Antique Stock Broking has initiated coverage on Honasa Consumer Ltd with a Hold’ recommendation and a target price of Rs 400 based on 60 times FY26 estimated earnings, as it feels the risk-reward has turned unfavourable for the stock. The domestic broking firm believes that maintaining strong revenue growth and materially improving profitability could be a challenge for the Mamaearth parent in the medium term.
On Monday, the stock was trading 1.49 per cent higher at Rs 408. The scrip is down 4.28 per cent year-to-date.
Antique appreciated Honasa’s ability to create brands with its innovative product launches and strategy of focusing on the online channel during the initial phase but believes the retail expansion will be time-consuming.
"The company now aims to drive growth in its new/ existing brands by replicating the success of Mamaearth’s brand building playbook. We believe Mamaearth has reached a sizeable scale (Rs 1,200 crore), where a large part of future growth will have to be driven by retail expansion, which could be time-consuming," it said.
Antique said the online channel entails limited profitability. Additionally, in order to drive higher growth in emerging brands, Honasa would have to continue with its aggressive A&P spends (35 per cent of sales), which could restrict profitability in the near term, it added.
The broking firm is expecting sales CAGR of 25 per cent over FY23–26 driven by higher growth in emerging brands and earnings to touch Rs 210 crore by FY26.
Despite the high growth, it ascribed a valuation multiple of 60 times factoring in the challenges of scaling up the offline business and improving profitability, which warrants a greater level of investments, it said.
Antique said Honasa has been able to disrupt the beauty & personal care (BPC) category, which has been dominated by large MNC players, through its innovative digital-first products with a focus on natural/ toxic-free products.
"The company’s strategy of launching products/ brands online during the initial stages and later expanding its presence to offline stores to drive penetration has been successful for Mamaearth. Mamaearth is the fastest and first digital-first brand to attain a revenue of Rs 1,000 crore. However, we believe Mamaearth has reached scale and the brand will have to be driven by retail expansion hereon for it to compete with established large FMCG players.
Antique said the current slowdown in the FMCG space has moderated Mamaearth’s growth, which reflects the brand entering a mature stage. Replicating Mamaearth’s success strategy for emerging brands may restrict profitability.
Over the last two years, the company has launched five brands with differentiated value propositions in the baby care, face care, body care, hair care, and colour cosmetics and fragrances segments.
"Replicating Mamaearth’s successful and dependable brand building playbook for other brands would be key. In our view, a large part of the future growth would be contributed by these emerging brands. We expect these brands to grow at 54 per cent CAGR over FY23–26E with contribution increasing from 22 per cent to 40 per cent. We believe creating new brands are time consuming and the promotional/ advertising efforts that go into creating these brands are immense," it said.
This, Antique said, could restrict the company’s overall profitability in the near term.
The brokerage said scaling up of the offline channel would be a gradual process as Honasa would be competing with well-established large FMCG companies and other D2C players.
For now, Antique said Honasa’s sales to grow at 25 per cent CAGR over FY23–26 driven by 54 per cent growth in emerging brands with contribution increasing from 22 per cent to 40 per cent over FY23–26.
The Mamaearth brand will enter a mature stage and its growth rate is likely to moderate to 14 per cent over FY23–26, it said.
Despite elevated levels of A&P spends, operating leverage should improve Ebitda margin from 7.2 per cent to 10.6 per cent over FY24–26.
"At the current valuation, we believe the optimism is priced in and risk-reward is not favourable. We initiate coverage on Honsasa Consumer with a HOLD recommendation and a target price of R 400, based on 60x PER on FY26E earnings," it said.