Ladies and gentlemen, good day and welcome to Q2 and H1 FY2025 earnings conference call of Honasa Consumer Limited, hosted by JM Financial Institutional Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and zero on your touch-tone phone. 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 welcome you all to Honasa Consumer Limited's Q2 FY2025 earnings conference call. From the management side, we have Mr. Varun Alagh, Co-founder, Chairman, and CEO of the company. Ms. Ghazal Alagh, Co-founder and Chief Innovation Officer, and Mr. Raman 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.
Hi. Thank you, Mehul. Hello everyone. Welcome to the quarterly performance call for Honasa Consumer Limited. I just had some context and highlights. We have released, of course, the results of the presentation alongside. I'll quickly recap some of the pieces that we have mentioned in the presentation, and post which we will open up for question- and- answers that you would have. I think if you look at the presentation, we've started by sharing the fact that we acknowledge the fact that the environment, consumer behavior, and distribution are changing quite fast, especially in the Indian context. Some of these trends were already happening.
Some of these trends, like the way media landscape has changed, the way consumer proclivity and propositions have changed, or how quick commerce is impacting consumer behaviors, are things that we are also seeing as relatively new changes to which one's model and thinking would, of course, need to evolve. And in light of that, we've also talked about the four or five key areas which are areas that we are focusing on, where we believe we need to rethink some of the strategies and calibrate and evolve them in line with how we've seen the landscape evolve. Of course, the first one is this whole amazing brand-building playbook that we've built out. The brand-building playbook has done really well for us in terms of scaling brands from the INR 0 to INR 1,000 crore journey. We have seen that happen for the other brands that we've built as well.
But the INR 1,000-INR 2,000 crore journey, it seems that we were trying to deploy the same playbooks. Over the last few quarters, all our sort of data seems to be pointing to the fact that we need to evolve those playbooks in line with how to win with the consumer who's buying offline and the kind of media that they're sort of looking at and the kind of distribution that is required to get that done. And a lot of work is happening on that front. The other learning that we've had, which is something that we've already started executing here also, is that winning in media and personal care, which is a complex sort of landscape of over 24 subcategories, will happen a few categories at a time.
We need to dominate in those categories and then keep adding more categories where we become leaders and dominate them. The whole strategy of House of Brands will help us do that. But that would also mean we need to focus investment, innovation, R&D, etc., far more on those categories rather than going too wide. In a phased approach, look at some new wins in GTs. A third area of learning which we are also implementing as part of Project Neev has been the entire area of offline GT. This is an area where we clearly recognize that this is something which needs to be relooked as the need and scale of your business over time changes. Even if I was to go back, I don't think we would be able to start with a different kind of distribution system.
Because at that point, with zero business and no regional supply chain availability, that was the best system that worked for us. But we clearly, now when we look at it from the next four to five or five year horizons where multiple of our brands need to go through this funnel, we clearly feel that the distribution system required for that is different. And that's the area where we've been dedicatedly working on. As we build this out, as we evolve, probably in other forms down the line, we will need to again look at the same from a next five years' business needs perspective. And that is something which is an evolving muscle rather than a straight line skill that we have required. The other area which we clearly have learned and are executing is brands need to remain sharp to what they stand for.
But our investments in the brands, depending upon the different consumer cycles, should and would vary. As we speak, for example, in a channel like online, the proclivity towards active and derma brands is far higher compared to Mamaearth. And we have different brands to play onto those different propositions. And we need to invest accordingly to win in the category and to make sure that we're able to gain share in the category in the most effective way. While offline might be a different sort of consumer proclivity. But at no point of time, we want all our brands to start speaking the same language. We want them to be sharp on their own propositions, but in line with consumer proclivities, change investment strategies to win in the categories. I think that is something that we've also sort of realized.
And 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 in all our focus categories, our hero products actually beat the competition in blind testing. And that's an area where a few of our products are already there. But it's a constant journey through dedicated investment that we are going to continue to be on from an organizational perspective. Now, from quarter two and half one perspective, I think there are two areas where we recognize that our outcomes have not sort of gone in line with our expectations. One, of course, is the impact of the sales return and the inventory correction. That has come through, which is higher than what we had imagined it to be.
