Ladies and gentlemen, good day, and welcome to Q2 FY 2024 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 then zero on your touchtone phone. Please note that the conference is being recorded. I now hand the conference over to Mr. Richard Liu from JM Financial Institutional Securities Limited. Thank you, and over to you.
Thank you. A big welcome to all of you, and hope everyone is doing great. It's a pleasure for us at JM Financial to be hosting the first conference call of Honasa Consumer as a listed company. I'm delighted to have with us, Varun Alagh, Co-Founder, Chairman, and CEO of the company; Ghazal Alagh, Co-Founder and Chief Innovation Officer; and Ramanpreet Sohi , Chief Financial Officer. Without taking more time, let me hand over to Varun for introduction, and then we can follow it up with our Q&A. Over to you, Varun.
Thank you, Richard. Thank you so much for hosting us. We're super excited and elated to do our first analyst call as a publicly listed company. This is also, you know, exciting because we get to talk about what we really love, which is our business. We've already talked to the team, but we have Ghazal, my co-founder and Chief Innovation Officer, and Raman, our CFO with us. For purpose of simplicity, I will take you all through the presentation, and then we will all be here to answer the questions that you have. I would also like to thank everyone who's attending this call and for taking your time out, and appreciate the time that you're spending with us.
Moving on quickly into the presentation, and I hope you can see the presentation in here. We'll move on from the first slide. The agenda for today is going to be covering the business results, and spending some time on sharing again, the business overview with you, because we are young and we would love to tell you what our business is all about. And then sharing some bits about our ESG purpose and our overall team and sorry. Without further ado, let me jump on to talking about the most interesting part of a quarter result, which is numbers. From a quarter two perspective, we have delivered INR 496 crore in terms of our net sales and revenue from operations.
This is about 21% growth year-over-year on Q2, FY 2023. And if you look at it from a like-for-like perspective, which is if you look at the businesses which we have scaled down and removed them, which is the services part of the business, right, then this is about 24% on our brands. And the other piece to note is the fact that in quarter one of last year, we had a ERP implementation towards June, which led to a slight depression in the quarter one base. And has led to sort of the quarter one growth looking slightly higher and quarter one growth looking slightly lower.
A better way to look at the business performance would be at a half one level, which is where after sharing the quarter two numbers, we'll also share the half one numbers with you. On quarter two continuing, we continue to maintain industry-leading gross profits of close to 70%. And our EBITDA for quarter two is about 8% at about INR 40 crore. And our PAT is INR 29 crore, which is 5.9%. This is significant growth over last year. And our growth is actually driven by volume, whereas compared to industry growth, which is largely driven by price.
While doing this, we've continued to maintain operational efficiency in terms of working capital, and where we continue to be negative, we are -5 days of working capital. Hence, while our PAT is still INR 29 crore, we've actually generated INR 41 crore in terms of free cash. Coming to half one, and like I said, half one is a better indicator of the company's business performance. These are the metrics basis which you can also, you know, understand and look at how the company will perform in short term, in the future as well. So from a half one growth perspective, we have delivered 33% growth. Like for like, this is 36%, and the gross margins are 70%. EBITDA is 7.2%, INR 70 crore.
This is almost 500+ basis points improvement in EBITDA. PAT is about INR 54 crore, and this is almost 14 times the PAT of last year H1. This is a volume-driven growth like we have mentioned. And in terms of cash generation, we've actually generated INR 89 crore in cash compared to INR 54 crore. Double clicking a bit on where this EBITDA improvement is coming from. You know, and actually, before I move on to next, I'd like to compare how these numbers compare to industry are significantly higher. We have even in the last sort of conversations talked about the fact that we will aim to deliver market-leading growth.
We have delivered almost, if you look at H1, a 33% growth, which is 3.8 times the average growth that the industry has delivered during the same period. And which is FMCG company peers who are in the BPC business. And that's the, that's the motive and motto with which we'll continue to operate. And while doing that and delivering significantly better growth, and we have actually become operationally and better, and we continue to see leverage kicking in in the business. And from an H1 perspective, if you look at our our EBITDA, we have improved by 531 points. Our PAT improved by 517 points, and with strong growth.
And these have been driven from the 1.9% of H1 to a 7.2% of H1 2024. And the three big drivers of the EBITDA improvement are, firstly, leverage in marketing and advertising expenses. And we have talked about this in the past, that as our brands grow, as they improve in their awareness, and the marketing bucket and becomes more of a value number and in terms of percentage continues to you know go down. And which is where we are seeing a lot of leverage coming in. And I would like to call out that this is, while this leverage is coming in, we continue to invest in building brands, we continue to deliver growth. The other area where we've seen leverage kicking in is employee benefit expenses and OpEx.
There we have seen the business seeing leverage, and as we have scaled up. And some other parts are procurement synergies, you know, where we've seen leverage as and when we scale. So those three are the largest pockets which have driven these benefits from the bottom line perspective. In the future also, we'll continue to focus on these areas to drive efficiency. Coming to our business overview, and like I said, we are a young company, and we would like to, you know, at the cost of repeating, keep sharing with you what we are building. We are India's largest digital-first beauty and personal care company with a diverse portfolio of brands.
