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Downgrade to SELL; strategic reboot needed to revive growth ahead

We downgrade Honasa to SELL from Buy, as we cut our Sep-25E TP to Rs300 from Rs600 earlier. Our thesis of accelerated growth with steady share gains in personal care got a beating from weak business commentary in Q2FY25. Mamaearth is likely to see decline in FY25E (where online growth slumped and general trade in 30% of Top-50 cities await distribution) and aims to recover base in FY26E. Limited offline presence and slower growth in core brand may pave the way for the competition, where recouping in the long term would be daunting. We cut topline estimates 9% for FY25 and 16% each over FY26-27. With margin revisions given a slower topline, our EPS reduced ~35% over FY25-27E. We cut EV/S valuation to 4x (50% discount to sector) from 6.5x. We await proof of execution as the management aims for a business turnaround.

Q2 print weak; ride ahead bumpy

Honasa’s Q2 delivery was weaker than our weak expectations. Topline declined 7% with: i) 6% like-to-like growth (with 7% volume growth), and ii) one-time inventory correction of Rs6.3bn. Weak seasonality and call to improve hygiene of offline business has taken a toll on like-to-like growth, which will see gradual recovery ahead. Inventory corrections drove operating losses in the business.

Building Mamaearth brand health key ahead

Management noted growth pressure for the Mamaearth brand. As the natural trend waned, Mamaearth as a brand has seen growth slowdown. This was further accentuated by execution lapses in offline, leading to brand decline in Q2, which should persist in FY25 given distribution gaps in top-50 cities. Also, the online channel sales is under stress, where traction for actives has heightened. Given the brand size, there is a need for targeted investments. Going ahead, the management would look to course correct by addressing distribution gaps and enhancing A&P deployment. Young brands are sustaining healthy growth momentum with >30% growth. We see its ‘House of Brands’ approach in personal care as the key to counter competitive stress.

Medium-term outlook stressed; downgrade to SELL

We have conservatively cut our earnings expectations ~35% over FY25-27E, where we have cut topline expectations by 9-16% and reduced margin expectations given reduced operating leverage benefits. Bunched-up corrective actions is a bold call from the management which risks medium-term growth but is a positive move to build the offline franchise. Amid recent correction in the FMCG sector and growth slowdown ahead, we now value Honasa at 4x EV/Sales, which is ~50% discount to sector average EV/Sales vs 6.5x earlier. We downgrade to SELL (from Buy) with new Sep-25E TP of Rs300 (from Rs600, earlier). We await proof of execution as the management aims for a business turnaround.

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