Because as we went into executing that, we clearly realized that there were pockets of sub-distributors or end market credits which we had not taken into account. And these are now full and final parking exercises. The impact has turned out to be higher than what we had imagined it to be. But we did not want to sort of do it half-heartedly. We wanted it to be a keen execution. And hence, we've been aggressive as well as deliberative in our approach towards that, to take a higher impact. I think the second area where our assumptions have not panned out 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 the brand in the past.
We have recognized that there are a few strong tweaks that we need to make across the mix from a product mix perspective in terms of a scale sizing that needs to be sort of promoted to communication perspective, where we need to become sharp, and to even, most importantly, our investment allocation, where I think our learning is that we've gone too wide and we need to narrow our focus onto a few categories and go deep within them with our core SKUs, and there is a very strong and active charter of body of work, which is, as we speak, we're all sort of part of, and this is absolutely the number one priority for us to recognize what all changes need to be made, and action then in form of pilots regionally or at category levels.
And this is those learnings that have scaled up strategy to bring Mamaearth back to a strong growth path. For some time, we kept sort of imagining this was more because of the base effect in the brand. But we clearly recognize that there are structural changes to our execution plan that we need to do to actually make things work. And if they start working, hopefully, the brand will actually be able to grow stronger than what we imagined it in the past. I think we are going to approach it from that perspective. Of course, outside of these two things, the young brands continue to demonstrate very heavy growth. Each one of them at H1 and quarter two level also have grown at 30% plus, which is a great sign for the company as they scale and become much larger.
These are also brands which are not as impacted by the offline transition. That is also sort of visible there. In other parts, again, something which is clearly showing example for us is our focus category strategy. Because our focus categories put together have actually done very well. Our three strongest categories where we have the best shares and addition also is the strongest in those two categories, which is face cleansing, serum, and sunscreen have actually demonstrated 28% growth in half one, and we want to make sure that this focus category approach, we are able to extend that to five to six categories over the next three to four quarters, with which we will be able to showcase healthy, strong growth across a much larger contribution of our revenue portfolio, where our ambition again will be to become sizable market share.
I think broadly, that's the highlight that we had from our side. We'd be more than happy to answer your questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to only use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We'll take a first question from the line of Vivek M from Jefferies. Please go ahead.
Hi, Varun and team. Varun, 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. Sorry.
So Varun, 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 it the size which is an issue for Mamaearth, you think? Because when you started Mamaearth as a brand or the other brands, there are some problems in whichever form and shape FMCG companies are also facing. Do you think Mamaearth also as a brand has hit a scale which has become sizable and because of which Mamaearth faces the same problem that, let's say, some of the larger FMCG company brands also face?
Vivek, honestly, I think at least our approach towards this has been not to externalize it. Actually, we genuinely believe that as a brand, given the kind of shares that the brand has in some of the subcategories of operation, it still has a long way to go. Hence, potentially, would the pace of growth be 15%-20%? Yes, that is probably an area where the pace of growth can be lower. Sustainable growth from a long-term perspective, we still believe there is a long way to go for the brand to hit a ceiling. While short-term demand pieces could be there, we wanted to look at it more structurally. That's the exercise that we've been doing over the last three or four months in terms of understanding structurally where could we be sort of missing the trick.
And for example, one of the areas which I touched upon, which is investment allocation, we realized that we were allocating our investments over 10 different categories in Mamaearth. And that was too wide a dispersion of investment which was happening. And our core SKUs and categories were actually getting suboptimal investments because of that. And that's a clear recognition that we have had. And even as we talked last time that from an offline playbook building perspective, we've got Bain on board to also share some of these learnings and help us see it through that framework perspective. And we have clearly seen some of these areas where we could do significantly better and get growth back on track. So in my view, I wouldn't want to add all of these that the brand is interested in.
And we are very, very clear and confident that this will become the number one skincare brand in the country over the next five, seven years. And we just need to get our game right to sort of get it there. And that's the body of work which we are actively doing.