Our journey started with Mamaearth, which is a clean label, toxin-free, natural personal care brand. This brand was launched in 2016, and it is yet to turn seven years. It will turn seven years on 6th December this year. In less than seven years, this is the fastest INR 1,000 crore brand. We are very happy to inform that it has also joined the top 15 BPC brands, which we'll talk more about. This brand has seen a lot of consumer love because of the cultural nuance-based innovation that we have done, and where we have crafted for the Indian consumer by understanding the Indian habits and bringing ranges like Onion, Ubtan , Honey Malai , which have been loved by consumers.
While building this brand into a strong success story, what we also built was an organization, and that had different capabilities across brand building, distribution, innovation, sourcing, R&D, which could be applied to the other consumer white spaces that we were seeing. In line with that, in 2020, we launched The Derma Co., which is a science-based active brand. And that also has done extremely well. We'll talk about it. And we launched Aqualogica, which is a hydration-based skincare brand. And again, a brand which is targeted at Gen Z and has been doing extremely well. And we also acquired two brands, BBlunt and Dr. Sheth's in 2022, and which have.
Where we have been able to demonstrate strong growth and also demonstrate the fact that we have muscle to build acquired brands and not just development. We also have Ayuga, which is a Ayurveda and you know natural ingredients-oriented prestige brand and for Indian lineage. With this diverse portfolio of brands, we are playing to capture the hearts and wallets of consumers in the BPC market. We genuinely are very excited about the growth that BPC will see in India over the next couple of decades. Even in the medium term, we believe it will continue to be the fastest growing FMCG category and with an expected CAGR of about 11%.
which is going to be driven largely by rising disposable incomes, and very importantly, women joining workforce as a mega trend, and this is going to shape the category. I think we are equally excited by the sub-segments which are driving growth in this category. We believe premiumization is going to be a core driver of growth in this category, and hence, prestige and mass premium are going to grow much faster than mass. All our brands play in that segment. We believe online and digital penetration will be growth drivers of BPC, and that's where almost 60%+ of our business comes from. We also believe that skin and color cosmetics is going to be the strong driver of growth for BPC, and that's where 60% of our revenue comes from.
So that just makes Honasa very well placed to capture strong shares in this category, and we have demonstrated that in the past as well. And we have had strong patterns in terms of our last year growth, right? We continue to demonstrate market-leading growth in this year as well, at 33% for H1. Our gross margins continue to remain amongst the highest in the industry for the last four years. And we've been Adjusted EBITDA positive for the last three years, but this year we have been able to demonstrate further improvement on that metric in half one, and we continue to demonstrate that in Q2 as well.
And we have done this in a very capital efficient manner, whereby our working capital has remained negative for the last 3 years and for this year, H1 as well, even after scaling the business in offline, which now contributes to almost 35%. And we've been able to do this because of certain core strengths which we have developed as a company. And, you know, brand building playbooks, content, data-based innovation, strong omni-channel distribution, and purpose-based brands with a strong ESG framework, are the four core strengths that I would say have been responsible for us being able to deliver this kind of constructive growth. I'll be covering a bit from each one of them as we move forward. And starting with the first one, which is our brands.
Mamaearth, we are elated, actually, has entered the coveted top 15 brands club in the BPC space. This is a large mega achievement for a brand which is just less than 7 years young, and is competing with brands which have existed for multi-decades, and some of them possibly centuries as well. In terms of retail sales, this is data that we have taken from a Jefferies Group. We actually are standing at 13th largest BPC brand in the country, where we are also taking into account oral care and personal wash brands. That just shows the kind of strength Mamaearth has as a brand.
It's also a brand which has showcased the ability to capture share across categories rather than in one category, and because of our value-based and purpose-based solution. This is also one of the reasons why it has been able to scale to this level so quickly, and which is why we believe it will continue to scale and grow much larger in terms of its franchise in future as well. This, of course, has happened on the back of strengthening brand metrics. Mamaearth continues to be India's most searched beauty and personal care brand. You know, our brand searches have actually gone up by 16% in Google, which is higher than any other BPC brand in terms of the overall number of searches out there.
This has been driven by our focus on, like I said, certain Indianized innovations, and which we have crafted and developed. The onion shampoo campaign on that saw almost 21 crore views. Shaadi Wala Glow, which is a campaign around our certain face wash, has seen. It's an award-winning campaign, which has seen over 22 crore views. Our property, which is a purposeful property, Beautiful Indians, and which we executed in half one, has seen over 11 crore views of the content that was generated from this property.
I think all of these things and the increasing brand strength is leading to not only Mamaearth growing significantly faster than other large-scale brands, but also gaining market share in the offline space, whereas in shampoos, we have gained 50 basis points, in face washes, we have gained 100 basis points. We will continue to focus and gain in other categories as well as we move forward. In other news, of course, The Derma Co., which is our second brand, continues to deliver strongly. It now has hit an annual run rate of INR 380 crore. This has been driven by its core categories like face serums, sunscreens and moisturizers.
Our focus on acne-based activation in Q2, which is a season that sees spike in acne concerns, actually has led to a lot of, you know, benefit for the brand. The brand also saw very strong gains in brand searches. We continue to hold a very strong belief that this brand will continue to grow very strongly in future as well, and we continue to invest in it. The next brand, which has again seen phenomenal growth, and is Aqualogica. This is a brand which is less than 2 years old, and in just 19 months, it's actually hit a scale of INR 180 crore ARR.
