Sugar Cosmetics turned profitable in December; looking at 2-3 years’ timeline for IPO: Vineeta Singh

Let us start off by delving into the numbers that you have delivered because I remember in November, the company said that you are on track to hit profitability by the end of the ongoing fiscal year. Are you on track?
Vineeta Singh: I am wearing green so I think that should give you a hint. December is the first month that we have hit profitability and we expect to continue that into Q4. Last year our revenue grew about 89% and we managed to reduce our EBITDA margin, a loss margin by about 15% to come down to as you mentioned about minus 14% EBITDA which we aim to bring quite close to zero with December being the first month that we are profitable and Q4 also expecting to be a profitable quarter and all of this while continuing to grow at a healthy 30% year-on-year.

So December was the first profitable quarter. Good for you. Hope that you build on that. And let us just talk about your margins. I know they have improved but are there any concerns with respect to inflationary pressures hurting your margins down the line? Will that force you to take on any increase in prices, any SKUs?
Vineeta Singh: Our gross margin in FY23 over FY22 improved from 69% to 72%. So we do not have gross margin pressure. We are a very healthy 72% gross margin business because we invest a lot in brand building and the entire effort has been to catch up with the legacy brands through more efforts in brand building and the idea of becoming profitable is really shaving off that extra that we spend in marketing and since the business has a fundamentally higher gross margin we are able to plough that back into EBITDA and that is the plan.

The inflationary pressure has seen demand being sluggish in Q1 and Q2 compared to the previous years but Q3, which is the festive quarter and whatever we are seeing in the first few days of Jan have been phenomenal. The markets really bounced back. Demand has bounced back. Irrational consumption in the festive period is back. So we are not seeing as much impact of the inflation-led sluggishness in demand in Q3 onwards.

Let us also get a sense as to what the outlook is in terms of your overall expansion plans because you are really ramping up your offline presence in a bid to grow faster. What is your current store count and what is the expansion plan for the year and the next couple of years?
Vineeta Singh: Sugar Cosmetics is available in about 50,000 retail outlets. We have 200 of our own stores and we expect to grow that to about 60,000 over the next 12 months and we plan to continue having about 200-250 own stores as well. The own store equation works very well with our D2CR app where we are able to reach 19,000 PIN codes from our warehouses and that is where we are really differentiated compared to legacy brands because we have a very short feedback cycle where we can innovate faster, we get very quick feedback because it is direct-to-consumer business in our own stores and on our app and we are able to iterate on our product within three to six months which a legacy brand would otherwise take 12-18 months to do.

You have also said that once you hit that or come close to that Rs 500 crore net revenue mark, which you are of course very close to doing, you will be optimising your marketing, look at profitability closer now that that has been hit. What is the outlook in terms of what will really lead to that growth?
Vineeta Singh: There is still a lot of inorganic expansion left in terms of building distribution. As on date, the largest brand in our category is available in about 200,000 and we are still at about 50,000. So there is room to expand the number of towns that Sugar products are available in for physical distribution. The other is of course expanding categories. A few months back, we launched with Kareena a brand called Quench which is a skincare brand. So colour cosmetics is a Rs 10,000-crore market where Sugar plays and now Quench which is a skincare brand in partnership with Kareena Kapoor Khan is going to play in the Rs 25000 crore skincare market and that opens up opportunities to grow in terms of expanding categories beyond just colour cosmetics. These are the two things – building on distribution and building on categories – where we see our future growth coming from.

When will you hit that Rs 500-crore revenue mark?
Vineeta Singh: We have already crossed Rs 500 crore revenue in FY24 and we are expecting to close FY24 at a 500 plus crore net revenue. There is no doubt that there is a lot of competition within the space as well. Be it the likes of WOW Skin care, a lot of small D2C players, Honasa, bigger players, well-established names that are in the market. What is the strategy for you to stay relevant in this competition?
Vineeta Singh: The only way to stay relevant is to be very close to the consumer and innovate faster than anybody else. We are very lucky to be the largest and the most followed brand on social media. On Instagram, 2.8 million women follow us. On YouTube, we have another 1.7 million women across categories, not just beauty, personal care, but across brands in India we are the most followed brand on social media. This allows us to have a very close understanding of where our consumer, especially Gen Z and next Gen Alpha is going in terms of their preferences and that allows us to innovate faster.

At the end of the day, in a very competitive market, the most important thing is getting execution right and having a very short feedback loop and innovating faster than your competitors, all of which we are doing. We also have our greatest strength has been the fact that we have understood that the way to win market share is through content and community. We have really invested over the last seven to eight years in building that as a moat. If you look at our community on Instagram, on YouTube and our own app, they are very passionate about the brand and it is very hard to build a community of more than 5 million women digitally in a short period of time. And we feel that as long as we are able to continue educating our consumers about beauty, personal care, using this community, we will be able to stay ahead of our competition.

We have seen that a lot of companies that were listed say a year or two ago were not on track with their profitability were met out by investors who clearly expressed those concerns. Will you now revisit those IPO plans? I know you have turned profitable in the December quarter, but would you like to further build on that before you decide to list?
Vineeta Singh: We are looking at about a two to three years’ timeline in terms of an IPO because it is important to have some solid track record of profitability in the bank before taking the company public. And this also aligned well with our board because we had an aspiration that we should go into the market at a Rs 1,000-crore plus revenue, plus profitability. And that is how we are expecting to look at.

Okay, fair enough. Is there going to be any more fundraising rounds because the last one that you had done, they were talking about valuations of Rs 500 to 600 million. What will the valuations be? Any sort of indications that you can give us?
Vineeta Singh: The good thing about becoming profitable and also not having a lot, getting invested in working capital every month is that we are really not looking at funding anytime soon. We will probably do a round before our IPO. But I do not think it is going to happen anytime soon because there is no urgency. We have a significant runway and we are now profitable. So we are keeping on adding to that runway. We have done a lot of corrections in terms of working capital optimisation as well as not requiring a lot of cash going into the business as well. So the idea is to look at a fundraiser probably just before the IPO. So maybe sometime over the next 12 to 18 months, but nothing in the near-term horizon.

Fair enough. And your ad spends also shot up and you spoke about that Rs 162 crore. Do you think that the overall rising ad spends will be a bit of a concern down the line?
Vineeta Singh: In Q1 and Q2, a lot of brands became pretty expensive to advertise on platforms and the ad rates for performance marketing had really shot up. Over the last 12 to 18 months, we have taken a conscious call to reduce our dependence on performance marketing and increase our spends on brand marketing, which includes television, which includes the work that we do with our influencers and the content creation that we do.

Over the next 12 months, we will continue reducing dependence on performance marketing and increasing our overall brand spends. And we feel that in the long run, the only way to get away from the pressure of rising customer acquisition costs, which all digital first brands have been experiencing over the last 12 months. The

only way to get away from that is to build brand awareness and make sure that distribution is omni channel. And both of these we have been working on over the last 12 to 18 months. I think we were quite prepared coming into this year about the fact that there will be pressure of ad spends going up to keep the revenue up because of the competition intensifying online with legacy brands jumping in as well as new brands continuing to spend more.

But the only way to beat that is to not depend so much on performance marketing and build brand awareness and just make sure that distribution is as widely available, which is hard for a brand to do in the first two, three years because you are really dependent on marketplaces and your own website for all the revenue.

But once you are able to build distribution, then that dependence goes down. Almost 50% of our revenue actually now comes from offline, which is incredible because the offline part of the business does not depend at all on performance marketing. That percentage will also continue going up over the next couple of years.