Okay. Okay. And on the same lines, your own presentation slide mentions that Indian consumers are shifting from family-oriented to individual-centric consumption, which also means that there is a fragmentation happening in the market and platforms are evolving, etc., etc. Do you think that because the entry barriers are low, Mamaearth as a brand is, in some ways, you have answered partly, but the entry into this category will keep happening from new players, 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 being bored with a 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 ball games. And one-size-fits-all strategy will not work. To your specific, yes, the entry barriers and hence the competitive intensity in the category is higher, 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 recognizing and realizing, that's still a very heavy hero product business, where most of the players have hero products and portfolios in specific categories which continue to have large shares. Segmentation has not happened in the offline space as much as it is happening in the online space. For Mamaearth, where a large part of the growth delta is now supposed to come from the offline consumers, getting that game right is very critical as we move forward. This is where optimal investments on hero products, getting them in the right sizes, distributing them in the places, and focusing very strongly on that is something that we need to dial up. I think we've talked about this in the 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 innovate will be sort of not be able to win the online game as much. That is something that we consider our strength, and we continue to do that well. The only thing that we talked about and recognized is that the way we want to look at this business is from category-out perspective rather than brand-out perspective. The objective is to become top three in share in face washes, number one in sunscreen, number one in serums, and get into top three in another couple of categories that we defined for ourselves, nationally, and not just in online. In that category, different brands at different points of time might have different sort of roles to play.
Like I said, at this point of time, Active as a Proposition has been in favor of the online-type consumers. Hence, using The Derma Co and Dr. Sheth's to get share in face wash as a category, while Mamaearth might be at hold, and might be a more beneficial strategy. But as long as we are gaining category shares, and is what the investment should be aligned to, is what we are learning from that whole approach. Innovation, to a certain extent, in all categories is a table stake for all companies.
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- INR 2,000 crores and all, you need a different playbook, etc. 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 centuries, how would you respond to that?
Vivek, finally, almost every couple of decades, in almost every category, there is a generation shift that sort of happens from consumers. And that generation shift is actually an opportunity for brands to sort of take ownership and share in the usage of those generations. I think, firstly, 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 offline consumers as well. It's the entire consumer landscape where there has been a growth of brand options. And in my view, right kind of brands, built on right propositions, is something where there is.
New brands have the right to sort of win there. 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 certain cases, that could be because we are specifically crafting for the Indian consumers. For example, the right to win for an Ubtan Face Wash in its space is because there is clear, strong association and credibility that the consumer has with the DIY recipe that has existed for centuries in India. And now there is a brand which is offering that in a great easy-to-use format. And this is something that no other international brand is able to offer from their core DNA. And this is something that our brand is built on.
Hence, we need to offer that and have the right to win from a product perspective. 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 likability. That even if you remove the brand, the product against competition actually does better. And that's something that people pursue upon. Of course, the third area would be from a GTM 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 and listening to brands. Because for the customer, which is the retailer in this case, there are two key benefits here.
One, of course, as you premiumize the category in RESPs, almost all categories are higher by 20%-25%. And that gives the customer higher bill value per transaction, the retailer. And if your margins are higher compared to what they've 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 their overall business is under duress, a brand which is able to offer them much better return on unit of sales is something that they would like to prefer. So I think combination of these three is what I believe will give us the right to win. And we are not even trying to become another deep distribution niche as an investor. We just need to get 200,000 direct outlets right.
If we are able to get that, this is where 80% of the weighted distribution game is being played. And that is where almost all of the Marsco and proposition consumers are going to buy. So for us, we don't need to get millions of stores right. We just need to get the 200,000 right. And which, in my view, focused approach towards that 200,000, that we should be able to demonstrate and build for, might be much higher compared to where someone is looking at a much deeper, wider kind of numeric 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 was detailed. And just a couple of more, Varun. One is where you are in that cleanup cycle right now. So do you think the bulk of the cleanup is done and now from here on, it's the build-up phase, or there is still a fear of unknown that you still or that you may still have as investors?
Vivek, the bulk of the cleanup is done. This is also a structural change. I don't know if we should call it cleanup, but we just removed the layer from the distribution. That layer, whatever stock that was holding, we have had to, of course, take the impact of that. From a distribution system perspective, the bulk of the cleanup that we need to do has already been done in quarter two. Of course, the ramp-up from here onwards is going to be slightly gradual. It will take a few quarters because wherever we have, for example, you would define distribution in geographical ward cells. Even a city might have six to eight ward cells depending upon the size of the city and number of outlets that you're trying to cover.
