Following a 7.5 percent decline in the stock just in February, global brokerage house Citi has initiated coverage on Mamaearth parent Honasa Consumer with a ‘buy’ call and a target price of ₹550, implying a 26 percent potential upside from its current market price of ₹436.25 (as on February 26).
“We initiate at Buy (TP Rs550) on Honasa – the leading digital-first beauty and personal care (BPC) company in India. Honasa’s strengthening market position through innovation, growth acceleration via expanding distribution reach, entry in new sub-categories and gradual margin expansion (ad-spend rationalization, improving mix, operating leverage) are key long-term positives. We expect growth outperformance led by company-specific initiatives and masstige positioning (business less impacted by demand slowdown). While absolute multiples are rich, these are likely warranted given the company’s strong business prospects, robust growth opportunity, portfolio of brands and improving financial metrics,” said the brokerage.
The stock has jumped 35 percent since November 2023. It has been almost flat in 2024 year-to-date (YTD), down 1 percent, falling 7.5 percent in February after a 6.2 percent rise in January 2024. The stock added 5.7 percent in December 2023.
The Mamaearth stock hit its record high of ₹510.75 on January 23, 2024. Currently, the stock is almost 15 percent away from its peak. However, it has advanced over 70 percent from its 52-week low of ₹256.10 seen on November 10, 2023 (soon after listing on November 7, 2023).
Earnings
In the December quarter (Q3FY24), the company’s consolidated net profit has surged 264 percent year-on-year (YoY) to ₹26 crore. In the same period last year, the company posted a net profit of ₹7 crore. For the first nine months of the current fiscal year, its net profit has jumped by seven times to ₹80 crore.
Meanwhile, its consolidated revenue surged by 28 percent YoY to reach ₹488 crore. Furthermore, the consolidated EBITDA experienced remarkable growth, soaring by 192 percent YoY to ₹34.5 crore.
The company launched 122 new products (NPDs) in calendar year 23, which has contributed significantly to its revenue growth, with new product developments accounting for an impressive percentage of its year-to-date revenue.
Investment Rationale
Strong position in the fast-growing BPC category in India: Citi believes with its clean-label positioning and community-led brand-building initiatives, Honasa is well placed to appeal to the new-age consumer and benefit from the growth opportunity in the BPC segment in India (India’s BPC market is estimated to post 11 percent CAGR over the next five years to USD33bn by 2027E, as per Redseer data). The brokerage noted that while Honasa started off in the baby care category under the Mamaearth brand, the company has been successful in pivoting its portfolio to other, larger and faster-growing categories within BPC (face care, body care, hair care, et al).
Innovation capabilities: For any BPC player, more so in today’s world of fast-evolving consumer preferences, continuous product innovation is key to success. Citi believes Honasa has established processes and tools that help the company identify customer needs and innovate along those lines. The company: a) effectively engages in social listening to identify emerging trends and propositions in India and globally; b) is then able to innovate using its in-house innovation team (headed by the co-founder, Ms. Ghazal Alagh); and c) leverage its large and loyal customer base (on its D2C platforms) to perform quick research around new product concepts, formulation, packaging, proposition and pricing.
Driving growth outperformance: As per the brokerage, Honasa continues to strengthen its position in Mamaearth through consumer-centric innovation, distribution expansion (gaining shares in the offline channel), and entering fast-growing sub-categories (color cosmetics). Strong growth in other brands (The Derma Co, Aqualogica, Dr. Sheth’s, etc.) bodes well – helps address specific consumer needs and accelerate growth.
Repeatability across other brands: Honasa’s ability to repeat its success at Mamaearth to other brands will be key for the company’s long-term growth trajectory, said Citi. It believes the company has developed brand-building playbooks (extending from innovation engine to distribution strategy to marketing and customer engagement capabilities) which should enable it to quickly grow its newer brands. Going ahead, it expects the share of new brands to continue to increase as they scale up; this is likely to be a key growth driver even as Mamaearth’s growth trends closer to the BPC market’s growth rate.
Gradual margin expansion: Honasa operates in high gross margin BPC categories with a masstige positioning which helps it generate 70 percent gross margin – better than most FMCG companies in India. However, EBITDA margin (at 2 percent over FY22-23; 7 percent over 9MFY24) has been below peers, largely due to the high advertising expenses (ranging from 36-42 percent over FY22-23). It expects gradual improvement in Honasa’s EBITDA margin driven by: a) further optimisation of channel mix at the Mamaearth brand (shift towards more profitable offline channel and rationalization of D2C sales); and 2) operating leverage in other brands as they scale up (ad spends grow slower than sales growth; the company recently reported that The Derma Co. is already EBITDA positive in 9MFY24).
Financial performance improving with scale: Citi estimates consolidated revenue to post 25 percent CAGR over FY24-26E driven by: a) 14 percent CAGR at Mamaearth (largely led by offline expansion); and b) 46 percent CAGR in other brands. It expects EBITDA to grow at a faster clip of 55 percent CAGR (11 percent EBITDA margin in FY26E vs 7.1 percent in FY24E) driven by ad-spend rationalisation, improving channel mix and operating leverage.
Improving return metrics: Citi also expects return metrics to improve gradually driven by improving profitability, a lean balance sheet (asset-light contract-manufacturing model, limited capex requirement for company EBOs) and prudent working capital management – it forecasts RoCE/RoE to improve to 22 percent/18 percent by FY26E (vs 16 percent/ 12 percent in FY24E).
Advises Buying
The brokerage values Honasa on EV/EBITDA multiple; its TP of ₹550 is based on 55x Dec-25E EBITDA, at the higher-end of its coverage universe, but warranted in Citi’s view given the faster growth opportunity and a premium positioned brand portfolio (relatively less impacted by macro/demand slowdown).
Market share gains through distribution expansion, innovation, growth in new brands and improving financial metrics could keep absolute multiples elevated, it said. Improving profitability to levels closer to peers (through optimisation of ad spends, improved channel mix and operating leverage) and possible improvement in the return profile going forward could further support premium valuations for Honasa, it added.
While the stock has had a strong run recently – up 35 percent since listing in Nov-23 – Citi believes further upsides are possible from potential sustained outperformance vs. the peer group; it noted that Honasa brands’ premium positioning ensures the company’s performance is relatively less impacted by macro/demand slowdown vs peers.
