Varun Alagh, Chairman of Honasa Consumer, emphasized that the company has been rapidly developing and expanding its brands due to the strong consumer response to its products. He affirmed their commitment to continue delivering innovative offerings, expand their distribution channels, and seize the numerous opportunities within the expanding beauty and personal care (BPC) market.

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During his conversation with CNBC-TV18, he extensively discussed the IPO, the company's operations, and a wide range of other topics.

Below is the verbatim transcript of the interview:

Q: We have been having this conversation about what is the sustainable growth trajectory for the company. 80% is what you have done. Just a week ago, when we spoke, you said that by settling in you would obviously grow faster than the industry. The question is, how much faster and by when, what is the steady state growth rate for you?

A: We are so happy to be at this juncture in just less than seven years of our existence, we have been able to see this day, come to life, it's genuinely the story of new India. We of course, have been building and growing our brands at a breakneck pace because the consumers have loved the offerings that we provide to them and will keep offering the right innovative products to our consumers, keep expanding our distribution and there is a lot of opportunity in this growing beauty and personal care (BPC) market that we can capture. And hence the long-term growth is something that we are very confident about. And I would still say we would continue to grow significantly ahead of the industry and that will be our objective. And of course, we will also focus on profitable growth from here on and try to make sure that we become even more efficient as we continue to grow.

Q: In the last three years or so you have been growing at around 2.5 times what the industry is growing at. Do you expect to continue that momentum and also plenty of debate on social media and other circles as well about the valuations. If you analyse the numbers, it’s close to around 100 times. What do you have to say?

A: Let me answer the second one first. I think for a fast-growing company, which is in investment mode, like ours, pure price to earnings might not be the best ratio to use as a comparative ratio. The better ratios to use are price-to-revenue and price-to-gross margins because in the long term, that is where the flowthrough happens and if you want to use P/E use price/earnings-to-growth (PEG), which is PE adjusted for growth and drive comparison basis that because it is a relatively faster-growing company and choosing to invest in driving faster growth. So, if you compare basis the price by revenue, price by gross margin kind of ratios, you will actually find that we are attractively priced. But from the social chatter, I think what we have learned from Gita also is ‘Karam pe focus ker, comment pe mat ker’. So, the focus is on showcasing business performance.

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Q: So, let's focus on the karam itself. You said that the best way to look at it would be PEG. PE, we know. Tell us about the G. I mean that is what we are trying to figure out. What is the sustainable growth rate that you are looking at? And in that as well, when you grow what will your margins settle at eventually because like you said it's an investing company right now, as you grow, scale benefits come by, ad spend come down - all of that discussion for a bit, while we talk about that, but what is the likely growth rate that you are going to settle at and at that level what would your margins be?

A: I think from a likely growth rate, the objective would be that we are very bullish on the overall BPC space, and we believe BPC is going to grow at a 10-11% CAGR and we would want to make sure that we grow more than twice of that and continue to have that pace over five to seven years. Now, from a margin perspective, as we are growing as a company, we are seeing that efficiencies are kicking in. In the last two years, we have not just built one brand and scaled it to more than ₹1,000 crore but also launched five more brands and invested in them. And even after those investments we have remained positive in terms of our margins, and I think we are seeing already Q1, we are at about 6% net EBITDA compared to 1.5 last year. So, as we are scaling, we are seeing leverage on marketing, leverage and opex (operating expense) kicking in. Of course, over time, the ambition will be to ensure that we not only continue to grow faster but also continue to showcase better efficiencies.

Q: Your ad spending as a percentage of sales are quite high, close to around 40%, approximately. Where do you see that number settle and where do you see that leverage, the leverage from these ad spends start playing out?

A: If you look at this number, what you are saying 40%, was a number for FY22. As we see it, it has gone down and already come down to 35% now. And this is, like I said, a sum of parts because in FY22, it was largely being spent on one brand and then moving forward it has been spent on six brands, and when brands are younger, this percentage is far higher for them because a certain amount of marketing needs to be spent. We are in the business of brand building and you need to drive brand awareness to actually get the brand to sell and trials to get generated and then consumers start buying more and more. So, I think even in that brand-building period where we were building five more brands, and we have been able to showcase that this, at a company level, has come down. So, of course for Mamaearth, it is even lower, and we are choosing to reinvest that in our younger brands and drive growth for the company.

Q: Regarding your business, you said that you reach out to about 120,000 stores currently. Offline will be your next leg of growth. So, there are a lot of large traditional players already in the offline space, they have a much bigger mode than you. What are the challenges of scaling this offline on the one side you can look at it as a big opportunity. But the large players are waiting for you to enter the store so that they can probably pounce on you. Your thoughts on the challenge of scaling offline and your next hero product because a large chunk of your revenue still comes in from onion hair shampoo and the ubtan facewash?

A: To answer the first question, I would say that finally consumer is the one who decides. It does not matter what the companies might be thinking, or competitors might be thinking. When the rubber hits the road, when you are sitting on the shelves, the consumer makes the decision and buys the product. So, our focus is completely on their end to provide high-quality, innovative products that consumers love, and they have been showcasing their love by picking the product from the shelves. Now we just need to provide it on more shelves. So, that is what we will continue to do. On your other question, I think we have a fairly well-diversified business. The top 10 products contribute only 30% to the company. So, there is a lot more that is contributing to our growth. So, it's fairly diversified in that sense and hence the risk is low. So, there are a lot of amazing newer products which have already started shaping up very well. Multani Mitti facewash, our Derma Co serums, and our Aqualogica sunscreens are doing phenomenally well.

Q: You have grown the business so well, and now you are going to be listing the business as well but didn't any of these large companies come and say I want to buy you out. Has that ever happened?

A: Many times.

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Q: So, what went wrong? The size of the cheque was not big enough.

A: No, it's just that we do not know what better to do. We are in this for decades. We love what we do, building this business and these brands just gives us so much joy.

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For more details, watch the accompanying video

(Edited by : Shweta Mungre)

First Published:Oct 31, 2023 4:21 PM IST