Currently, in about 70% of them, we have been able to deploy distributors, but there are at least 30% of the ward cells where we are still deploying distributors, and that will happen over the next three-to-four months, and based on that the coverage in those outlets in the form of direct coverage will sort of get built up, so all of that scale-up will be something that will happen from now onwards gradually, but all of that scale-up is going to be fairly structural direct distribution scale-up with a much better quality and transparency of execution.
Okay. And last one, do you think FY 2026 is where you start with a clean slate and second half FY 2025 still will be somewhat volatile, somewhat weakish? Also, in the context of urban consumption slowing down, do you think that also adds to the headwind?
Yeah, it's not been the best time to sort of from seeing the genuine tests and experiments of outputs perspective. There clearly seem to be some form or change in terms of consumers buying in trackings which are visible. But we genuinely want to see that as an understanding that of a structural change. We want to figure out what kind of things will work in that new environment, what do we focus on and build on. That said, I would agree with you that the build-up from here on would be slightly more gradual, and getting into the next exercise, we should be far more confident of all the experiments and changes that we are executing as we speak.
Got it. Varun and team, wishing you all the best, and hopefully, we'll see a recovery soon. Thanks.
Thank you.
Thank you.
We'll take our next question from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, Varun and team. I just wanted to know one data point if you can give me. For the GT distribution, see, 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 YOY basis?
Hi, Percy. Honestly, the YOY number is not a number that we are ourselves able to also fully track because last year, DMS did not exist in the system, and it's only this calendar year that DMS execution started and has fully shaped it end of Q1 basis, which we were able to do some of these actions in Q2, and so actually, that area from a secondary is not available. What is available and what we can share with you is the Nielsen data, which continues to be the same panel which existed, and if you look at the Nielsen data in the core categories, which is face wash and shampoo, the brand actually is growing 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.
Both face wash and shampoo, YOY, as well as sequentially, we have gained share. I think that is probably a better indicator of YOY secondary groups.
Got it. Got it. So 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 two, three 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 anyways 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 Nykaa or Amazon, where you are seeing a slowdown? So that is one option. Or as you said, there are some categories like face wash, etc., where you are 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?
Let me sort of try and answer this one. So firstly, of course, GT is the biggest sort of contributor to the drop in the chain because that's a place 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 that transition, we've not been able to grow those bases. So that's the biggest delta drop.
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 remove that, even then the GT is an issue, is it?
So even after we remove it, GT, of course, the issue reduces significantly. But GT still continues to be an issue even after we remove it. MT is not, but GT is. And because GT is a sort of inch by inch, step by step, outlet by outlet game. And if your core distribution infrastructure is not fully in place, then that's an area where we've not been able to hence grow the brand. And even in online, even if you remove D2C, the brands become more flattish now. And largely, what we have experienced is that there is a proposition skew more towards actives, which has kind of impacted that to some extent, which we believe might be a more short-term wave over time. Of course, most countries and geographies that we've seen, natural turns out to be a very long-term consistent proposition.
The other area, which you specifically also touched upon, actually, there are certain categories which are declining much deeper, which are not focus categories for the brand, which again will be a turn that will happen that might impact negatively in the short term. As we further strengthen our investments in some of the focus categories, and the growth rate of focus categories becomes even better, I think we should be able to net overtake any drop that comes from non-focus 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 three to four quarters, or those brands are growing at the same rate as what they have been growing over the recent past?
Slight slowdown relatively is there. 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 humidity and rain, a negative correlation, of course. And that is specifically one category where we've seen last quarter to be more shaping in line with what we sort of imagine it to be with the weather. But otherwise, the overall growth rates are fairly similar. There is a slight impact of these two things in the short term compared to Q1.
Got it. Got it. And 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 do you think that online advertising can still sort of help with the offline sales as well?