This is much faster than what The Derma Co. and Mamaearth have taken to hit. I think as we are growing, applying the same playbooks of i nnovation through which we develop products which consumers love, and the brand mixes that consumers love, and marketing to millennials. And I think as a company, we understand how to use content community and the right kind of mediums and to win over Gen Z and millennials. And as well as our purpose-based marketing. And the combination of these three levers and of course, supported by our distribution playbooks, has helped us hit this kind of revenue mark so early. And we continue to believe that this brand, again, has a lot of potential in future in the way it's going to shape and is being loved, but especially by the Gen Z out there.
Another great news is we have Dr. Sheth's, which has entered the INR 150 crore ARR club, and this is the fourth brand from Honasa's portfolio to enter the INR 150 crore ARR club after The Derma Co. and Aqualogica. In just less than seven years, the company has now captured and scaled more brands to that level. This is specifically heartening to us because we acquired Dr. Sheth's early 2022, and we've grown it 30 times to take it to this number. It just gives us confidence that not only do we have the capability to apply our playbooks to brands that we launch and build, but also to brands that we acquire. This gives us a lot of confidence from that perspective.
We'll continue to focus on scaling this brand and capturing share of the active market through this. The other brand which we had acquired was BBlunt. And we've focused on building the styling and care portfolio in this brand, and we are very bullish on professional haircare market and a salon-like hair at home kind of a proposition. And this is the brand which is playing in that proposition and helping us, you know, capture the share of haircare market too much. And in quarter two, of course, because of context of hair fall being high, we focused on that, and that campaign has done really well.
We also continue to focus on both innovation as well as expanding our distribution footprint for the salons, where we have opened 4 new salons in H1, and taking the overall count to 14 salons now. The salons business is helping build the brand equity for the products business. And where the product business alone has grown by 300% since acquisition. The second large strength for the company continues to be innovation. We are a data-based innovation company, where we capture a lot of data and trends from various sources and apply that to figure out what is the kind of right innovation that the consumers are looking for. And in line with that, all of our brands have seen amazing innovations in this calendar year as such.
That innovation has led to, you know, 13% contribution of H1 FY 2024 revenue. And some of the cool innovations that I would like to talk about is Mamaearth launched Multani Mitti range, and an ingredient which we've been using for hundreds of years. But consumers find it, you know, difficult to sort of, you know, mix and use, and now this is readily available, and they're loving that. Rosemary range that we have launched, and entering into color cosmetics with, we have launched The Derma Co., launched new formats of sunscreen, like the sunscreen stick. And we've launched a range of variants in the De-Tan range for Aqualogica.
In BBlunt, we are launching many innovative haircare products, like, Intense Moisture Heat Hair Spa Mask , which does self-heating without using any electronic equipment, and creates much better conditioning because of that. I n Dr. Sheth's, we continue to find the right bioactive combination to capture spaces like pigmentation. So, all in all, some amazing innovation done to drive growth for the brands. And the third area where we continue to focus on was strengthening our distribution. And we have been building physical distribution and strengthening our offline scale. And this quarter also, we are happy to share that we have actually reached 1.65 lakh outlets on our core category, face washes, which is an increase in 47% in terms of distribution over last year.
And, we have also expanded our EBOs. Now, we have 97 Mamaearth exclusive stores, and, which are out there, not just to build imagery, but more importantly, to showcase and sell our overall assortment, to our consumers. And, we have been deepening our relationships in modern trade channel, and have very strong relationships across, our customers. And, we've also continued to strengthen our, leadership and team on the offline side, and, looking at the future potential of it. Even on the online side, we continue to, focus on not only our core channels, but also our emerging channels. We've seen quick commerce emerging as a great, growth driver, which has grown by 100%+ YY growth.
We've also forged new partnerships with Tira , and which is Ambani's. The fourth strength, of course, we continue to focus on ESG. We are a company which strongly believes in building brands with strong purposes, and where Mamaearth has a Plant Goodness initiative, and we have planted almost 510,000 trees under this initiative. And the beauty is that we've actually built a technology through which when you place an order on our website, and we actually send you a mail with a picture of the tree, the actual geolocation of the tree that we have planted, and connected it back to your order. And so you would see as a consumer, the contribution that you're making by buying our brands.
We also, of course, continue to remain a plastic-positive organization. We have recycled 7,591 metric ton of plastic since 2021. We also have other purpose programs where we've impacted over 10,000+ students in the The Young Scientist Program for over 500 families through the Fresh Water Plants initiative in Aqualogica. And along with this, of course, you know, the corporate governance framework is also something which is a strong focus area for us. We genuinely believe that the only lasting businesses are the ones which are sustainable and in a strong governance manner. And in that light, we have a 50% independent board, strong gender diversity. Being a beauty company, 58% of female workforce.
We are externally audited by Ernst & Young, which is a member firm of EY. We have an internal auditor in BDO, and where we continuously review and strengthen our processes. We've also implemented ERP systems like SAP and DMS, and systems like M3, and through which we want to enhance data visibility around and control visibility around the business. With this, we would like to end the presentation. We have a panel summary, this has been shared as a part of our notes, and I've already captured most of the heads of the summary as a part of my presentation. Thank you so much for listening to us. Would love to answer the questions that you have for us. Thank you.
