Buy Honasa Consumer Ltd for the Target Rs. 310 by JM Financial Services Ltd
Honasa’s 1QFY26 earnings print was tad better on revenue front but significantly ahead in terms of profitability – Revenue growth was 7.4% (UVG of 10.5%) led by double-digit growth in focus categories (c.80% of sales), despite impact of early monsoons on its large sunscreen category. Better channel mix & scale-led benefit on A&P and other expenses led to better-than-expected EBITDA margin of 7.7% (vs. our est. of 5.3%). On the revenue front, the strategy revamp continues to deliver positive results for Mamaearth with focus categories (c.70% of brand sales) showing improving trends across all channels vs. 4Q. Younger brands’ sales growth momentum (+20%) was lower vs. 30% seen in FY25 (impact of weak summers). Going ahead, management expects revenue momentum to improve (double-digit growth for 9MFY26) and also sustain margins at 7% (better vs. earlier mgmt. guidance of 7% by 4QFY26). Recent transformation steps to sharpen execution are in right direction yielding encouraging results. Current valuations at 3.4x/3x FY26/27E sales are not expensive (HUL acquired Minimalist at c.6x sales), rerating hinges on sustained improvement in Mamaearth and scale up of Younger brands. We have raised our est. to factor in higher margins (in FY26) & other income, roll forward & maintain BUY with revised DCF based TP of INR 310.
* Revenue performance broadly inline; Mamaearth shows green shoots across channels:
Revenue performance broadly inline; Mamaearth shows green shoots across channels: Consolidated revenue grew 7.4% yoy to INR 6bn, while EBITDA remained flattish at INR 458mn and PAT grew 2.6% yoy to INR 413mn. Revenue performance was largely inline, led by robust UVG of 10.5% and double-digit growth in focus categories (contributing to 80% of total revenue), partially offset by early onset of monsoons impacting sunscreen portfolio (impact of c.200bps on growth). Flagship brand – Mamaearth’s strategic pivot continues to show signs of improvement with focus categories (contributing to c.70% of brand’s revenue) growing in double-digit across e-commerce/modern trade channels and positive growth across other channels. Younger brands (The Derma Co., Aqualogica, Bblunt, Dr. Sheth’s and Staze) continued on its healthy growth trajectory and grew 20%+ yoy in 1Q. Management highlighted that growth in Aqualogica and Dr. Sheth’s lagged a bit vs. other brands in this cohort, due to higher saliency in sunscreen category. Overall distribution reach was up 20% yoy to c.240k outlets with direct reach increasing 50% yoy.
* Margin delivery ahead of our expectation as well as management guidance:
Gross margin was inline at 71.2%, up c.50bps qoq led by improved product mix (younger brands having higher margins, contributes to >50% of total revenue). Staff cost grew 22% yoy due to yearly increment/bonus payouts as well as higher ESOP expenses. A&P spends as % to sales was similar qoq while other expenses saw decline (due to better channel mix & scale leverage). Resultant EBITDA margin saw sequential improvement of 264bps to 7.7% (much better vs. our est. of 5.3%). Reported PAT grew 2.6% yoy to INR 413mn led by higher other income. Going forward, management expects to sustain EBITDA margin trajectory of 7% for balance 9MFY26 and would target to improve margins by c.100- 150bps yoy through scale & driving efficiencies across lines.
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