IPO Size: Rs. 1,701 cr   

• 79% of IPO is offer for sale (OFS): mainly by the investors Stellaris, Sofina, Fireside, Rishabh Mariwala among other and 8% by promoters (37.4% to drop to 35.3%)
• 21% or Rs. 365 cr is fresh issue: for brand advertising (Rs. 186 cr), 132 new Mamaearth physical stores (Rs. 21 cr), 20 BBlunt salons (Rs. 26 cr).

Price band: Rs. 308-324 per share

• Only 10% retail and 75% for institutions, as company reported net loss in FY21

M cap: Rs. 10,425 cr, implying 16% dilution

IPO Date: Tue 31^st Oct to Thu 2^nd Nov 2023, Listing: Fri 10^th Nov 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Direct to Consumer (D2C) Beauty & Personal Care Company

7 year old Honasa Consumer is a digital-first beauty and personal care (BPC) ‘House of Brands’ company with a portfolio of 6 brands. Flagship brand Mamaearth was the fastest B&PC brand in India to reach Rs. 1,000 cr annual revenue within 6 years of launch. Company has been replicating the Mamaearth playbook for its five other brands (DermaCo, Aqualogica, Dr. Sheth’s, BBlunt and Ayuga) combined revenue from which has touched Rs. 325 cr in FY23 and Rs. 160 cr in Q1FY24, thereby reducing share of Mamaearth in total revenue from 96% in FY21 to 65% in Q1FY24. Scale up of existing brands and possible new ones in the future keep outlook optimistic.

Capital Efficient Operations

Honasa has built business in a capital efficient manner, with 70% gross margin being the highest in the listed FMCG universe and operating at only 5 days of working capital.

Fresh issue component of the IPO though looks structured, as company has Rs. 350 cr cash equivalents as of 30.6.23 and business is in no need of any funds. Salons under BBlunt are a service business and merely for brand equity, as 30 salons even after 3-4 years will not move the needle for the company.

Advertising-Led Growth
FY23 revenue rose 58% YoY to Rs. 1,493 cr and Q1FY24 revenue rose 49% YoY to Rs. 464 cr, with 64% revenue generated online and 36% offline. This growth has been on the back of heavy advertising expenses, especially for digital scale up of brands. On an annual topline of Rs. 2,000 cr, overall advertising expenses stand at 35% of revenue.

Even for Mamaearth, which is now a mature brand, having Rs. 1,200 cr annual topline, advertising was 31% in Q1FY24, as against 8-15% for most listed FMCG peers. High advertising spend led to an adjusted EBITDA margin of only 7.5% in Q1FY24, against 20-25% for peers. What is comforting is company’s profitability is not a question mark, unlike some new-age companies, which got listed in the past couple of years. Thus, while Honasa’s EBITDA margins have improved from 3.2% in FY22 to 7.5% in Q1FY24, they are still some time away to match peers, especially the non-food personal care ones like HUL, Colgate, Godrej and P&G Hygiene.

Valuation for Growth

Q1FY24 PAT of Rs. 25 cr resulted in 5% net margin and an EPS of 83 paise, annualizing which leads to a PE multiple of 98x on current year basis, which is much higher than peer average of 40-55x. Penciling in a 40% topline growth for FY24E, current year revenue multiple is 5x, which is attractive, as most peers are either struggling with growth or ruling at comparable revenue multiples, while Honasa looks poised to continue with 30%+ topline growth for the next few years, and resultant margin expansion.  

Last secondary transaction was undertaken at Rs. 262 per share in Feb-Mar 2022, and the 24% premium in IPO price now is justified for the revenue growth clocked in past 18 months.