Buy Honasa Consumer Ltd For Target Rs.375 By JM Financial Services Ltd.
Honasa’s 3QFY26 print was inline on revenue performance, but once again profitability was significantly ahead of exceptions – LTL sales growth was 21.7% YoY (UVG of 30.2%). Key positives were a) Mamaearth sales growing in teens while young brands sustained momentum growing at 25%+ on YoY basis and b) scale leverage/marketing efficiencies led to LTL EBITDA margins expanding to 10.4% (vs JMFe:8.4% and 1HFY26 margins of c.8.1%). Management commentary remains positive – expects to sustain double digit growth momentum for Mamaearth and margin expansion of c.100bps YoY in FY27E. Clearly the initiatives around reviving growth in Mamaearth/scaling up younger brands and management’s execution capabilities are showing promising results on revenue growth; working capital cycle remains negative too. Faster growth in higher margin Mamaearth brand, scale up in Young brands provides adequate levers for margin expansion going ahead too. Factoring strong Q3, we raise our FY26-28E by 12-13%. Maintain BUY with revised DCF based TP of INR 375 (earlier INR 330)
? Revenue performance inline with our optimistic assumptions: Consol. revenue grew 16.2% YoY to INR 6bn (inline with our and street estimates). Similar to 2Q, 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 21.7% YoY with UVG of 30.2% YoY. Focus categories (contributing to 75% of total revenue vs. 70% last year) grew by 25% YoY healthy secondary sales across channels (MT/e-commerce/GT channel saw 25%/20%/25% growth in secondary sales). Overall distribution reach was up increased to 270k+ (vs c.250k+ in Q2) outlets. We are factoring sales CAGR of 14% over FY26-28E led by improving growth in Mamaearth and c.20% sales growth in young brands
? Mamaearth growth in teens; momentum for younger brands sustains: Flagship brand – Mamaearth’s strategic pivot continues to show signs of improvement with brand growing in teens in the quarter, aided by interventions around product superiority, stepped up investment in focus categories and distribution expansion. Market share gains were seen in key categories of Face Cleanser and Shampoo. Younger brands (The Derma Co., Aqualogica, Bblunt, Dr. Sheth’s and Staze) grew 25% YoY (vs 20% YoY in 1H). Going ahead management remains optimistic about sustaining double digit growth in Mamaearth in FY27E.
? Margin delivery positively surprises (ahead of our forecasts and management guidance) yet again: LTL gross margin were flattish on YoY basis at 69.9%, QoQ drop in margins is more to do with product mix (recovery in Mamaearth and higher growth in winter products where margins are lower). Staff cost grew 37.2% YoY due to ESOP provisioning and higher incentives; same run-rate is likely to continue in 4QFY26E and then YoY growth should normalise in FY27E. A&P spends grew 5.1% YoY – a function of optimization from refreshed marketing playbooks delivering better marketing effectiveness. LTL other expenses grew by 10% YoY benefiting from better fixed cost absorption with improving scale. Resultant EBIDTA increased by 150.5% YoY to INR 655mn (30% above est) with LTL margins at 10.4% (vs 5.1% in base quarter and 8.4% in 2QFY26). Going forward, with improving scale/mix management expects c.100bps margin expansion per annum over the medium term.
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