It has been a good all-round performance for you, at least for the quarter gone by. Directionally, things are moving in the right spirit. I want to first understand with the growth, what you have reported, revenue growth of 20% and volume growth numbers which you have reported for the first time also is 20% plus. 20%, will that sustain for FY25 and are we likely to see a build up on that?
No, of course, I think from a quarter perspective, pretty decent quarter for us. We have delivered about 23% value growth and volume growth is coming at 27%. And in fact, for the year, our volume growth was, in fact, about 40% and value growth for year perspective was plus 30%. So, yes, I think from the way our business is shaping up, the way we are looking at going deeper from a distribution perspective, building a younger brand, we are very confident of delivering plus 20% kind of value growth for the coming year.
But tell me you had guided for that 28.6% year-on-year growth in FY24. Your growth is slightly lower than what you had guided because you had guided about 30%, if I am not mistaken, for FY24. And then what is the guidance for FY25?
Yes, for 24, we have delivered 30%. So, in fact, if I am not wrong in line with our guidance or in fact a little better than our guidance is how we see it and from a 25 perspective what we have been consistently guiding the Street has been plus 20% growth. In fact, for next three years our guidance is plus 20% CAGR.
I am looking at your EBITDA guidance and you are guiding for an EBITDA margin expansion of about 150 bps, 1.5%. But if you are confident of a 20% growth and if your advertising and promotion expenses are coming under check, then why are you being conservative with your EBITDA guidance? Because the way it would work is the operating leverage benefit would kick in, financial leverage benefit would kick in. So, the margin expansion has to be at least 3% to 4%. Are you being conservative with your margin expansion guidance?
Yes, so if you actually see this year, we have actually improved our operating efficiency by almost close to 500 bps from a year-on-year perspective. We have delivered 7% EBITDA for the year and we are looking at about 150 bps expansion into next year.
Now, of course out of this, two-third of this will be driven by marketing A&P efficiencies. I think one thing that everyone needs to understand is that we are building a house of brands.
So, we have a Mamaearth, which is a large thousand core plus brand and then we have a set of six new brands that we have launched over the last three years which are in different phases in their journey.
And hence, those brands need investments. And at an overall level, directionally, we continue to improve and scale the business efficiently, unlocking margins and hence sort of deliver a strong 20% plus kind of a top line CAGR.
So, given where the brands are in their journey, they would need investments. But at an overall level, we are still delivering efficient growth and faster profitable growth.
I wanted to get in a perspective from you as well. There are a lot of emerging brands as well. What is next in line to hit that 500 crore ARR? Do you have any timeline?
As you know, so we had hit a Rs 500 crore in annual run rate with our second brand, Derma Co earlier this year and in fact, the brand has been profitable through the year as well.
So, we have actually executed a scale up of a brand to a 500-crore run rate and also profitably. We see clear signs of the other younger brands, Dr Sheth’s and Aqualogica, which are very differentiated propositions, we are likely that over the next three to four years we see them also hit a 500-crore run rate.
So, yes, so I think we are building these brands in the right direction. We are very confident and hopeful in terms of our experience of scaling and building brands. We should be able to replicate our playbook, leverage our capabilities and skill sets to also enable the younger brands to hit that run rate.
Tell me which is your other emerging brand where you think which could be next in line to hit that Rs 500-crore ARR?
Like I mentioned, so Dr Sheth’s which is a botanical plus active proposition skincare brand and Aqualogica which is a hydration based proposition, both these brands are headed in the right direction. Our last reported run rates for these were about 150 and 180 crores in annual run rate and since then they have also been scaling in the right direction. So, over next three odd years we expect brands to hit a 500-crore run rate as well.
Let me address the stock market view here. Honasa is growing. The growth will be higher than the industry average, that is largely because of the base. But if one looks at mature FMCG companies, the return ratios and EBITDA margins are north of 20, north of 25%. In how many years you think you will be able to reach what could be called as industry average, not in terms of growth, but in terms of comparable margins?