That's a very relevant question. This is, again, a body of work which we've been actively doing. So two parts. Firstly, yes, we do. That's one learning which has come out of the body of work 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 in-person, seasonality-focused, instead of which we need to be far more always on in terms of our set of media on these focus categories. But also on media vehicle choices, where there is a detailed media mix modeling work that we are doing with our internal data science team, as well as data science expert agencies, which is working to tell us what part of our media is the strongest in sales as well as brand consideration.
Through searches and combination of that, will help us come up with a much more effective media strategy that we want to deploy getting into the next year.
Thanks. Thanks a lot for your patient answers. Varun, all the best.
Thank you.
Thank you, Percy.
We'll take our next question from the line of Latika Chopra from JP Morgan. Please go ahead.
Hi. Thank you. Hi, Varun. I think a lot of questions were already asked. I want to probably check with you, is there any rethink on your margin ambitions of reaching double digits as it seems you need to invest back into reviving growth for Mamaearth?
Latika, while in the short term, from a quarter-to-quarter basis, to experiment and get some of these media mixing funnels right, we might need to skew things a little here and there. But our view on being able to get to high double digits in the medium term for any companies to hold strongly and impact, one of the things that we've also learned from this exercise is that if we're able to build even stronger dominance in a few categories, our ability to generate higher margins in those categories also becomes stronger. And if we're able to unlock some of these hero products in GTs, that should actually further help the margins. So I don't think from a medium-term perspective that we change.
And of course, to get to that, the path that we were expecting an earlier, our view was just continuing on the same path we'll be able to get there. And that path we will need to re-imagine and work on, which is the work that we're doing. But the destination still continues to remain the same.
Sure. The second bit was, could you share some color on the most recent brand that you launched, Staze, on the cosmetic side? Is this something which is still in the test phase for you? Any thoughts there?
I mean, Latika, fairly early days on that brand. The big difference between any of our other brands and that brand is that this is an absolutely new category that we are playing in. And hence, the learnings that we are and not just a category, but also a different price point, to be honest, just slightly in the mass club kind of price area, not a mass premium kind of price area. And hence, we have actually been learning a lot in terms of supply chain management, category innovation, media deployment, and how to do that for that brand. And that's the brand is scaled in line with our sort of expectations. And it actually is already at a INR 25 crore plus run rate area. And we believe we will sort of continue to learn on it. And our basics even stronger to win in that category.
Early days, but yes, good signs.
That's good to know. And the last bit was on these emerging brands which grew 30% in the first half. What kind of growth expectations do you anticipate for them over the next two, three years? We did hear you mentioning Mamaearth did see some impact from actives. So it seems like the Mamaearth company should be doing fairly well. Any thoughts on this portfolio and maintain a 20%-30% kind of growth band given our investment plan? Latika, your voice is breaking. Can you just repeat, please? Sorry about that.
Sorry, Latika, I didn't get the question.
Okay. Thank you.
So you're saying what kind of a view do we have on the younger emerging brands? Do you believe they'll be able to grow at least a 20% plus kind of a pace? And actually, we're very confident. From propositions, categories, channels, and all of that perspective, not only are the brands growing, but they're also gaining share in their own categories of interest. And The Derma Co especially has been doing phenomenally well and, again, has a lot of scope to further grow. And we just entered the face wash category last year, and it is doing exceptionally well for a brand. And that's a category where we can see it becoming much larger as a play. And we'll continue to sort of work on that. And similarly for other brands, there is clearly success that has been seen in one or two categories for each of those.
We continue to work on further strengthening and bringing those categories. But as they grow, there are also other subcategories 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.
Thank you so much, Varun and Sri. All the best.
Thank you. We'll take our next question from the line of Manoj Menon from ICICI Securities. Please go ahead.
Hi, team. Quite a few clarifications, hopefully nuanced ones. Just on the playbook revisit team, 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 very sure about what will?
You're right. I mean, in terms of we know that at least the last sort of media mix model was not generating 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 one state or one subcategory and implementing a very different kind of playbook on the same, getting into all of that is working plan starting now and looking forward. Then seeing if it generates disproportionate results in that cell. There are eight to 10 such pieces which we want to activate in action to actually learn which cell sort of and hence what kind of strategy works in which part.
