Honasa Consumer

Owns new-age FMCG brands

Expanding portfolio into adjacent categories such as color cosmetics and fragrances

Incorporated in 2016, Honasa Consumer provides beauty and personal care products through its digital platform. Company owns new-age FMCG brands such as Mamaearth, The Derma Co., Aqualogica, Dr. Sheth‘s, BBlunt and Ayuga.

Honasa Consumer was the largest digital-first beauty and personal care (BPC) company in India in terms of revenue in FY2023. As of June 30, 2023, its portfolio of brands includes products in the baby care, face care, body care, hair care, color cosmetics and fragrances segments.

The company is focused on building purpose driven brands. Its flagship brand, Mamaearth, is built to service a core customer need for safe-to-use, natural products, and focuses on developing toxin-free beauty products made with natural ingredients. As of FY2023, Mamaearth emerged as the fastest growing BPC brand in India to reach an annual revenue of Rs 10 billion (in the preceding 12 months) within six years of launch.

The company’s products are available to its customers through omni-channel distribution networks across both online and offline touchpoints. For FYs 2021, 2022 and 2023, and the three months ended June 30, 2022, and June 30, 2023, its revenue from online channels constituted 81.37%, 69.91%, 59.36%, 62.86% and 64.01% of total revenue (including sale of services), respectively. Revenue from offline channels as a percentage were 18.63%, 28.87%, 36.14%, 31.90% and 33.47%, respectively.

The company has adopted a digital-first approach to distribution strategy of first incubating new brands on its online channel and then selectively introducing them in the offline channel.

The company leverages the online channel to (i) test product market fit by capturing early feedback from consumers on brand proposition, positioning, packaging and performance; (ii) capture valuable consumer insights across purchase behavior, product preferences, and need-spaces; and (iii) generate customer affinity by providing a personalized and engaging brand experience for consumers. Once a brand achieves a certain scale and customer acceptance online, the company selectively introduces products from the brand into its offline channel with the key objective of driving household penetration.

The company had a market share (in terms of gross merchandise value) aggregating to approximately 5.4% of the online BPC market (DTC and e-commerce) in India in the calendar year 2022. Similarly, the company had a market share (in terms of gross merchandise value) of 1.5% of the total BPC market for calendar year 2022 and a market share aggregating to approximately 28.9% in the DTC BPC market in the calendar year 2022.

In Q1 FY2024, the company derived 64.35% of its revenue from third party e-commerce marketplaces and the Direct-to-Consumer channel contributed 35.65%.

The company intends to open new Mamaearth EBOs (Exclusive Brand Outlets) across a mix of mall stores and high-street outlets in India. The company has also identified expansion opportunities in priority markets such as the United Arab Emirates, Nepal, and Bangladesh, both organically and through strategic acquisitions.

The company intends to acquire new users to drive growth. Moreover, to support its offline expansion plans, the company aims to differentially focus on other modes of advertising, including television advertising, to reach and target a larger consumer base.

The company is open to acquiring new brands across value propositions and price points. It has plans to expand its portfolio across the full spectrum of BPC categories by further penetrating into adjacent categories such as color cosmetics and fragrances.

In Q1 FY2024, the company introduced 109 new SKUs in the BPC market in India. The contribution of new SKUs (across all its brands) to an absolute increase in revenue during the period was 25.45%, as compared to the preceding corresponding period.

The company has a dedicated in-house innovation team, consisting of 47 members, as on June 30, 2023.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 365 crore and an offer for sale of 4,12,48,162 equity shares worth Rs 1336.44 crore by existing shareholders.

The price band for the IPO is Rs 308 to Rs 324 per equity share of face value Rs 10 each.

The objectives for the fresh issue include advertisement expenses worth Rs 182 crore towards enhancing the awareness and visibility of brands, capital expenditure worth Rs 20.6 crore for setting up new EBOs, investment of Rs 26 crore in BBlunt for setting up new salons, and the remaining amount for general corporate purposes.

The promoters of the company are Varun Alagh and Ghazal Alagh. The promoters and promoter group holds an aggregate of 117,002,850 equity shares, aggregating to 37.41% of the pre-offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 35.34%.

The issue, through the book-building process, will open on 31 October 2023 and will close on 2 November 2023.

Strengths

The company has grown its revenue from Rs 459.99 crore in FY 2021 to Rs 1492.74 crore in FY2023, representing a CAGR growth of 80.14%. In the same period, the median revenue CAGR of all other BPC companies for which data was available was 28%.

The BPC products market in India is undergoing a fundamental re-industrialization owing to the convergence of technology, demographic dividend, and growing consumer aspirations. The company is well positioned to benefit from the expected growth in the market.

The company follows an asset-light contract manufacturing model that gives the benefit of economies of scale at small batch sizes, while also providing flexibility to scale up production as needed. During the three months period ended June 30, 2023, the company worked with 37 contract manufacturers to produce products.

Due to its success with Mamaearth brand, the company has developed brand building playbook that will enable it to replicate its success across newer brands.

