Honasa Consumer Limited (Avoid)

Highlights

Honasa Consumer Limited (HCL) incorporate in 2016, is the largest digital-first beauty and personal care (BPC) company in India in terms of revenue from operations for the FY23 and it is focused on beauty and personal care business with the primary objective of developing products that address beauty and personal care problems faced by consumers.

The company has a portfolio of six BPC brands viz., (i) Mamaearth, (ii) The Derma Co., (iii) Aqualogica, (iv) Ayuga, (v) BBlunt and (vi) Dr. Sheth’s, each with differentiated value propositions. Its products portfolio includes products in the baby care, face care, body care, hair care, color cosmetics and fragrances segments. This product portfolio is supplemented by professional salons chain, BBlunt Salons.

The company has set up a dedicated in-house start-up team called ‘Brand Factory’ that closely works with company founders and is responsible for end-to-end ideation, incubation and execution of new brands. HCL believe that this model gives them a competitive advantage over both incumbents and digital-first companies in the BPC market.

The company had a market share (in terms of gross merchandise value) approx 5.4 pct of the online BPC market (i.e., DTC and e-commerce) in India in CY22, a market share (in terms of gross merchandise value) of 1.5 pct of the total BPC market in CY22 and a market share (in terms of gross merchandise value) approx. 28.9 pct in the DTC BPC market in CY22.

Out of the total proceeds of Rs. 17,014 mn, the company would utilize Rs. 1,820 mn for advertisement expenses towards enhancing the awareness and visibility of its brands, Rs. 206 mn for Capital expenditure towards setting up new EBOs, Rs. 260 mn for Investment in its Subsidiary, BBlunt for setting up new salons and remaining Rs. 13,348 mn would go towards existing selling shareholders.

Key Highlights

• The market for BPC products in India is estimated to grow from USD 20 bn in 2022 to USD 33 bn in 2027 at a CAGR of approximately 11 pct, which is among the highest within the broader retail categories and faster than other retail categories in India during this period. The BPC products market lends itself well to digital penetration and the online BPC market, which is currently sized as USD 3 bn, is estimated to grow at 29 pct annually to be around USD 11 bn by 2027, translating to an online penetration of 34 pct. The company is well-positioned to gain from the anticipated expansion in the market since it recognizes changing customer preferences and whitespaces in the sector.
• According to the RedSeer Report, in FY23, the company launched at least 5.7 times the number of new products / SKUs as the BPC industry median. This capacity to successfully launch new innovations as well as conceptualize and construct new brands has been and will continue to be vital to the company’s success.
• The company strategy is to (i) expand its distribution and brand awareness, as of now they have 18640 delivery pincodes. (covering 96.58 pct of the total pincodes) (ii) To incubate or acquire a new engine of growth by way of launching new products, expanding into new marks such as United Arab Emirates, Nepal, and Bangladesh, both organically and through strategic acquisitions and (iii) To strengthening its business efficiency drivers.
• For manufacturing, HCL has set up an asset-light model enabled with contract manufacturing. During Q1FY24, the company worked with 37 contract manufacturers to produce products. Contract manufacturing gives them the benefit of economies of scale at small batch sizes while providing the flexibility to scale up production as needed.
• In FY24 Mama Earth brand products contributes 81.94 pct of total sales (excluding sales from service) and other 5 brands products in BPC segment contributes 18.06 pct of total sales (excluding sales from service)
• The Sales of the company has grown by 80.2 pct CAGR during the period FY21-23 while Adjusted EBITDA 27.5 pct CAGR over the same period. During FY23, company reported revenues of Rs. 14,927 mn which increased by 58.2 pct YoY while adjusted EBITDA rise by 68.5 pct YoY to Rs. 509 mn as adjusted EBITDA margin improved from 3.21 pct in FY22 to 3.41 pct in FY23. Loss in the FY23 stood at Rs. 1509 mn, which decreased from the profit of Rs. 144.3 mn in FY22 due to impairment charges. During Q1FY24 company sales, EBITDA, Profit increased.

Key Risk

• The company generates bulk of its business from flagship brand Mamaearth. As this brand gradually sees growth moderation on a high base, it is critical for the company to scale other brands faster, for sustaining revenue growth momentum.
• High advertisement spends in the past.

Valuation

Honasa Consumer Ltd. is the largest digital-first beauty and personal care company in India in terms of revenue from operations for the FY23. Honasa Consumer with its ‘house of brands’ portfolio, is aptly equipped to capitalize on the swiftly growing beauty & personal care segment in FMCG space. Based on a Rs 308-324/share price band, post-issue implied market-cap would be Rs 99 bn-104 bn. At the upper end of the price band, the issue is quoting at PE of 105.5x its FY24E annualised earnings on fully diluted equity. The issue seems to be aggressively priced discounting all the near-term positives. One can Avoid this issue.

Disclaimer: Financial Hospital Advisors LLP (Brand Name Fintoo) herein referred as Financial Hospital is registered with SEBI as an Investment Adviser under the SEBI (Investment Advisers) Regulations, 2013 with registration number INA000015756. No disciplinary action has been taken against Financial Hospital Advisors LLP or its associate entities by any regulatory authority.