And like I mentioned, I think we've been working closely with Bain on this, and we're getting some really insightful hypotheses on the basis of which these tests are being looked at.
Understood. Thank you. And moving on to Mamaearth as a brand, let's think about, let's say, the three brand keys you have for the brand look at it. Is it a case of you did allude it 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, orderly stretch? And is it that you have went a little too far with the brand? The reason I'm asking is because at least I can't think of too many brands which have successfully straddled body, face, hair, etc., etc.
So that is, of course, one hypothesis. But I don't think we are taking it in the dimension of brand versatility and extendability as well. What we are taking that in the dimension of is that versatility has come at the cost of underfunding core categories, which is something that at this early stage of brand evolution and penetrations shouldn't ideally have been done. It should have been getting to a certain optimal scale in one category, and only then sort of looking at investing in others. So while the acceptance in terms of versatility we felt was pretty high to the feeling that even something like a Mamaearth lipstick does some INR 4- INR 5 crore monthly business case. So the versatility was there, but the versatility comes at the cost of going wide in terms of investments. And that has not clearly worked.
Versatility cannot sort of come at cost of suboptimally funding your core and focus categories is the big lesson. 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 there are multiple examples. I mean, Dove can be a good example, like Dual Manjak, even a younger brand like CeraVe, which have straddled across five-to-seven subcategories then. But the learning around opening one frontier when you've sort of not fully captured another is a learning process. And that's what we're going to take on.
Understood. Just one last thing on the brand. Let's say versus Mamaearth, which has been a high-growth brand or other, I would say, in high-growth phase, even otherwise, I mean, excluding the incident this quarter, etc., 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 the denominator? What is the proportion of, let's say, hero brands or other hero SKUs, rather, sounds correct, for a Mamaearth versus some of the mature ones? I mean, how much gap that would be currently?
Oh, significant. I would say most, for most others, top 10 SKUs would probably, especially in the offline kind of environment, contribute to 75%-80%. While for Mamaearth, it will be about 40%-45%. And hence, there is that's a clear opportunity that we see the brand needs to focus on.
Understood. Thank you. And one last thing on the offline piece. Look, I think at least I was advising investors that, look, when a company moves from online to offline, it is fair to assume that since you start on a zero base for some instances 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 learn, right? I mean, kind of you started on a zero base, and as each year goes by, you learn.
The only question which came to my mind was, let's say, a conversation 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 accuracy far better than somebody starting in offline for the first time.
Sorry, Manoj.
Oh, hello?
Sorry?
Completely yours.
Yeah, please.
Okay. No, no. What I was saying was, I mean, my chats with investors have been that, look, let's say, demand planning, when you're going for the first time into offline, it is natural to have some incidents, etc. And again, because you started on a zero base, right? I mean, obviously, as each year goes by, 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.
Yeah, Manoj. I mean, that's been an area of learning for us as well. Now, when we sort of, at least a year back, and after that, we, of 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, which they were listed in online, and for a long time, 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.
Our sales teams kept getting sort of that feedback from retailers, "No, no, this product is not there. You should stock this in my shop as well. And this product comes in an add-on." That led to proliferation of the catalog compared to what we were planning the catalog to be. 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 sort of buy it. Hence, salient and focus on a few in absolutely relevant needs spaces and payoff spaces is a far more effective strategy compared to having many but not being salient in one. I think that's also sort of been a learning.
We've already systematically curtailed our ordering assortment itself now based on some of the data and science.
Understood. One last thing on the distribution. You started with, let's say, super stockist sort of a model, if I recall correctly, three years back. At least anecdotally, what I found that probably now you have a lot of Class A distributors. What I mean by that is that people have been in the distribution offline for a long period of time and evolved distributors. Let's say of your overall, let's say, distributor base today, how do you say, I mean, you already achieved where you want to be, or that journey is still on in terms of the quality of distributors?
That journey is still ongoing, right? I think all the new partners that we are deploying our effort, of course, has been that in all the places, we should work with someone who's a Class A strategic distributor, who's doing the right kind of coverage, going to those stores. And hence, both relationship as well as logistics-wise, that's something which is very natural to them. In eight out of 10 cases, those are the partners that we are finding and working with. And in two out of 10, we still, because it's still a younger company, because in a lot of these wards, the revenue size is lesser. And we're still in a place where we have to work with probably a Class B for now and get to a better business size which will attract a Class A to work with us.
