IPO: Honasa Consumer Limited

Honasa Consumer, one of the largest digital-first beauty and personal care companies with a recognised brand, 'Mamaearth', has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The company has inconsistent profits combined with a low return on capital.
  
• Growth : The company's revenue has grown at 80 per cent per annum in FY21-23.
  
• Valuation : The stock will be priced at a P/B of 10.454 times respectively, compared to its peers' average P/B of 17.4 times, respectively. P/E is not applicable due to negative earnings.
  
• Overview : It is raising money for marketing and for investment in new exclusive business outlets and to invest in its subsidiary. The company looks to ride the growth in the BPC segment in India.

About Honasa Consumer

Honasa Consumer, launched in 2016, is a Beauty and Personal Care (BPC) company with a 29 per cent market share in the direct-to-consumer segment and a 2 per cent share in the overall BPC segment. It houses some famous brands such as Mamaearth, Derma, Aqualogica, and more. The company's product offerings include baby care, face care, body care, hair care, and more.

Strengths of Honasa Consumer

• Strong brand presence: The company houses some of the most well-known brands in the beauty and personal care industry, such as Mamaearth, Derma, Aqualogica, and more.
  
• Strong online presence: While it has an omnichannel network, most of its business is conducted online. This makes the company relatively asset-light, too.

Weaknesses of of Honasa Consumer

• Reliance on marketing: The company highly depends on high marketing costs in order to be visible among its peers. While, on average, advertising already accounts for 39 per cent of revenue, it cannot afford to bring it down in the future either.
  
• Inconsistent financials: While the company's top-line growth has been impressive, it has been recurring losses and has inconsistent cash flows, which also affects its return on capital.
  
• Competitive environment: The company shares its consumer base with many established players with huge market share, causing them to always maintain a huge expenditure in promotion and marketing.

Risk report of Honasa Consumer

Company and business

• Are earnings before tax of Honasa Consumer more than Rs 50 crore in the last 12 months?
  No. The company's loss before tax for TTM June 2023 is Rs 93 crore.
• Will Honasa Consumer be able to scale up its business?
  Yes. Presently, the top 10 products associated with the brand Mamaearth account for 29.1 % of revenue from operation, and the company is working on increasing the reach of its other five brands, all under the Beauty and Personal Care Segment.
• Does Honasa Consumer have recognisable brands with client stickiness?
  Yes, Honasa Consumer does have a recognisable brand "Mamaearth".
• Does the company have a credible moat?
  No. The market has several other well-established and recognisable players that offer similar products and services.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, the promoters' stake will be 35.3 per cent.
• Do the top three managers have more than 15 years of combined leadership at Honasa Consumer?
  Yes. Key managerial personnel do have more than 15 years of combined experience.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Honasa Consumer free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  No. The company's ROE and ROCE for FY23 are -23.0 and -0.3 per cent respectively. Due to negative equity in FY21, the numbers were skewed, and as a result, we have omitted it for analysis.
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flows in FY23.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company is net cash positive as of June 2023.
• Is Honasa Consumer free from reliance on huge working capital for day-to-day affairs?
  Yes. The company's operations are not working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  Yes. While the company has inconsistent cash flows, the fresh issue must be sufficient for expansions in the next few years.
• Is Honasa Consumer free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of total equity stood at around 4 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 0.7 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Not applicable since the company has reported negative earnings.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 10.4 times compared to peers' average of 17.4 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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