I think when it comes to operating margins, we think we should be able to do a double-digit EBITDA in a couple of years from now and I think it is important to actually see our business as sum of parts.
So, a brand like Mamaearth which has of course much more scaled up, that is already at a double digit EBITDA profile and younger brands are, of course, like I mentioned earlier, a 500-crore run rate brand like Derma Co breakeven profitability.
We have clearly seen as brands scale, they are scaling efficiently and hence, I think in terms of trajectory we continue to add at least 150 bps of expansion on a year-on-year basis.
So, next year if we sort of add 150 and another 150, we should be at a double-digit profile.
Sort of when it comes to, let us say, return ratios, we probably would be about 10% ROCE today but very clearly as profitable growth is shaping up, our ROCEs will be competitive in the market over the next couple of years.
How much of your growth in the next three years will be inorganic and how much could be purely driven by your own brands?
Very difficult to say currently, the guidance that we are giving, we are hopeful that this will be primarily organic growth. Now, if we come across an opportunity which kind of is complementary to our portfolio, that is when we will evaluate and see.
But currently, there is nothing on the table and the growth guidance that we are working towards is primarily organic.
Let us also understand what the outlook is in terms of the offline quality of distribution. Can you just tell us a little bit about what the company’s strategy is on that front? Is that in any way going to impact your margins?
Yes, in fact, in terms of the channel mix, offline is about 35% of overall business. It is a three-year-old channel for us. Primarily Mamaearth is how through which we are building this channel. In fact, given we have been a young brand and it is a young channel for us, we have actually seen a little bit of a transition.
In fact, as we speak, we are in the middle of distribution transition where we are moving our top 50 cities to direct distribution. We have actually been able to transition top 10 cities to direct distribution model, moving out of super stockist model to a direct distributor model which enables us to have much better control on our distribution. In market execution quality will also improve.
We are also over a period of time working with better quality tier I distributors, more process-oriented distributors, distributors open to using systems, which enable us to give clear visibility, data visibility, and take more effective decisions as we expand our distribution.
So, I think we are in the middle of that transition and hopefully, by Q3 of this year, we should be able to complete a transition wherein top 50 towns would be directly sort of we will have a direct distribution model wherein we will remove the super stockist layer and we will distribute directly through our distributor to the markets and also cover our outlets more directly.
Today, if we reach close to 100,000 retail touchpoints, out of that almost 70 off percent of that is in direct reach and hence over a period of time we want to ensure that 70% of our coverage is a direct reach.
So, yes, we are in the middle of transition. We have done some corrections during the year and we are hopeful that by Q3, we are stabilized on our offline distribution and we continue to further expand our distribution and move into newer towns as well.
Can you give me a split of your mix in terms of the channel mix? How much is e-commerce? How much is quick commerce? How much is pure distribution led?
Offline is about 35% and balance is online, which is, of course, a mix of e-commerce, quick commerce, and our own direct-to-consumer channel. Quick commerce, of course, is still very young, but it is of course growing four to five times faster than other platforms, given the acceptance of the channel and of course, that channel is also more profitable for us in terms of how it is structured. So, yes, I think it is a very good sign for us in terms of how quick commerce is scaling in our country.
Honasa started with one homegrown brand. I mean, it is such an exciting story that you feel so proud when you talk about it and then you expanded into new categories. Will that be the linear model that you will be experimenting with more and more new categories? You will remain a cosmetic company, but you would add more layers of cosmetic products?
Yes, absolutely. So, I think we are clearly focused on beauty and personal care as a household brand. We have, today, six brands with differentiated propositions across the spectrum of beauty and personal care categories. Depending on the proposition of the brand, if we think the brand has a right to win in a certain category, we will approach that category with that brand.
For example, with Mamaearth, we extended into personal wash earlier this year. We also announced the launch of a new brand called Stays in the colour cosmetic space. So, yes, so I think that is the direction. But we will continue to win our customer love, consumer love in the broader beauty and personal care categories.