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 their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Participants watching the webcast, you can post your text questions on the Ask a Question tab available on your screen. In order to ensure that the management is able to answer queries from all participants, please restrict your questions to two at a time. You may join the queue for follow-up questions. Ladies and gentlemen, please wait for a moment while the question queue assembles. I'll take the next question from the line of Percy Panthaki from IIFL Securities. Please go ahead.
Hi. Hi. Good evening. My first question is on the Mamaearth brand. So if I look at your sales growth for this quarter, it's 21% year-on-year and 7% versus the previous quarter. If you can give some idea on what the Mamaearth's growth was for the same period, because these numbers are at a total company level. I just wanted to know how the Mamaearth brand is performing.
Yeah. So Mamaearth brand, at a high level, continues to grow much faster than the large size brands out there that we have showcased as competitors. I think we are happy to see that the investments that we're making in the brand building are showing and delivering much faster growth than the industry peers. That's the level of building that we shared.
Understood. Understood. Also, if you could share some color on the channel-wise growth between your own e-com channel, the third party aggregators on e-com and the general modern trade.
So actually, at company level, both online and offline continue to grow very strongly. At brand level, of course, offline continues to drive growth for, you know, larger, more mature brands like Mamaearth, and while online is driving growth for younger brands, which are Aqualogica.
Percy, if I may add, I think, from an H1 perspective, online delivered a 40% growth and offline, 20%.
Okay. Okay, very helpful. And just one follow-up on the previous question, if I might be permitted, on the brand-wide growth. So it's great to know that Mamaearth is growing faster than overall industry. But you know, right now the industry growth itself is very, very subtle, so that really is not giving us much information. I mean, is it even a double-digit growth on a YoY basis, or you would not be sort of comfortable sharing that kind of information?
Actually, that, that assumption is correct. It is in double digits.
Okay. Okay. I will return the queue for more questions. I'm sure there's a long queue.
Thank you. We have our next question from the line of Akshen Thakkar from Fidelity International. Please go ahead.
Again, congratulations on your first results. Just a couple of questions. One was on, margins. So, you know, very healthy margins here, at least percent. Could we just talk through sustainability of margins, either at 8% or 7% that you've done at H1 levels? Because, you know, there has been some reduction in manpower costs, channel spend, they have been, are lower. How much of this is scale? How much of it is timing? You know, because it's a new so, so pardon, repeated questions, but we're just trying to build our understanding. Question one. Question two, I think you broke in H1, what is the online, offline growth rate? Could you just break that out in Q2 as well?
Because I think, you know, like you called out, Q1 was so growth rates could be misleading. Just on a going basis on Q2, if you could, just help, break the like numbers between online and offline, that would be great. Thanks.
Thanks for asking questions. I think on the first one, what we are seeing is all of what we are seeing is more timing, but scale and structural, you know, impact on the business, because of which, we are seeing this improved profitability. And the half one level profitability that you see is something which we believe is fairly sustainable. And in fact, the future, in the medium term, our objective would be to see how we can find more areas of leverage and how we can continue to demonstrate, you know, such performance and in terms of improvement.
On your second question, actually, it is much better to look at H1, because, see, what also happens is because of the ERP disturbances, the business just gets more impacted. You know, channel level SKU doesn't get impacted. It's the B2B billing , which can move from one quarter to the other. And hence, our view would be to look at quarter one. And at quarter one, like Raman said, 40% in online and 30% in offline. H1, sorry, 40% in online and 30% in offline should give you a good flavor as to overall how business is sort of shaping in both parts.
And just to complete the point on the margins, like Varun mentioned, of course, the sustainable level margins are more the H1 margins. And in Q2, we have a one-off ESOP reversal on account of it is, you know, scaling down of operation s of The Moms Co. . So, which is, hence our, you know w hich is on an H1 basis. So, I think, excluding that, you know, balances, of course, the structural, you know, margin movements.
All right. Very good. Next question.
Thank you. We have our next question from the line of Tejas Shah from Spark Capital. Please, go ahead.
Hi, thanks for the opportunity. So currently we are interacting with the analyst community for the first time, where we are allowed to share guidance. So just wanted to understand, how you look at the current 20%, is it in line with the expectation or, or below, or we can do better? Or, or looking at macro, you will be happy with, the current, the current growth range?
Like we mentioned, Tejas, I think it's better to look at half one, you know, where we have delivered about 30%+ growth. And that's at least in the short term, and the kind of benchmark that we would want to deliver.
Considering that we are in a distribution expansion mode and the runway is huge, and as you highlighted that in offline alone, we had some 49%+ growth. So, how do you measure the like-to-like growth in terms of repeat purchases? And if you can share some qualitative or quantitative insights on how are we doing on offline in terms of repeat purchases?
So, there are positive indicators, of course, especially in our modern trade businesses, you know, and in basis some of the Nielsen data that we get. We're actually seeing very healthy same-store growth numbers, be it in our EBO, be it in our modern trade, be it. This is the Nielsen same-store growth, that.
Got it. And last then, with the capital infusion and all this visibility from investors has improved materially. What are the key priority areas to kind of next three years, five years, which you would like to invest from here on, to kind of achieve your near-term or long-term milestones?
