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Strong quarter; improving outlook - Upgrade to BUY

Honasa’s 2QFY26 earnings print was tad better on revenue front but once again profitability was significantly ahead of exceptions – LTL sales growth was 22.5% (UVG of 16.7%). Mamaearth primary sales were back in green (low-single-digit growth if we add back inventory impact in the base quarter), while young brands sustained momentum growing at 20%. Initiatives around reviving growth in Mamaearth are showing promising results and management commentary was optimistic in terms of accelerating growth to double digits by 4QFY26E. Further on profitability, the pace of margin expansion has been much ahead of our expectations for past few quarters (led by improved mix and operating leverage), which should sustain led by improving growth in Mamaearth, scale up in premium brands and marketing efficiencies. Working capital remains negative. We raise our FY26-28E by 2-5%. Given recent correction in stock and improving outlook, we upgrade our rating from ADD to BUY with revised DCF based TP of INR 330 (earlier INR 325).

* Revenue performance broadly inline: Consol. revenue grew 16.5% YoY to INR 5.4bn (inline with our and street estimates), driven by robust UVG of 16.7% YoY. During the quarter, revenue recognition was lower due to change in settlement terms by flipkart (impact on revenue of INR 280mn as logistics & fulfilment costs are now netted off from revenue); however, there is no corresponding impact on profitability. On LFL basis, revenue growth stood at 22.5% YoY. Focus categories (contributing to 75% of total revenue vs. 70% last year) continued on its double-digit growth trajectory across channels (MT/e-commerce sustained 20%+ growth, GT secondary sales: double-digit growth). Overall distribution reach was up 20% YoY to c.250k+ outlets with direct distributor now contributing to 79% of revenue vs. 33% in 2QFY24. We are factoring lowdouble-digit sales CAGR over FY26-28E led by improving growth in Mamaearth and c.20% sales growth in young brands

* Mamaearth growth turns positive; momentum for younger brands sustains: Flagship brand – Mamaearth’s strategic pivot continues to show signs of improvement with sustained doubledigit growth in e-commerce/MT and single-digit secondary sales growth in GT (primary sales were also positive). Adjusting for inventory impact in base quarter, Mamaearth sales grew in low single digits. Younger brands (The Derma Co., Aqualogica, Bblunt, Dr. Sheth’s and Staze) grew 20% YoY. Further, management tapped into two new growth spaces – a) entry into prestige night-focused skin care with new brand Lumineve and b) prestige oral care focused on teeth whitening and oral wellness via investment in FANG (25% stake for INR 100mn).

* Margin delivery positively surprises (ahead of our forecasts and mgmt. guidance) yet again: Gross margin improved by 172bps YoY to 70.5% (JMFe: 70%) led by sourcing efficiencies and better product mix (younger brands having higher margins). Staff cost grew 16.3% YoY, while A&P spends declined 1.6% YoY and other expenses declined 19.4% (shifting of cost to revenue by flipkart and scale efficiency). Resultant EBITDA margin trajectory improved to 8.9% vs. 7.7% in 1Q and 3.3% in FY25, was much better vs. our expectations of 7.3%. Reported PAT of INR 392mn was 8% ahead of our expectation, driven by better-than-expected EBITDA performance. Going forward, management expects to sustain EBITDA margin trajectory at current levels of 1H aided by better mix and operating leverage (especially on marketing spends). We are building in EBITDA margin of c.8% for FY26E.

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