We have also indicated that you actually need to look at H1 results. We have delivered a 33% year on year growth and a like for like growth of almost 36%. Most of it is volume led. So we are seeing good traction. We are focused on investing and building our brands. Our younger brands are doing really well. All of them have achieved new milestones during the quarter. Our largest brand Mamaearth continues to scale. We continue to build our brand on the offline side.
Our distribution expansion increased by almost 47% year on year; we have reached almost 1.65 lakh retail outlets. So I think our focus on building brands and focus on expanding and strengthening our distribution is working well. We continue to double down on these things.
Which are the categories where you think you would be able to grow and maintain this kind of growth rate because the traditional FMCG business is now reaching a mature curve. But the categories which you represent essentially are very niche and have an online presence. So which are the categories where you are confident of exceptional and strong growth?
Yes, sure. Just to clarify, almost 40% of our business comes from offline now. And hence our brands and categories, especially Mamaearth, are largely focused in terms of incremental growth coming from offline. We are present in multiple categories. There are face cleansers, moisturisers, shampoos, oils and also emerging categories like sunscreen. We are seeing good growth across categories.
Of course, we are also focused on the market share gain game here. We are seeing good gains across categories. But of course, some of the emerging categories would be serums and sunscreens for us. I think that is as categories are also something that we are seeing penetration gains coming in for these categories.
If I talk to some of the large established brands, whether it is local or global or MNC companies, they are saying the penetration has already happened. Volume growth is low and the base effect has kicked in. But you are pretty much saying the opposite of that. Penetration has started. Category growth is strong and we are confident of a double digit growth.
No, absolutely. One thing I want to call out there is that we are focused on masstige and mass premium categories. And I think as a business and as a household brand, all our brands play in the mass premium, masstige categories. And this space is expected to grow at almost twice that of the mass segments in the country. Given that and how the whole online offline ecosystem is evolving, we are fairly uniquely positioned to capture this evolving opportunity in the beauty and personal care space.
One of the concerns that the Street had at the time of IPO was the high advertisement spends, right. Talk to us about the trajectory of bringing it down and how the operating leverage will kick in, because this quarter as well, we have seen an improvement in margins. What could be the trajectory going forward in terms of margins?
We have delivered a 7% odd EBITDA margin for the first half. We expect a similar kind of margin profile for the rest of the year. The expansion in margin that we are seeing in H1 is more structural. It is something that we think will be sustained. Most of it, as you rightly said, is led by leverage. And leverage kicking in two particular aspects of a P&L. One, of course, is the A&P. We saw almost 260 odd bps of A&P rationalisation. That is something that we had planned for, given how our brands are scaling, how Mamaearth as a brand continues to grow as we invest and grow that brand.
Also, as our younger brands grow and mature, we are clearly seeing leverage in A&P. And also, across other P&L levers, payroll cost is the other aspect. In other overheads, we are seeing leverage kick in. Hopefully, that is the focus. Our focus is, of course, continuing to grow and deliver market-beating growth, but at the same time ensure that we grow efficiently as well. Once your offline strategy does scale up because you articulated that during the IPO as well, do you think the ROCE etc will take a dip? How are you looking at the entire offline strategy in terms of the pace of expansion?
We are a negative working capital business and a very capital-efficient business in our journey so far. In this journey, our focus on offline is a three-to-four-year-old channel for us. We are doing really well there. Our execution has been pretty good. But at the same time, if you look at our capital efficiencies, we have continued to maintain our working capital cycle. So our focus there will continue.
The business, of course, is capital-efficient and that does not require that kind of cash investments in terms of how the channels are panning out for us. So we do not see too much of a deviation when it comes to capital efficiency of the business. Even today, 35% of the business is offline and we are in a negative working capital cycle. So that is how we are positioning, and we are fairly confident that that is how we will continue to deliver and build this business.
What is going to be the next hero product? And can you also tell us a little bit more about how some of the hero products compete with the large, very well-established FMCG players?
In terms of our focus, innovation is the key strength. Almost 13% of sales for the period has come in from innovation, which continues to be our biggest growth driver. We continue to focus on innovation based on data science tools that we have in our house. That is one of the key strengths for our business. And of course, we want to stay ahead of the curve and continue to innovate. Some of the innovations launched recently have been focused on ingredient innovations like Rosemary, Multani Mitti, we are also working on leveraging cultural nuances of the Indian consumer. I think that is a big strength for us and we continue to focus and build all our brands on innovation based pipelines for us.
Let us understand the mindset of an investor here. An average investor would say that why should I buy Honasa stock because the return ratios are not the best in the industry. Yes, the growth is one of the highest. That is the purest who looks at return on capital, return on equity, free cash flow generation. So how would you tell a new investor saying that your business indeed is different?
I think a couple of things; firstly, of course, on the growth aspect, we are one of the fastest growing consumer companies, growing at almost three times faster than the market. Our margin profile is evolving and now with our focus on efficiency, we are also starting to deliver and execute on the margin aspect.
Also on the return ratios, we are a fairly capital asset model. In our balance sheet, if you exclude cash and if I have to analyze our performance in the first half, we are almost at 50% plus ROCEs. So it is a business where given the opportunity that exists, we will focus on ensuring that we continue to deliver market beating growth, ensure the margin profile continues to improve given leverage driven efficiencies and hopefully investors will see us perform and deliver quarter on quarter.
We are in FY24; in FY27, three years out, when the business would have reached a curve of operating leverage margins would have kicked in. Wwhat is your aspirational number for return ratios, return on capital and return on equity?
The focus is clearly on delivering growth which is backed by a profit, which is faster than top 10, given where our margins are. I think that will solve for itself, you know, our return ratios will continue to improve. Like I said, if I exclude cash today, we are already delivering 50% plus ROCEs. And those ratios will continue to improve. I do not think I can call out the exact number three years from now but clearly, for this business given its asset light model and negative work capital cycle, we do not see return ratios as something that will worry us. If we are able to deliver our growth and continue to grow the way we have grown in terms of growing efficiently, our focus should be on very, very healthy return ratios.
Since you are focusing on growth, tell me is this 35% growth rate what we should expect for the next 12 to 18 months as well? That is what you delivered in the first half?
Like I mentioned earlier, the endeavour is to ensure that we continue to deliver growth in a 30% kind of range given how we are focused and structured, that is the endeavour for the management.