Tejas, I think, you know, as a business, we are in the business of building brands. And hence, the first priority area is going to be brand building, which is delivered through driving awareness and consideration for our brands. And, so I think that's the first area where the company will continue to invest. We are seeing that investment leading to much better growth outcomes for the company compared to industry and share gains being delivered. And so I think the first area where we'll continue to invest is in brand building. The second area where we'll continue to focus on is distribution expansion, like you rightly mentioned. And, be it in terms of expanding GT distribution, deepening our Modern Trade tie-ups, and even improving shares and presence on the online platform. So we'll continue to sort of.
The third area of investment will continue to be product and proposition innovation. And we believe product and R&D has been a strong strength. We continue to innovate in line with the consumer trends that we are seeing, right? And that is going to be the third area of investment. Fourth, I think, you know, we'll selectively look at either new geographies or, you know, newer category acquisition opportunities that come our way over the next three to five years, right? Which also potentially could be an area of investment.
Anything on human capital?
All of this is underlined by human capital itself, right? That said, we did, you know, invest ahead of this curve over the last two years in building the right leadership team, building the right kind of organization structures. But as a growing company, we continue to deliberate on what's the right organization designs and to serve the growth that we need to deliver. And this is that we will take the right strategic calls on the human capital front as well.
Thank you. So, so, also my side and best wishes to the journey ahead.
Thank you.
We have our next question from the line of Aditya Soman from CLSA. Please go ahead.
Hi, good evening, and all the best to the company. Two questions from me. Firstly, in terms of innovation, can you give us a sense of what proportion of your sales came from organic innovation? And second question around channels. You indicated, obviously, that e-com and quick commerce in particular, that premium quick commerce as well as GT. Can you give us a sense how the channel economics differ from sort of your own e-com, third party e-com, and then offline? Thanks.
Hi, Aditya. Thanks for the good wishes. The first question on innovation, and we have called it out in the past, and we continue to call it out. Innovation is a core growth driver for the company. We genuinely believe that consumers love brands which bring the right kind of on-trend innovations and categories to them before others. And we want to be the company that does that. In the first half of FY 2024, innovation, organic innovations in fact has contributed 13% of the company's revenues, and continues to be a strong growth driver for us.
On your second question, I think, you know, from a from a e-commerce perspective, I think we're seeing, you know, growth across all channels and platforms, be it vertical beauty platforms like Nykaa, Purplle, Tira, et cetera, or horizontal platforms like Amazon and Flipkart. I just keep calling out to e-commerce because that's a a area which has grown much faster than others, right? And hence, that was a call-out. And while the area was expected to grow for categories like grocery, but it also is doing really well for categories like beauty in in our business.
Thanks. No, very clear. I think, my question was also around in terms of, economics for you. Is there a meaningful difference in the economics in terms of margins or, or profitability or profitability over the day?
Yeah. So Aditya, hi, Raman here. So I think on the channel front, between, let's say, online and offline, at a contribution level, our per unit margins are very similar. And so that's, you know, from a inherent margin providing perspective, there's not too much of a difference. In a similar range.
All right. Aditya, thank you. Thanks a lot.
Thank you. We have our next question from the line of Abneesh Roy from Nuvama Institutional Equities . Please go ahead.
Thanks. My first question is on pricing. It seems negative 6%-7%. Can you explain which categories are seeing this and is there a mix deterioration also? And how do you see this negative pricing in the second half?
I think, Avnish, hi, hope you're well. I think you're referring to this basis, the fact that volume growth is faster than value growth. So it's actually not because of price deterioration, but it is because of the channel mix change. So in a B2B channel, which is where offline and some of the other channels like that lie, and which is what is increasing as a competition share. Those channels have a lower per unit realization compared to B2C channels, right, where the per unit realization is higher. And as the contribution of those channels increases, and is where you're seeing the volume growth to be higher than values. Right? It is not price deterioration.
I think, Abneesh, just to add, you know, if you see the numbers, our first half, like, growth is 36%, the volume growth is similar. Yes, Varun mentioned, does impact the volume growth, but in H1, it's absolutely, you know, 100% volume driven. So it is not so much of an impact coming from business mix as well, but it does sort of.
So just to clarify in terms of pricing and, say, discount and mix, there is no like-to-like deterioration in your business?
No, no major change.
Now coming back to the question, which has been asked again and again. My question here is, lot of the urban discretionary categories have been, experiencing slowdown for many quarters now, USL, apparel, innerwear, sports retailers. At first time, United Spirits also highlighted the initial signs of slowdowns are there. Obviously, every form of consumption, directly, indirectly, some correlation will be there. So I wanted to understand, how much is the impact of ERP, because ERP impact, normally we see retail companies, really highlight that impact. Consumer companies or B2C companies don't really impact, highlight the impact of ERP. So if you could explain, ERP was the main reason for, one is to two kind of a difference, because your Q1 growth seems to be almost double of Q2.
Second is, when I see Q3, there are 3,500,000 weddings happening from tomorrow. Second is, festival's full benefit is there. In your kind of business, my sense is festival and marriages should have a good positive impact. So would you expect acceleration versus a 33% growth, which year then should be the number we should monitor? So would you expect acceleration because festival and marriage, in fact, full benefit is there in Q3?
Yeah. So I think, you know, what I would like to call out is that in quarter one of FY 2023 is where we had done ERP implementation. And the most impacting month was actually June. And what happens is, because of our implementation and, for some part, and it's in the last 7-8 days, and our billing got impacted. And this billing usually is the B2B billing, which happens, for our offline distributors, our retail customers, et cetera, and which moved to the first week of next month. Because of which, and the base of quarter one is slightly lower and the base of quarter one is slightly higher. And hence the H1 level is where we are asking. Look, so it's largely back and back.