Honasa Consumer is the largest company in the DTC BPC market in India in terms of revenue generated from the DTC channel in FY2023. During FYs2021, 2022, 2023 and the three months period ended June 30, 2022, and June 30, 2023, 38.51%, 43.15%, 56.90%, 52.65% and 63.20% of its revenue from this channel (for Mamaearth brand) was attributable to existing customers.

The company’s Digital-First omnichannel distribution helps it to launch new products in an efficient manner by enabling it to check product-market fit at an early stage before scaling them up in a much larger offline environment.

The company is led by visionary founders and professional leadership team with a combined experience of over 100 years across consumer-packaged goods, e-commerce, and DTC companies in India.

Weaknesses

The company recorded losses in FYs 2021 and 2023, and the three months ended June 30, 2022, wherein its restated loss was Rs 1332.21 crore, Rs 150.96 crore, and Rs 11.52 crore, respectively. Any losses in the future may adversely impact its business.

The company’s auditor’s report on internal financial controls issued on standalone financial statements for FY2020 contains a disclaimer of opinion relating to the auditors’ inability to obtain appropriate audit evidence to provide a basis for opinion on adequate internal financial controls. Further, the audit report on Special Purpose Ind AS Standalone Financial Statements for FY 2021 contains an emphasis of matter paragraph.

The company’s majority revenue comes from the sale of products under its flagship Mamaearth brand. Any decrease in demand for Mamaearth branded products could have an adverse effect on business. For FYs 2021, 2022 and 2023, and the three months period ended June 30, 2022, and June 30, 2023, its revenue from Mamaearth brand, represented 96.06%, 93.04%, 81.94%, 87.09% and 67.06% of its total revenue (excluding revenue from sale of services), respectively.

The company incurs significant advertising expenses, which has contributed to its growth in the past. If the company reduces its advertising expenses in the future, there is no assurance that it will be able to maintain similar growth. For FYs 2021, 2022 and 2023, and the three months period ended June 30, 2022, and June 30, 2023, its advertising expense as a percentage of revenue from operations was 38.68%, 41.49%, 35.52%, 41.33% and 34.99%, respectively.

The company had a net cash outflow of Rs 51.55 crore in FY2023. Any negative cash outflows from operating activities in future could have an adverse impact on business.

The company faces intense competition from many competitors, some of which are larger and can spend more on advertising and marketing and offer substantial discounts. Failure to compete can result in loss of its market share.

Subsidiaries which the company acquired in the past, including Just4Kids, BBlunt, B:Blunt Spratt and Fusion, have incurred losses for certain historical periods. There is no assurance that these entities will be profitable in the future.

The success of its business depends substantially on its management team and operational workforce. Its inability to retain them could adversely affect business. During FYs 2021, 2022, and 2023, and the three months period ended June 30, 2022, and June 30, 2023, the company had high employee attrition rate (annualized) of 36.93%, 29.29%, 47.01%, 45.86% and 81.71%, respectively.

Valuation

In Q1 FY2024, consolidated sales were up by 48.76% to Rs 464.49 crore as compared to Q1 FY23. OPM increased by 1029 bps to 6.31%, which led to operating profit of Rs 29.31 crore as compared to loss of Rs 12.44 crore. Other income increased 192.37% to Rs 12.61 crore, while interest cost increased 34.83% to Rs 1.48 crore and depreciation increased 34.83% to Rs 6.49 crore. PBT was Rs 33.95 crore compared to loss of Rs 14.03 crore. Tax expenses for Q1 FY24 was of Rs 9.24 crore as compared to tax credit of Rs 2.51 crore in Q1 FY23. Net profit was Rs 25.96 crore as compared to losses of Rs 9.30 crore.

In FY2023, consolidated sales were up by 58.22% to Rs 1492.75 crore as compared to FY2022. OPM increased by 32 bps to 1.53%, which led to 98.76% increase in operating profit to Rs 22.77 crore. Other income increased 7.85% to Rs 22.52 crore, while interest cost increased 121.73% to Rs 6.66 crore and depreciation increased 262.06% to Rs 24.96 crore. Extraordinary items were of Rs 154.7 crore compared to nil. PBT (after extraordinary items) was negative Rs 141.04 crore compared to profit of Rs 22.44 crore. Tax expenses for FY2023 were Rs 9.93 crore as compared to tax expense of Rs 8 crore in FY2022. Net loss was Rs 142.81 crore as compared to profit of Rs 15.71 crore.

The TTM EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 1.8. At the upper price band of Rs 324, P/E works out to 180.

As of 26 October 2023, its listed peers such as Godrej Consumer Products traded at TTM P/E of 56, Emami traded at TTM P/E of 31, Hindustan Unilever traded at TTM P/E of 56, Bajaj Consumer Care traded at TTM P/E of 23, Gillette India traded at TTM P/E of 53, and Colgate Palmolive traded at TTM P/E of 49.

BPC is one of those categories that lends itself well to digital penetration. The online BPC market, which is currently sized as US$3 billion, is expected to grow at 29% annually to be around US$11 billion by 2027, translating to an online penetration of 34%. Among the most significant trends driving the online BPC market forward is the disruption led by the digital-first brands, as they are better at catering to the rapidly changing consumer demands.