that was -- one of the reasons was because we have finally entered this category. And we have talked about this category multiple times in the past, that we like the category. We have been doing work on this category for almost 1.5 years to make sure that we have a differentiated product proposition with which we are able to enter this category. And we finally have launched a brand called Friccin. It's India's first elixir-based brand, which is the highest dosed and the strongest form of perfume that we have brought to India. And these are one of the key needs for Indians, given our temperature, given the sweat profile that we have, as well as external environment that we have, is perfumes which stay longer. And that's what we have optimized this for. The perfumes are clinically tested for 12 hours long stay. The design with which we have launched is actually patented by Honasa. It is again a first-world design that we have brought in fragrances for our collectible packs. And we are very confident that this brand is going to be amazing as we scale it. With that, we come to the last section. As we grow, our community contributions also continue to grow. Our brands continue to plant more trees, teach more kids, give more certifications to women in salons, provide more fresh water as well as do more health checkups. And we will continue to have purposeful growth as a company. With that, I'll come to an end. Thank you so much for listening in. I would love to answer the questions that you have.

[Operator Instructions] Our first question comes from the line of Vivek M. with Jefferies.

Two questions from my side. First is, I know you are a very young company with young brands. But when we look at purely from a Y-o-Y comps, as we head into, let's say, the rest of the year, the comps start to get higher. On that, let's say, revenue base, what is your expectation for growth, let's say, from a 9-month perspective?

Vivek, like we've said from a 5-year view, we have a high teens agenda. We will make sure that we deliver that CAGR over the next 5 years. If you divide that over years, there will be years where we'll do better than that in terms of our overall growth profile and there will be years where we'll be just about that CAGR in terms of our growth profile. And I think this is going to be a year where we'll be better than that CAGR on the growth profile. And the attempt will always be to make sure that we continue to grow faster. Priority will be wherever we can reinvest to grow faster, we do, right? And that's what we're doing. But we stick to our 5-year call out of where we want to get to, which we communicated in our Investor Day in May.

Sure. And just a follow-up, Varun, do you think -- on the Mamaearth side, how do you think the trajectory will be for the rest of the year? You have done an exceptional job in this quarter. And I think Mamaearth for the last few quarters has also done very well. What do you think will be the trajectory? And apologies if the question is more near term, but I just want to know how does it progress for the rest of the year?

You might find my answer again boring. But like we have said Mamaearth from a 5-year perspective will be a double-digit CAGR growth story. And we stick to that story we would make sure we deliver that. Again, it usually never is an average journey over the next 5 years. And there are years which we'll do better in terms of our growth profile and there will be years where we'll be sort of almost at the level that we said. This year, again, even for Mamaearth we will be better than the plan CAGR profile is how it's sort of looking and feeling like the inputs that we are doing, the distribution gains that we are sort of getting are actually serving us in getting to the goal if you want.

Got it. And second question is on your point on the call out in the presentation on gaining share from quick commerce platform. Now 2 parts or 2 things over here. Apologies first if it's a naive question, but what level of data that the platform share with you? When you say gaining share, is it at the category level? Or is it at an overall level, number one? And the second part is with the -- when we look at the -- any of the, let's say, QC apps, we look -- it looks like that the number of brands are like expanding by the day, literally on a daily basis. How is it that you are able to still gain market share given that you are -- there is a traditional FMCG from which market share can be gained, but you yourselves have been ahead in this game. So how are you ensuring -- so 2 parts, if you can answer on both, please?

So we engage with the QC teams and we get understanding of category level shares. So we would track, for example, what is Honasa's share in a face wash, in a sunscreen. of course, this is not a third-party audited data like AC Nielsen, which is why we would not sort of share it in the platform. This is a data that's between customer and partner because of the relationship and we get and we track that data. So the data is at category level and we look at Honasa's share in every category and how we are doing. So that's to the first. The second question, honestly, compared to e-commerce, quick commerce is in our view, especially in our category, a further branded purchase play, which means that if for any category in e-commerce, we see 50%, 60% of the sales coming from branded searches, right in case of quick commerce, it's higher. And hence, we believe that quick commerce people buy -- people are evolved enough to know the brands that they want to buy, especially in our categories and they come searching for the brands. And quick commerce is able to fulfill that in just 10 minutes. So, for us, building the brand strongly in the minds of consumers, which is measured through our brand tracks, which is measured through the searches that we have, it is the strength which is visible in our ability to gain share on quick commerce as well. So as long as our brands continue to get stronger, we will continue to also gain share in quick commerce, right? And we believe that in the long term, Pareto is what will thrive on quick commerce as a format because finally, it's not an unlimited physical space -- digital space play, which is what e-commerce would be. It is actually constrained physical space play. And over time, the best velocity per square feet is what the channel will and brands which do better will continue to do even better over time. So I think that's what our belief is.