So I think that's a journey that we're on.
And very lastly, and I'll come back into 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 the exchange about the Canteen Stores Department. Does these results baked in already? I mean, these are already there, or these are incremental? I know that all will grow, but at least the first cut, let's say, this quarter, all this has gone into the market?
Manoj, the small-sized packs, right, is something that we've started executing since, I think, two months back, and then they've actively gone in the market. And we now, of course, need to drive awareness as well on the same. So in November, on Facebook media, we created an ad which specifically calls out that pack also. And hence, I would say the action has started, but very early in terms of where it is.
Thank you so much. Good luck and God bless. Thank you. Thank you, guys. Thank you.
Thank you.
Thank you, sir.
Ladies and gentlemen, we request you to restrict to one question at a time, please. We'll take our next question from the line of Shrenik B from PGIM. Please go ahead.
Thanks for the opportunity. My first question was.
Shrenik, can you raise your hands a bit more, please? Your audio is not very clear.
Sure. Is it better now?
A little better. Please go ahead.
Yeah. So just wanted to understand, as you highlighted, the bulk of the remedial action is done when. Can we expect the normal growth path 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 experiments themselves 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 critical from a long-term growth perspective our entire focus in that. And that said, we expect the recovery to be gradual and not sudden when it comes to sort of getting back on the growth path that we're talking about.
Sure. Also, Varun, can you throw some light on the Dubai case that is ongoing, 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, the judgment has not been as favorable. And that said, our lawyers are very confident on the construct of our case. It's a simple parting with a distribution partner with the due notices that has been done. And even in terms of the quantum of business, it was not as large as the damages has been assigned to be. 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 High Court in Dubai, right, while the High Court judgment is already in our favor. And we continue to sort of discuss that as well.
Thank you so much. That's it from me, sir.
Thank you. We'll take our next question from the line of Yash from Stallion Asset. Please go ahead.
Hi. Thanks for the opportunity. So I just wanted to understand on your slide number 13, where you have given the bridge for your 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'm just trying to understand how has just about INR 63 crores, which is like about 12% of your Q2 FY2024 revenues, because in Q2 FY2024, you had 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.
Yeah. Hi, this is Raman saying because I'm the head of. So the INR 63 crore inventory impact means this is returns coming back to the company. So there's an effect. It's impacted our primary sales for an extent, and hence we make 70% gross margin. So we lose that 70% gross margin on the return inventory. And along with that, given that inventory is coming from the trade, we've also provided for certain inventory-related provisions. So that if there is inventory which is coming back, which is in a certain condition, we are adequately provided for. And hence, so there's a lot of gross margin, there is an inventory provision, and also we provide certain trade cost-related provision on top of it, which is impacting this close to 10.7% impact from an EBITDA perspective on our EBITDA margin. So that's what it is.
I would like to further add to that, like we have shown, even if this wouldn't have 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, etc., on account of the short-term supply chain condition, etc., have been there, and the revenue in the scale that we expected has not shaped up, and so that is also one of the reasons why it has been more severe than it should have been, and as some of that sort of stabilizes over the next quarters as well, we should be back to the normal revenue and then start growing from there as brand growth comes in.
Sure, sure, sure. So I mean, just for your.
We have participants in the queue, please.
Sure. Got it. Okay. No problem.
Thank you. We'll take our next question from the line of Manish Poddar from Invesco Asset Management. Please go ahead.
Yeah. Hi, everyone. I have a couple of questions, so I'll take them together given this one question thing. So just two minutes. First is, if you look at the last quarter commentary, I think the call-out thing was there will be like a INR 40 crore impact from this inventory correction. I think the number is significantly higher. So can you help me understand what explains that? And the second thing is, let's say the call happened sometime August, mid last quarter call. And that time, I thought we were quite acquainted with this inventory correction. And we were wanting to put steps in place in terms of this Project Neev and other interventions. And that time, we were guiding for 20% growth for the rest of the year, adjusting for this sort of inventory correction.
