Buy Honasa Consumer Ltd for the Target Rs 575 by Emkay Global Financial Services Ltd
Honasa’s 2QFY27 was a strong quarter, with a beat on all fronts. Revenue grew 36% yoy (highest in a quarter since listing), 6% above consensus’ estimate, led by 31% volume growth. EBITDA nearly doubled yoy (16% beat) and adj PAT grew 86% (12% beat). Growth was broad-based, with focus categories (>80% of sales) growing >40%, Mamaearth sustained its high-teens growth and younger brands grew >45% (>40% ex-Derma Co). Gross margin (GM) declined by only 60bps despite crude-led packaging inflation, likely aided by better mix and price increases, while EBITDA margin expanded by 380bps on favorable channel mix, A&P efficiency, and operating leverage. Management expects EBITDA margin to maintain current levels even in 2H and believes it is on track to achieve its 15% target over coming 4Y. We raise FY27-29E earnings by 5- 9% led by higher sales (stronger-than-expected performance of Mamaearth and The Derma Co) and higher margin assumptions (to factor in the past several Quarter beat). Overall, we expect sales/earnings CAGR of 18%/27% over FY26-29E and retain BUY; we raise our TP by 4.5% to Rs575 (50x Sep-28E EPS).
2QFY27 results summary
Revenue grew ~36% yoy, coming in 6% above consensus’ estimate, led by 31% volume growth. GM declined by 60bps yoy to 69.9% (+20bps qoq), led by higher RM costs, mainly packaging (crude inflation) related. EBITDA nearly doubled yoy, 16% above consensus’ estimate; EBITDA margin expanded by 380bps yoy to ~12.6%, led by savings in staff costs (110bps) and other expenses (330bps, on favourable channel mix and A&P efficiencies), with A&P flat as a % of sales. Adj PAT grew 86% yoy, at 12% above expectations, despite a higher effective tax rate (27.6% vs 25.6%).
Earnings call highlights
2QFY27 was Honasa’s highest-growth quarter since listing; Management expects to uphold EBITDA margin at ~12-13% in 2H and reiterated its 15% EBITDA margin target over the next 4Y.
1) Focus categories (>80% of sales; ~5% share of a ~Rs500bn market) grew >40%, with face wash, shampoo, sunscreen, and moisturisers all growing >20%.
2) Mamaearth sustained high-teens growth across online and offline, with ~80% of growth from existing stores and share gains of 140bps in face wash and of 50bps in shampoo.
3) Younger brands grew >45% (>40% ex-The Derma Co); ARR for The Derma Co stands at ~Rs10bn, with outlet reach at 65k.
4) E-commerce grew >20%, while offline delivered >30% same-store growth, 0.32mn outlets (+26% yoy) and >40% MT offtake growth.
5) EBITDA expansion came from A&P/channel-mix efficiencies (250-270bps) and operating leverage (110-140bps).
6) MRP increases were taken to offset crude-led packaging inflation.
7) BBlunt hair color grew >100% post-relaunch, and Honasa plans to enter the hair color space with another brand.
8) Dr Sheth’s proposition is being revisited, to target actives consumers.
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