Sure. Over time, I do understand. But at this stage, gaining share, I think compliments to you and your team and wishing you all the best.

Thank you.

Our next question comes from the line of Videesha Sheth with AMBIT Capital.

My first question was on the emerging brand portfolio and I'm looking at excluding The Derma Co. So the organic brands or even the inorganic ones, be it BBlunt, Aqualogica, Dr. Sheth's, it's been a little challenging to scale those brands beyond the INR 180 crores, INR 200 crores ARR. And with even Reginald reaching this similar number of INR 150 crores ARR, what are the initiatives that you're undertaking to scale up all of these brands to the next level, maybe INR 50 crores ARR?

So I think the playbook is fairly similar to the playbook that has worked for Mamaearth and Dermo Co. It is about finding a differentiated proposition in a category, doubling down on that proposition and actually gaining share within that category with that proposition. And different brands go through their own different journeys. Mamaearth has gone through its own journey. Dermo Co. has gone through its own journey. And over time, we need to keep reflecting and contextualizing them versus the consumer and how they are evolving. And so each of these brands, the younger brands also as they grow, we are also recognizing what part of the category portfolio mix, what part of the consumer brand mix is where we are seeing the best rights to win. And once that gets recognized, you invest harder in that. And over time, the brand starts to grow much stronger because of that emergence. So I think each of the brands is in that journey. And we just did packaging as well as proposition rehash for Aqualogica to make it far more relevant for Gen Z. It's the first brand which is tested on Gen Z claim, and that has shown very good results in terms of how we're seeing the growth of the brand, right? Similarly, there are other actions on BBlunt, Dr. Sheth's which are planned over the next 6 to 9 months, and you'll see those sharpening happening on the brand. So I think in case of The Dermo Co., of course, we have clearly got some underlying fruits like expansion on marketplaces or expansion into other geographies, which we deploy quickly to grow that. So for each brand, there is a different strategy which is crafted and we test that out and whenever we see green shoots on that, we double down on it. But that's the basic playbook that we execute.

Sure. My second question was on the margin. Now given that you're already at 12.5% normalized EBITDA margin, there could be front ending of the 15% aspiration. But from a long-term basis, how should we think about the balance between growth investment and margin expansion? So at what point of time would you prioritize reinvesting in the younger brands or the brands which are kind of fading out on the growth profile to get that incremental growth?

So honestly, the plan that we have shared as part of our Investor Day, assumes the prioritization of growth over margins. And the commitment that we have made quantity takes into account the new categories or the new brands that we want to build. So it's just that even with that, we know that our core will also continue to grow and the core will continue to become more profitable, allowing us to actually invest in some of these new categories or new brands that we want to build. But overall, still be able to deliver to the goals that we have committed. So the plan that we have shared already assumes that we are going to build young brands into other franchisees. We are going to enter into new categories. So it takes all of that into account.

Our next question comes from the line of Aditya Soman with CLSA.

Thanks for the clarification on sort of the margins on the slide that you have. So just to be sure, about 300 to 350 basis points was sort of organic margin improvement. And then you have another 100 to 150, which is sort of seasonal, which may not recur from 2Q onwards. Is that the right way to look at this number for this year?

I think from a year perspective, like we said, right? I mean while we're saying over 5 years, we'll improve by 500 basis points, right? I mean if you divide it by average that comes out to be 100, but there will be years where we'll do better than that and this is a year where we'll clearly do better than that at least 150 basis points plus, 100 to 200 basis points is what we see us doing over last year and this year. But yes, broadly, that's what we think from a year perspective as well.

That's clear. And secondly, you've had obviously very strong growth in general trade and modern retail. Now we've had this issue in the past where there was sort of an inventory buildup. I see in your slide, you sort of called out that primary and secondary growth are similar. But how confident are you that you don't see any of this sort of issue as we saw before?

Extremely confident. We are now tracking every distributor's inventory and our collections are at highest ever levels. We are tracking cash is the best way to sort of ensure -- we're tracking the health of our distribution system. So we do that very clearly. And our distribution system is on less than 30 days of inventory now. And with our kind of wide assortment, and that's actually very tight to run, but we have been able to sort of achieve that. And all of those factors, in fact, even if you look at retail STRs, our retail STRs are also relatively far healthier than the categories that we operate in. So from all of those angles, we are continuously tracking this and extremely confident that this is being built on a fairly healthy distribution system.

