Mamaearth open to exploring tactical and strategic opportunities to outgrow markets: CEO

Varun and Ghazal Alagh, co-founders of Mamaearth

Honasa Consumer expects that organic expansion will drive its future growth. Simultaneously, it maintains its commitment to exploring opportunities, both tactical and strategic, to continue outperforming the market.

In a pre-IPO interview, the management, including CEO, Varun Alagh, and Chief Innovative Officer, Ghazal Alagh, highlighted that Honasa is the brand in the BPC (Beauty and Personal Care) ecosystem that has grown from zero to Rs 1,000 crore in just six years.

Mamaearth’s non-core acquisition Momspresso- A drag on financials

The management also spoke about pulling the plug on the non-core and costliest acquisition - Momspresso.  Varun Alagh said, “Over the course of four quarters, the company worked on integrating and optimising various aspects of this acquisition but failed to deliver the expected long-term value. It negatively impacted the company's overall profit and loss statement. Consequently, at the end of the last financial year, the company made the decision to discontinue the Momspresso segment. This decision resulted in a one-time exceptional impairment charge in FY23, which is considered a non-recurring expense and is not part of the core business operating costs”. Having said that, he quickly added that the company does not anticipate incurring any further impairments related to Momspresso as it has ceased its operations.

Edited excerpts:

The company started with the idea of selling a baby care product and now has turned into a complete personal care brand. What's next for the company ?

Ghazal Alagh: I think we started our journey seven years back. Honasa Consumer is a company which, you know, started as just a one brand company, which was Mamaearth, but now it's a house of brands and we have six brands in our portfolio. Mamaearth started as a baby-first company, but after receiving a lot of consumer insights and talking to our consumers, we understood that they were the ones who said why just limit Mamaearth to babies, why not the entire beauty and personal care category. And that's how that brand expanded. And over the last seven years, I think, again, listening to them, talking to them and we have technology, which helps us interact with our consumers on a daily basis. What we also understood is that there were a lot more propositions that they were looking for, and while a lot of companies and brands were selling to India, there were not as many who were crafting for India. And that was the place Honasa Consumer wanted to take. We are a company which crafts brands and products for India, keeping their skin and weather in mind. We came up with our second brand, The Derma Co, which is a brand based on active ingredients for skin concerns like acne and pigmentation. And in just three years, it is a Rs 300 crore ARR brand now.

We also launched Aqualogica which is a brand based on deep hydration. In a little over 18 months, the brand has already achieved an ARR of Rs 150 crores. We also acquired Dr. Sheth's and BBLUNT, which continue to grow very strongly. So, yeah, Honasa Consumer and us, that's what we have done and we have built in the last seven years.

I think going forward as well, like I said, our focus will continue to be consumers. We are going to provide them the right kind of options through products and brands and we will continue to craft for them. And one metric that the company is going to chase aggressively is consumer love.

Most of your funds are going to be directed towards advertisement expenses, towards enhancing the awareness and the visibility of the brand put together. As of March 2022, market share was around 1.5 percent of the total Indian beauty and personal care market. How intense is the competition within the space? What's your strategy to cut across?

Varun Alagh: I think what I would like to say is that we are in the business of building brands. And when you're building brands, you need to drive awareness for what the brand stands for, what kind of products the brand makes and to get consumers to try those products. Once they try them, they actually then continue to use them and that we have seen in the success of Mamaearth. From zero to Rs 1,000 crores in revenue in just six years is something that no other brand in the BPC ecosystem has been able to achieve and we've been able to deliver that. And that has given confidence for us to do it on other brands as well, which is where we are going to build those brands as well by investing in the right kind of mediums and letting the right kind of consumers know about what those brands stand for and what all products they have. And that's where we believe that once you create the brand, and for a very long term, that's how consumer companies have been built. You continue to see strong growth and momentum on those brands. So, I think that's how the business is shaped and that's where we would choose to invest. I think being able to take a share in this highly competitive market and being able to grow much faster than what the industry is growing is testimony of the fact that the capabilities, skills and the team that we have built is equipped to actually capture a share of this fastest growing BPC market that we are in. And we'll continue to focus on doing that.

Your Revenue CAGR over the last three years stood at 80 percent. How sustainable is this rate and what could be the growth drivers?

