Sell Honasa Consumer Ltd for the Target Rs.250 By Emkay Global Financial Services Ltd
Getting its act together; aligning execution with demand key
We retain SELL on Honasa, with Sep-26E TP of Rs250, on 3x sales (implied P/E: 35x; EV/EBITDA: 30x). Honasa’s performance in Q2 was better than expected, wherein topline growth at 16.5% was in-line, while EBITDA margin at 8.9% surprised positively, driving the 18% EBITDA beat. Changes in settlement by Flipkart (mid-teen revenue mix) drove the change in logistic cost recognition (now adjusted with revenue), which led to a 140bps negative impact on gross margin (reported at 70.5%) and a 50bps positive impact on EBITDA margin (reported at 8.9%), in Q2. We cut topline by 3% for FY26 and by 1% for FY27 to factor in the changes, while we upgraded earnings by 6-15% over FY26-28E, given better margin delivery in Q2 and factoring in the accounting adjustments. In Q2, the Mamaearth brand saw growth recovery, while younger brands saw 20% growth. Also, Honasa has enhanced product upgrades and innovation. Q3 marks its entry into prestige skin care under the Luminéve organic brand.
Healthy topline delivery; actions in place to accelerate growth
Honasa has reported better-than-expected topline results with like-for-like growth at 22.5%. Reported revenue saw 16.5% growth (in-line), affected by Rs280mn lower revenue recognition from Flipkart (due to adjustment of logistics spends with revenue). Volume growth at 16.7% YoY stood better than our expectations of 16%. On a low base, Mamaearth returned to growth. Honasa’s other ‘younger’ brands posted 20% growth in Q2. The Derma Co has reached the Rs7.5bn annual revenue run-rate milestone; the management targets crossing the Rs10bn milestone in the next couple of years. After a year of slump, the company has gradually enhanced its innovation funnel across focus categories. Also in Q2, it entered the prestige skin care segment with organic brand Luminéve. In line with our expectations, the company is looking at an oral-care segment entry with 25% stake (Rs100mn consideration; on 5.7x EV/Sales on Rs70mn ARR for FY26) in Couch Commerce Private, which operates prestige oral care brand ‘Fang Oral’.
Better gross margin and lower A&P spend aids EBITDA margin delivery in Q2
Gross margin for Q2 stood at 70.5%, up by 170bps YoY. Had the company followed the old accounting of revenue recognition from Flipkart, gross margin would have been 71.9% (like-for-like), up by 320bps YoY. Reported EBITDA margin stood at 8.9% as against -6.6% in Q2FY25. Like-for-like EBITDA margin stood at 8.4%. We see a better sales mix and accounting changes helping the company sustain improved margin levels. Going ahead, we factor in the accounting impact for three quarters in FY26 and for one quarter in FY27. Such changes have driven the 6-15% earnings upgrade over FY26-28E.
Supply-chain stability and enhanced thrust on demand key for valuations
We see management actions in Q2 as strategic, wherein focus has been on addressing white spaces and enhancing execution. We maintain SELL with Sep-26E TP of Rs250, on 3x sales (implied P/E: 35x; EV/EBITDA: 30x).
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