Mamaearth parent Honasa Consumer's Q2FY25 to be muted as it shifts from super stockist to D2C company

Honasa Consumer reported a product business growth of 20.3 percent with underlying volume growth of 25.2 percent, adding that it captured a strong market share in the face wash category online while steadily gaining ground offline.

Mamaearth’s parent company, Honasa Consumer, is expected to witness muted growth in Q2 FY25 due to its distribution transition from a super stockist to direct-to-customer (D2C) company which will require inventory correction, CFO Ramanpreet Sohi told Moneycontrol.

The impact on the company at an annual level would be a 150 to 200 basis points on growth due to the “accelerated transition in Q2,” Sohi said.

“Q2 numbers will be muted because of this one-time correction, and from a bottom-line perspective, margins will be impacted. But it will be an exceptional one-time clean-up. We are hopeful about completing this in the next quarter. By Q3 onwards, we expect to see more streamlined inventory and normal profitable growth,” he said.

Honasa’s strategic transition towards direct distribution will include implementing this model in 7 out of 8 metro cities. This shift has led to lesser reliance on super distributors. Furthermore, a distribution management system now captures over 90 percent of secondary sales.

The company plans to bring down the inventory levels in the distributor network from 70 days to about 30-45 days.

Over Q2, the beauty and personal care company will reduce the super stockist layer in the top 40 to 50 towns. A stockist is a retailer or distributor who keeps products on hand for sale, while a super stockist has several sub-stockists under them.

The company has partnered with logistics firm Delhivery for supply chain management.

Project Neev

The distribution transition is part of Project Neev, which aims to improve supply chain capabilities. It has also partnered with Bain & Company for the next three years to identify how to strengthen its offline expansion strategy, execute the distribution transition more effectively, and back it with the right level of investments in categories.

The company is optimistic about its offline business. Sohi said that, in the last three years, the offline channel's contribution to the business has grown from 9 percent to 35 percent in FY24. “Offline continues to be the biggest growth driver for us, especially for Mamaearth. We've driven almost 30 percent distribution growth there. Mamaearth reached nearly 2 lakh FMCG retail outlets in India as of June 2024, increasing distribution by 30 percent YoY,” he said.

Honasa’s Q1 FY25 net profit increased to Rs 40.2 crore, a jump of 62.9 percent year on year (YoY) from Rs 25.96 crore, according to a stock exchange filing. The jump in earnings was driven by sales growth momentum and expanding margins.

Demand outlook

As the company operates in the top 100 cities, the CFO feels that it has not seen any major slowdown in demand, nor any impact on urban consumption.

On the other hand, rural demand has impacted larger companies. This has led to increased discounting across e-commerce platforms, which has impacted premiumisation to some extent.

With improvement in rural demand, “discounting intensity should come down, which bodes well for us. Structurally, we never saw urban consumption being impacted. There is a big trend of premiumisation underway across categories. We’ve seen almost a 1000 bps market share shift in the face wash category,” he said.

There is a strong trend of premiumisation happening across categories like face wash and sunscreen, with consumers shifting towards more premium offerings. This plays well to Honasa's strengths as a mass premium brand.

Overall, Sohi is positive about the demand outlook, with urban consumption remaining stable and premiumisation trends continuing to benefit the company.

House of brands

The Derma Co has scaled up to an annual run rate (ARR) of Rs 500 crore and is expected to reach Rs 1,000 crore in the next 3-5 years. Aqualogica clocked Rs 150 crore ARR.

Aqualogica and Dr Sheth’s are expected to hit Rs 500 crore. Meanwhile, BBlunt achieved a Rs 100 crore ARR and is expected to grow to Rs 250 crore, according to the company’s Q1 results.

However, the Ayurveda brand Ayuga did not align with the market, and the relaunch efforts to scale it did not pan out well, leading the company to sunset (discontinue) the brand from June 2024.

“Ayuga was our take on Ayurveda. But clearly, consumers are evolving fast. Efficacy is a big concern. Customers associate Ayurveda with a lot of heritage and experience over time. Hence, there were some big disconnects. We've decided to stay away from Ayurveda for now,” Sohi said.

Honasa reported a product business growth of 20.3 percent with underlying volume growth of 25.2 percent, adding that it captured a strong market share in the face wash category online while steadily gaining ground offline.