Varun Alagh: I think the growth drivers of scalability are, one, expansion of distribution footprint. We clearly realise that our consumers are now looking to buy our products in offline stores and that's something that we've been focusing on. We are there in about 1,00,000 stores now. But we believe there is a lot more expansion that can be done. The growth is also going to come from the younger brands, two to three years old, but are growing very fast. Like Ghazal said, we've already seen Derma Co reaching the 100-crore and 300-crore mark faster than Mamaearth. And Aqualogica has actually done it even faster than Derma Co. So we are getting better at even scaling other brands. And hence, we expect those brands to add to growth. I think the third growth driver is going to be recognising newer innovation needs in consumer spaces, and in being able to innovate and provide products in that. At Honasa, we aspire to and we will continue to deliver better growth, than at the levels that the market is growing at.

How scalable are you organically versus inorganically? How do you intend to grow going forward?

Varun Alagh: It is not an inorganic growth in the past as well. All the past growth, 90 percent plus of the growth is actually organic growth. We will continue to look out for opportunities, tactical opportunities or strategic opportunities where we can see our ability to grow a mix much faster than what it is currently growing at, and evaluate it on and off. But our focus is going to be organic. Also, we currently aren’t evaluating  any inorganic prospects.

You have taken an impairment on goodwill of the most expensive acquisition, that's Momspresso. What's the road ahead for that?

Varun Alagh: The company has done three acquisitions – Dr. Sheth's, BBlunt and Momspresso. Dr. Sheth's, like I said, has grown 20 times in about a year of the  acquisition. BBlunt is also growing very strongly. But we also did another acquisition, which was so to say a non-core acquisition which was in the services space, which is Momspresso. We had a certain vision on how it will be able to add efficiencies through content to commerce funnel in our business. We tried integrating and figuring some of those pieces out over the four quarters that we worked on that acquisition. But after working on it and spending a fair bit of management bandwidth, we realised that we don't see it being able to create the value that it was supposed to create in the longer term. And it was also turning out to be a bleed on our overall P&L. And it was taking a fair bit of management bandwidth. So in fact, at the end of last financial year, we have taken a decision to shut that part down. That has led to a one-time exceptional impairment in FY23, which is not a part of our core business expenses, but it's a one-time expense. And we don't expect to see that impairment on Momspresso go any forward because we have actually shut the business down.

Do you expect to turn around and be profitable in this year onwards?

Varun Alagh: Actually, if you look at quarter one, we already are profitable. We have six percent EBITDA and we have generated close to Rs 30 crores in EBITDA. We have generated almost Rs 23 crores to Rs 24 crores in PAT. So, if you look at that number, we are already there.

How about your operational performance?  Advertising expenses seem to be higher than the industry leader, HUL. What explains that? Also, employee expenses have risen more than 100 percent in FY23.

Varun Alagh: I think on advertising expenses, it needs to be seen on two fronts. One, when you compare advertising expenses, you should also compare growth. We are investing to grow faster and gain share. We've demonstrated that in the growth that we've achieved. The other thing that needs to be seen is that during the same time, we have not only built one brand that has scaled, it is actually showing far more efficiencies. During that same time, in the last two years, we have actually chosen to invest and build four more brands, where the investment in the early stages of brand building is higher. So the net amount that you see is actually a sum of parts, where there is one brand which is actually showing a lot of efficiency. But there are other younger brands, which are still in investment mode, and which is where the organisation A&P is. But even at the organisation A&P  level, as we are scaling, we are clearly seeing leverage kicking in. From 40 percent, it's already gone down to 35 percent levels. And we believe that as brands scale up, these leverages will continue. Even on younger brands, from 80 percent in FY23, we're seeing them to be at 46 percent in FY24 Q1. So that efficiency is kicking in. And we believe that that will continue to be the model that we will follow.

Also, when you're a younger company, an earlier entrant into offline, a lot of the on-foot execution salesforce is something that you need to invest in because you can't get your distributors to invest in that given it's a younger business. And that's something which also leads to better execution in the market because you have better control. So, I think in the last two years, we have invested in building that salesforce. But now we have a strong salesforce and a strong business. And as we grow further, we do expect to see efficiencies there. The second thing that I would say is that in the last two years, we were also strengthening our leadership team and putting down the right kind of organisation structure and design, which can serve this organisation not just for next year, but over the next five to seven years' horizon. And which is where we have strengthened the leadership team and brought in the right leaders. But once they're there and they can take the business to grow, we do expect to see and we are already seeing OPEX leverage kicking in, as we see it already in this quarter.