And, otherwise, like-to-like, if you see, you know, the, the H1 numbers is what, like I said, we would like you to focus on. And, from a perspective of, festivals and weddings, I think, you know, every year they happen. So to some level, they're also there in basis. And, and our businesses does not see, as much seasonality on account of either occasions or on account of seasons, because we are a multi-category business. So while one category might see some seasonality in some quarter, the other might be seeing, you know, something opposite. So they take care of each other. And, and hence, we don't see, any disruptive impact from our communications.
No, if you see the bunching of the marriages is definitely there, and we see this happening every four years. Second is, again, festivals, if you really see this time it's delayed. The Diwali was delayed, and so every company is saying Q3 will see that benefit. So I leave that. My second question is on the BBlunt. So when you say 21% growth was there in Q2, what was the growth ex for BBlunt? And BBlunt obviously has seen a change of the promoter last 10 years, twice. So I want to understand, how do we see this business now? Because they've been running it now for some quarters, and how has the business done in Q2?
So overall, from a Honasa perspective, you know, BBlunt continues to be about less than, you know, less than 6% contribution in terms of the overall business. And so I don't think you would see any major difference sort of keeping it out or keeping it in. And as a business itself, I think like we called out, while for a long time it was not growing disruptively, after we have acquired it, and we've actually been able to grow the product business in almost three times, as stated in my presentation. And we are seeing our playbooks of innovation, online distribution, and actually bringing the brand to a very strong buzz.
In fact, even in terms of Google searches, the brand has almost doubled Google searches over the last couple of years. And, so I think we're very happy with the way the brand has shaped, and we continue to see strong growth momentum in the brand.
Thanks, welcome. Thank you.
Thank you.
Thank you.
We have our next question from the line of Kunal Shah from Jefferies. Please go ahead.
Hello. Good evening. Am I audible?
Yes.
Kunal, yes, you're audible.
Yes, sir. So, two questions from my side. First one is, on the standalone PNL. If you look at the margins there, that is somewhere around 10% or so. So would it be fair to say that, you know, the top four brands, I mean, Mamaearth, Derma Co, Aqualogica, and BBlunt product business would be at this margin, and the losses are coming from, the salon business and, BBlunt and w ould it be fair to look at it this way?
I think that, so far, you know, BBlunt is profitable and, you know, so Salon business is profitable and doing really well. You know, it is a 20% EBITDA business for us. I think in the September quarter, it is a one-time, in fact, only in the standalone financials, for a reversal of our derivative liability. You know, this is regarding The Moms Co. , you know, scaling down of operations. There's an INR 10 crore reversal in fair value of derivative liability there, because now that you've acquired that business 100%, there is a reversal of a certain amount, which is equivalent to INR 10 crore, which is happening this quarter, and that is making the overall margins of standalone and consolidated.
So, you know, ideally, we should look at consolidated numbers as the right representation of us.
To further add on to it, so I think even standalone business, right, Mamaearth, of course, as a mature brand, is at a much higher profitability compared to the average profitability that the continuing or standalone business has, right? And the other brands then are still younger, are in invest mode, and but as they're sitting and we clearly see the same chart that Mamaearth has passed, those brands will also pass over the next few years.
Understood. That's very clear. The second question was, just to follow up, so you talked about the ERP implementation in June. So the impact of that on the offline revenues would be much higher, right, compared to the online revenue? Would that be a fair understanding?
You are correct. Correct. Yes, that would be a fair understanding.
Understood. Understood. Yeah, that's all from my side. Thank you.
Thank you. We have our next question from the line of Yash Gandhi from Stallion Assets. Please go ahead.
Hi, thank you for this opportunity. My question was, you know, in the first half, we've grown like to like 36% and, you know, given a smaller revenue base as well as funding distribution network, and if you compare it to our larger FMCG peers, so can you, you know, kind of expect to go, a bit higher than that, let's say, 40% for the next few years? I mean, what's your opinion on that?
So, I mean, you know, we would like to continue to focus on building brands in the right manner. And, I think we are also being cognizant of the fact that as we grow, and we need to see windows of efficiency and continue to become better. So that's also a priority now as an organization. And, I would rather want to play the long-term, strong compounding growth story, and continue to build this, deliver market-leading growth for years to come, and rather than just look at the next few years is how I would look at this.
Okay. So, I mean, what I understand is that, you know, we can expect about at least first half growth, right, in the next, in the short term, if I understand you right. Similar to the first half.
Yes, that's correct.
My just question was, you know, this quarter, your advertisement expense was 8% of your sales and, given, you know, the operating leverage and economies of scale as you grow, how should we see that number? Do you think it can go down significantly, you know, in the next coming quarters or it will stay the same?
Okay. On one hand, you would like us to grow even faster. On the other hand, you would like to see that number come down . See, finally, it's investment in brand building and driving awareness that gets us that growth. That said, we clearly have showcased that as we scale, that percentage has continued to go down for the business. In fact, that percentage even today is a sum of parts. For a Mamaearth, which is much lower than the sum, and for the other brands, which are much younger and in invest mode, and which is much higher than the sum. And, of course, over time, we do see opportunity, and efficiency, to bring more leverage onto that as we grow.
