Honasa Consumer: Mamaearth stock climbed over 45% since its IPO last November; what lies ahead?

Honasa Consumer (Mamaearth) has been in focus after global brokerage Goldman Sachs initiated coverage on the stock with a 'buy' rating. The brokerage has set a target price of ₹570 for the stock, suggesting a potential upside of over 26 percent from its last closing price post its June quarter earnings. Goldman Sachs highlighted the "India beauty transformation" as a multi-year growth opportunity, which has fueled optimism about the company's future.

This led to a 4.5 percent rise in Honasa's shares to ₹472 in intra-day deals on Tuesday, August 13, after 2 straights session of losses post its June quarter results. The stock shed 9 percent in the last 2 sessions.

Goldman Sachs highlighted the ongoing transformation in India’s beauty industry as a significant growth opportunity for Honasa Consumer. The brokerage noted that the combined revenue of leading new beauty companies, including Honasa and Minimalist, has surged 28 times from FY19-23. Goldman Sachs anticipates that Honasa will experience 2.5 times revenue growth and a doubling of EBITDA margins over FY24-30. The firm's expansion strategy includes scaling up its Derma skincare brand and increasing offline distribution to 400,000 retail outlets by FY27.

Despite boasting the highest gross margins in FMCG at 70 percent, Honasa Consumer currently has the lowest EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins at 7 percent. Goldman Sachs projects that these margins will improve, reaching 10.2 percent by FY27 and 14 percent by FY30.

Meanwhile Emkay has a 'buy' rating and a target price of ₹525. It noted that while the shift in distribution and inventory clean-up might impact short-term performance, the underlying business remains strong. The brokerage expects a rebound from Q3FY25 and have slightly adjusted their forecasts: lowering FY25 revenue estimates by 4 percent and EBITDA by 17 percent, but upgrading earnings by 2 percent for FY26-27 due to anticipated better ‘other income’.

JM Financial has also provided a 'buy' recommendation with a target price of ₹505. The brokerage praised Honasa’s operating performance, citing strong volume growth and an improved EBITDA margin of 8.3 percent, which exceeded forecasts. Mamaearth continued to gain share in key categories while newer brands continue to scale up much faster, albeit on a low base. Profitability-wise, EBITDA margin at 8.3 percent was ahead of forecast, aided by better GM and scale-led efficiencies on overhead lines, said JM Financial.

It added that management remains optimistic about the skincare category and within this expects sunscreen to see strong growth where it continues to invest & fortify its position. Post the correction, performance is expected to revert to normalised trajectory in subsequent quarters. From LT perspective, the story remains intact. However, in the near term, the stock is likely to remain under pressure, it added.

However, Kotak Institutional Equities has assigned an 'add' rating with a target price of ₹475, incorporating a 12 percent reduction in FY2025 EPS forecasts. It broadly maintained estimates for FY2026-27 but acknowledged the near-term challenges the company faces.

Stock Price Trend

Since its IPO debut at ₹324 last November, the stock has climbed 45.7 percent. Despite this overall growth, the stock has experienced volatility in 2024, showing only a 7 percent increase year-to-date. In August, it remains virtually unchanged, slipping 0.03 percent after a 7.5 percent rally in July. In June, the stock fell by 2 percent, following increases of 2.4 percent in May and 7 percent in April. Prior to that, it experienced a 3 percent decline in March and an 11.5 percent drop in February, which came after a 6 percent rise in January 2024.

Honasa Consumer Q1 results

For the quarter ending June 30, 2024, Honasa Consumer reported a robust 63 percent year-on-year increase in net profit to ₹40 crore, up from ₹24 crore in the same quarter of the previous year. Revenue from operations for Q1FY25 reached ₹554 crore, marking a 19 percent year-on-year growth versus ₹464 crore posted in the year-ago period.

The company achieved a 20.3 percent growth in product business with an underlying volume growth (UVG) of 25.2 percent. EBITDA margin also expanded by 201 basis points year-on-year to 8.3 percent, resulting in an EBITDA of ₹46 crore. The strong performance was attributed to improved gross profit margins and scale-led efficiencies.

"Honasa has captured a strong market share in the face wash category in online while steadily gaining ground offline, driven by its House of Brands strategy and innovation capabilities. The category achieved approximately INR 800 crore GMV ARR (annual revenue run-rate) for Honasa Consumer," said the company.

Honasa Consumer's stock has drawn significant attention following Goldman Sachs' optimistic buy rating and target price increase. While analysts from Emkay, JM Financial, and Kotak have varied outlooks on the stock, they generally see potential for long-term growth despite short-term challenges. With a strong performance in Q1 and ambitious plans for expansion, Honasa Consumer remains a key player in the evolving beauty market, and its future performance will be closely watched by investors.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.