So what really has changed in the last, let's say, three 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 underlying concern. And if possible, can you really call out, let's say, among the brands in Mamaearth? Let's say if there was an INR 100 crore brand which has just gone down to, let's say, INR 10 crore, are there cases like that? Are you able to 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 and delivery. So I'm just trying to, just trying to understand it better, not trying to push it towards the wall. Thank you.
Hi, Manish. So yes, we had called out the inventory impact of INR 40 crore-INR 50 crore. And as we 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 stockist. But during the same period, when we have actually executed this, they've also taken inventory from some stockists which owed them money, as well as to some extent, in certain cases, trade. And all of that has resulted in a higher net revenue take-back compared to what we had estimated it to be. And from a planning execution perspective, after sort of the communication of this, we realized that the current system had gotten fairly aware of us wanting to make this transition.
And hence, we started seeing significant friction in them wanting to execute the agenda that we needed to execute, because of which we were seeing almost a stalemate kind of a condition. And the earlier we had planned, we would be able to probably phase it out and do it in a certain way. 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 expected to be. And I mean, from a brand perspective, of course, our objective was to firstly execute the plans that we had, and the hope was that the same plans should result in a different outcome when it comes to any growth. And there's been clear recognition and acceptance on the fact that, okay, this is not working.
Rather than trying to do the same things and expect different results, we probably need to step back, sharpen the saw, look at doing different things because our long-term objective continues to remain the same. To get there, if you need to take risks, we must sort of take that. In line with that, we've made some of those corrections I just mentioned. Our view, like I said, still is that from a medium to long term, the path, the destination continues to remain the same. This is just sort of a screenshot to course-correct and evolve in line with how things are sort of changing. Things do seem to be changing faster than what we imagined them to be in terms of the consumption landscape or distribution landscape from a [audio distortion] perspective and consumer productivity.
And that's what we want to make sure that we look at them all together, do the right kind of hypothesis testing, and sort of build a model which is able to deliver growth even on a brand like the size of Mamaearth and sustainability and structures.
Sorry, one more question. If you can, if you can.
Okay. Yep. Sure.
Yeah. So just to understand, let's say if Mamaearth sales is INR 100, of this, let's say, let's look at half-year basis just to get some sense, or let's say if you want to take trailing points and find with that also. Just to get some sense, in this INR 100, there are bits and pieces which would be growing, right? Or there are bits and pieces which would be declining. To just get some caricature, let's say, if you have to divide the portfolio, let's say, four or five broad categories or percentage of portfolio which would be growing versus declining, just to understand are there pockets which you need to course-correct, or there's broad-based at a brand level? Because I think in the earlier part, you mentioned some bit of intervention in the channel levels.
I'm just trying to look at more from a, let's say, portfolio product level. So if possible. Thank you.
Manish, my view on that would be I'd rather let us look at it and figure out a solve where we need to solve the same to generate the right kind of output which will help brand growth and growth. And I don't think sharing that level of breadth is going to help the union. And we understand the pockets where those issues are, where, like I said, taking concentrated approaches to figure out how we will resolve those issues and turn them around. And in a couple of quarters, I think we'll be fairly confident in being able to share what all are the big changes that we are making and implement the next scale to get to where we need to get.
Sorry, can I come up? Let's say, thinking how this one year, let's say, the intervention you are taking and let's say the input workflows are different than the quarterly results which come out. So that's where the question was from, but I hear you. Thank you so much.
Thank you. As there are no further questions, I now hand the call over to management team for closing comments. Over to you.
Oh, thank you. Thank you so much for asking these questions. I hope you were able to provide clarity on the interventions and changes that we are sort of looking at. And Ghazal and I still continue to be super excited and confident about the opportunity that is ahead of us and our capability as a company to actually capture that opportunity. And this is more of a sharpening the saw kind of moment for us where we are clearly correcting certain structural pieces to make sure that we win structurally and sustainably in this space. And we are very confident that we will come out with the right kind of answers and execute them in the best manner possible to get them.
Thank you. On behalf of JM Financial Institutional Securities Limited, that concludes this conference. Thank you for joining us. Now, disconnect your lines.