Sure. Thank you.
Thank you. We have our next question from the line of Vishal Agarwal from Bajaj Allianz Life Insurance . Please go ahead.
Hello. Yeah, hi, everyone. Hi, Raman. Can you all hear me?
Yes. May I request you to use your handset, please? It is not very clear.
Yeah. I hope I'm clear now.
Yes.
So my question was related to your employee expenses. So employee expenses this quarter is around INR 57 crores, 37.1 crores, and you mentioned a reversal of around INR 4.7 crores. So if I include that, your employee expenses is around INR 11.86 crores. So I just wanted to understand how has it declined from last quarter? So last quarter, the number was around INR 44.5 crores. So this reduction was because of shared expenses reduction or there was a reduction in your core employee expenses also?
Yeah. So I, this is Raman, this side. So actually, you're absolutely right. So the reduction is on account of the ESOP INR 7 crore. You know, the one-time reversal we saw that has happened in this quarter. And, you know, in terms of, you know, sequential, you know, payout, the payroll number, that's the range that we are looking at in terms of at an absolute level. So I think that's how one should look at it. And also, you know, we should also look at, the other aspect which is impacted when you say it has come down, is, apart from the ESOP reversal, the one-time impact, there is also, scaling down of operations of Momspresso, which were there last year along the years. That's also leading to, somewhere, coming down.
Which was a people-heavy services business s o that, that is the impact structurally.
Okay, understood. Would it be possible for you to share the ESOP related expenses, excluding the reversal number? What was—i f that would not be possible, my question had to be ESOP expense.
So sorry, the ESOP expense that we are referring to is only related to the Momspresso ESOP reversal. There is, of course, the ESOP expenses, which are regular ESOP expenses as part of our quarterly payroll costs. On average, they range between 0.7%-0.8% of our sales.
Okay. Okay. Sure. One more thing. Actually, was there any reduction in your expenses like your platform and other sales commissions Q1, or was more or less flat against Q1, those numbers?
Yeah, so these are part of our other expenses, and, you know, they've, you know, these are variable in nature and hence, in line with how we've grown.
Some efficiencies we have been able to drive right because of scale as well as because of improving regional utilization on that front.
Okay.
Because I remember you mentioning, like, advertising trends being a lever, but I'm just comparing our second quarter of FY 2023 versus second quarter of FY 2024, and, as a percentage of revenue, this trends have remained similar at around 35% or so. So I'm just unable to, like, link additional commentary.
Yeah, like we said, better to look at H1. And, you know, at the H1 level, you'll be able to see that, because like we said, right, Q2 has, you know, in a base, has slightly higher sort of revenue in the while because of the Q1 due to the implementation. So the H1 level, if you see, will actually find that impact.
Sure. Okay. Those are the questions from my end. Thank you once again.
Thank you.
Thank you so much.
Before we take the next question, I would like to remind participants to press Star and One to ask a question. The next question is from Chintan Sheth from Girik Capital. Please go ahead.
Thank you for the opportunity and congrats for the good first quarter, you know, publishing results . A couple of questions on the new SKUs launches and all. If I look at the slide, you know, with The Derma Co. and Dr. Sheth's, the bet is towards—o bviously, there will be N number of launches you must have done during the quarter, but bet is towards, you know, summer products like sunscreens and all. So if you can highlight what kind of new launches we have done this quarter, right? What is in the pipeline going forward, because that piece is kind of contributing more. If I look at Q1 for the current year, the new SKU launches has contributed almost 9% as per DRHP.
That has moved for the first half to 13%, right? So, if you can provide some color on the, you know, pipeline products which we are planning to launch and, and to confirm on the, you know, we are entering into the winter and, we are looking at more, summer-based products on the pipeline. If you can highlight anything on the product side, yeah, it would be helpful.
Actually, I'll talk about two things. One, I think the good thing is India, country, we are a typical country where we don't have extreme seasonality.
Correct.
While you're right, we are getting into winters, we'll probably have two years of winter—two months of winter and back and back to lean, North. And, rest of the places, it's much smaller in terms of seasonality. Hence, some of the categories, like face washes, or even for that matter, now, sunscreens, continue to see throughout the year usage, from our consumers. And, they're not as seasonal as some of the categories earlier, like talc, et cetera, used to be so seasonal towards summer. And hence we are not. As on the, on the other front, actually, you, you pointed out rightly so. Our innovation calendar, is in line with consumer context.
You know, which is the reason why, from a H1 perspective, we are talking about the launches that we activated in H1, which were more contextual towards the season is half done. And, and hence a lot of sunscreens, a lot of, acne-oriented products or Aqualogica products. And, you know, and accordingly, in our innovation pipelines, we ensure that the, the, the innovation or the ingredient or the category that we are innovating in is in line with the context that the consumer is looking for. So moisturization, for example, would be, is what we'll focus on, in a season where the consumer is looking for moisturization. So in line with that, and, and this is, not something which we have done just this year.
Over the last five years, every year, every quarter, innovation has been a strong driver, and it has been in line with our understanding of consumer needs, and which is why, you know, it is able to get as much consumer.
Any number to number of products which you will launch during this quarter of first half?
Oh, it's actually, you know, continuous business as usual. So I mean, you know, nothing which will disruptively change. We continue to do what we have been doing.