Our next question comes from the line of Jay Doshi with Kotak.

I have a couple of questions. First one in terms of the retail outlet reach of 3 lakhs. Is this for Mamaearth as well as The Derma Co.? If not, then there is The Derma Co. in the journey of offline scale up? And if you could give some color of the INR 1,000 crores ARR, what is the split between online and offline ballpark at this point of time for The Derma Co.? That's question number one. And the second one is some thoughts on Fluence Pharma acquisition. How do you intend to sort of build the nutraceuticals business on that asset? And how ballpark -- what should we expect in the next 12 months in that space?

So on the first question, Jay, the 3 lakh is actually the universe that we are reaching out to according to AC Nielsen. That's largely an intersection of the universe, but largely Mamaearth is what is driving that expansion in terms of distribution. I mean Dermo Co. relatively new in this journey about a year old into sort of getting offline, but has seen very good traction in offline, especially on modern trade and now in GT as well. In general trade, we are already there in close to 50,000 outlets. And from a contribution perspective, latest contribution, 80% still online, 20% is coming from offline, which is GT plus MT for The Derma Co., is how we are seeing that shape. On your second question, I think Honasa Health is the subsidiary that we have created. We are clearly very strategic -- thinking very strategically about this whole space and category. We believe nutrition and wellness is going to be a decadal opportunity like beauty and personal care and we will get to create brands which stand for different niches, different kind of payoffs and appealing to different kind of life stages over the next 10 years in that space, which is why we have chosen to sort of create a separate company around it. Now within that, we will do different propositions. Fluence is one proposition that we announced where we are still in the condition precedent process and the diligence process, which is getting completed. As it completes is when we will sort of be able to talk about it getting integrated. But outside of that as well, we continue to think about potential organic propositions that we can shape over time to take on the category of nutrition and wellness, which we believe is a multi-decadal opportunity in India.

So, is it right to sort of assume that you will probably acquire some more brands in this space over time as you sort of build the portfolio in nutrition and wellness? Or will it be organic from this point?

Like we have always mentioned, Jay, our priority is always to find things that we can do organically. And even in this case, the priority will be to build the R&D capability to do things organically. We have already sort of hire the right kind of capabilities to actually be able to go after that organically. But of course, if we come across good inorganic opportunities where we are buying not only great brands, but also bolstering our capability in this space as an organization, we will continue to be on the lookout for certain.

The next question is from the line of Umang Shah with Banyan Tree Advisors PMS.

Great performance. Sir, my question was why has it been that the fragrance segment has not been cracked by any of the large players in India? What have been the challenges? And the second part to it was, if my memory serves me right, we had done a foray in fragrances through Mamaearth some time back, and we discontinued it. So, what were the learnings from the same?

Yes. So let me answer these 2 questions. Actually, the second question first and probably will answer the first. So, there is a certain world that Mamaearth as a brand operates in. There are certain categories where as a brand, it has the right to win. While when we did our early research, we felt that fragrance was a category where the brand can extend into. But with early reads that we have consumers, we were not happy in terms of the PMF that we achieved. So, we shut down. And those are experiments that we keep doing. But like we have under Mamaearth, not called out that as a core strategy. In fact, none of the brands have that called out a core strategy or focus category because we realized that fragrance brands will need to be fragrance-first if they want to win in the fine fragrance market in the long term. And once you win in fine fragrances markets, then of course, your ability to extend into other fragrant categories like body washes, body lotions, body care actually become relevant, multiple examples exist globally where brands have been able to do that. But starting with fragrances as the core is essential for you to win in fine fragrance market is what we learned from that experiment, which is why we have chosen to launch a specific brands which are targeted at gender-specific fragrances and building brands like that, and picking is where we are sort of starting this journey. It took us time to build the product capabilities internally to be honest. Any category that you want to succeed in, we have clearly learned that our own strong R&D capabilities, understanding the signs of nodes, how do you extend life of fragrances on is also critical, right? So that's the time that we spent over the last 2 years after shutting down that category in Mamaearth and actually building this journey for us. If you look at the India landscape, then yes, probably you won't come across FMCG companies who have done fragrances because there are no pure-play B2C companies if you look at B2C pure-play companies globally, you look at L'Oréal, you look at The Estée Lauder, fragrances is one of the largest business areas that they have as a category. And which is why we believe any pure-play FMCG company needs to have a strong fragrance play over time. It not only gives them entry into a relevant category but also build internal capabilities to do fragrance well in other categories as well. And that's the way we are shaping up.