Okay. If you can just call out what is our services revenue for the first half, would be helpful.
Sorry, what is?
Services revenue.
Revenue from services, yeah.
That's it is about INR 18.5 crore.
Of the company revenue.
Oh, great. Okay. All right, thank you for taking question.
Thank you.
Thank you. We have our next question from the line of Milind Rajguru from Aditya Birla Sun Life Insurance. Please go ahead.
Yes, thank you for the opportunity. Just on the margins, when, I mean, we are already seeing we talking around the first half, around 7.2% margin and around 8% for this quarter. So just wanted to know, directionally, can we see, like, continue to see your improvement, at least for now, annual basis, around how it is going forward? Just directionally, any thoughts on that?
Hi, thank you for asking that question. So from an annual basis, every year we will have endeavor to find leverage opportunities the way we have, right, to look at, you know, the levels at which you talked about are probably even better than that as we grow.
Sure. Thank you so much.
Thank you. We have our next question from the line of Mihir P. Shah from Nomura. Please go ahead.
Thank you for taking my question. I was also going to ask you about this, but the other question I wanted to ask you was on the manufacturing capability. So while I understand your innovation and R&D in the pipeline and products are quite customer-centric, can you please talk little bit upon your manufacturing capability and any plans to strengthen it? Do you see that as any risk that you may face in the future as you, you know, scale higher? Yeah.
Sure. Thank you for asking that question, Mihir. So on the manufacturing side, actually it's important to understand how our innovation engine works, right? Of course, the conceptualization, as I said, is very data-oriented basis, which we recognize trends and opportunities, right? That is then picked up by our internal innovation and R&D team, where we have 50-odd members with labs and facilities in both, you know, Gurgaon and Bombay. And along with that, we have an ecosystem of R&D partners, and more than 20 different partners, who also work with us on providing solutions to different problem statements that we need. So all R&D happens in-house. And in prototypes, we develop out of those R&D, we do extensive consumer testing.
It's almost like a collaborative effort with consumers that we develop these products from. Once we are confident of a certain formulation, then we have a network of almost 30+ different manufacturing partners, and who have expertise in different kind of manufacturing processes and categories. Of course, some of them are far more critical with us. The top 4 partners actually contribute more than 60% of our sourcing, and some of them have independent units fully deployed for our business. But actually, instead of risk, it's a flexibility that we have, right?
Where we are able to, at any point of time, scale, you know, manufacturing by taking that formula to manufacturing, multiple manufacturing partners, as well as, our ability to open up and work on any new category, is very high because we're able to find the right partner and, you know, run the process with them. Of course, we have very strong QC standards. Most of our partners, our own QC teams, work with them to ensure strong quality controls, and, which is of course, evident in the last couple of years.
Got it. Thank you for that, very interesting.
Thank you.
The other question would be on margin. Sorry to talk about it, but any direction you could give us? I understand that, you know, improve and cost efficiency. What is the level of margin that you may able to be, you know, on a constant basis, on a significant basis for you, which itself allows you to grow at the rate at which you grew it in the first half at about 35-odd%? Any number that you know, or that you may or a range that you may have in mind that will continue to allow you that rate, with that?
So, you know, I think how I would want you to look at things. It's not that even this year we have reduced our ad spend and value. Actually, we have spent more marketing dollars, right, to build our brands, right? And that's a space of investment which we generally feel is the right space of investment, because that's what helps us build and grow our brands, right? So in actual value terms, we have, we have actually grown it, right? But because our revenues grow faster, right, in percentage terms, it is lower. And that's the trend line that we continue, and we hope to see over years to come as well. Because over time, there are two things that happen. One, our understanding of media mix efficiency improves, right?
Because we have more data after doing so much media on a brand, we know which part of the media mix works harder, right? Because of which we are able to sort of keep the brand spend at a certain value number, and deliver same kind of growth with that, right? And as we deliver that growth, so percentage-wise, it actually goes down. So I think that's how you need to see it. We will continue to invest in brand building, and and deliver you know, faster than market growth.
Got it. Can you share what is the mix of ad spend that you're spending on Mamaearth versus the other brands, the new brands that you mentioned, currently?
So at least in the, you know, from a Mamaearth perspective, we would say it is almost 500 basis points lower.
Got it.
Compared to the average company.
Understood. Got it. Thank you, and that's all from my side. Wishing you all the best.
Thank you.
Thank you. Ladies and gentlemen, that was the last question today. I now request the management team to answer the text questions posted through webcast. Please go ahead.
Yes, so I think as we see the questions, we've probably answered most of them during the questions that were asked on the call itself. There are probably, I think, one or two theme-based questions which are more data-led, which is basically, you know, people asking questions around what is part of your other expenses, the marketplace commission and fulfillment costs, part of other expenses? So the answer to that is yes. I think most of our expenses related to fulfillment expenses are part of other expenses. I think apart from that, very similar repeated questions. So we probably most of them have been answered.
Thank you, sir. Any closing comments?
So thank you. This was very exciting to have this conversation with you and share more light on our business. And your questions also help us become, you know, sharper and think from a customer perspective. And so we'll love to continue these conversations both during these calls as well as offline. And thank you so much for taking time out and joining our first call and giving your wishes to us as well.
Thank you, members of the management team. On behalf of JM Financial Institutional Securities, that concludes this conference. Thank you for joining us, and you may now disconnect.