Honasa Consumer Limited IPO

About the company:

HONASA Consumer Ltd aka Mamaearth incorporated in 2016 providing beauty and personal care products.
It was founded on the values of Honesty, Natural ingredients, and Safety. The company has grown organically through several consumer brands like Mamaearth, The Derma Co., Aqualogica, Dr. Sheth's, and Ayuga and inorganically by acquiring BBLUNT and the content platform Momspresso.

Objects of the Issue:

- Towards advertisements for enhancing awareness and brand visibility (182 crs);

- Capital expenditure for setting up new EBOs (20.6 crs)

- Investing in the Subsidiary, Bhabani Blunt Hairdressing Private Limited (“BBlunt”) for setting up new salons (26 crs);

- Unidentified acquisition for inorganic growth (Bal).

- General corporate purposes (Bal).

Risks:

- Over-dependence on 3rd party manufacturers: Any disruptions may harm its financial stability and operational results.

- Significant revenues from a limited number of products: In Q1FY24, 29.1% of revenues came from just ten products, making the business highly vulnerable to changes in consumer preferences.

- Facing fierce competition from established giants and emerging startups, would result in loss of market share and the management is not clear in dealing with challenges effectively.

- High Advertisement Costs: Advertisement costs are approximately 40% of total revenues, and the management is uncertain about revenue growth without these expenses. Moreover, 50% of fresh issue proceeds are allocated towards marketing and advertisements, despite management's claims of a 60% customer retention rate, raising questions about the advertising's effectiveness.

- As of June 30, 2023, contingent liabilities stand at 21 crores, while the profit after tax (PAT) is 25 crores. If these liabilities materialize, they could severely impact financials.

- Working capital days showed persistent negativity, decreasing from 2 days on March 31, 2020, to 5 days on June 30, 2023. This signifies delayed Trade Receivables receipts, prolonged Inventory holding periods, or accelerated Trade Payables payments.

- Employee benefit expenses surged from 28 Crs in FY21 to 165 Crs in FY23, significantly outpacing revenue growth.
 
- Acquired subsidiaries like Just4Kids, BBlunt, BBlunt Spratt, and Fusion, reported losses for the year ending 2023. However, in Q1FY24, all except Just4Kids showed slight improvement with a PAT of Rs. 1.3 crs, Rs. 1 crs, and Rs. 91 lakhs. Just4Kids remained a loss-making unit with Rs. 5.4 crs. The absence of a clear strategy to sustainably maintain or enhance profitability raises concerns.

Strengths:

- Being the initial player to enter this segment via digital modes this company enjoys the benefits of 1st mover advantage.

- Data-driven contextualized marketing.

- Product innovation based on the requirements and interests of consumers.

Financial Snapshot (Rs. In Crores):

- Because of an exceptional loss item of Rs. 155 crs the PAT as on FY23 converted into loss of Rs. 151 crs.

- Revenues for the period Q1FY24 stood at Rs. 464 crs, Adj EBITDA – Rs. 35 crs, Adj EBITDA Margin – 7.53%, and PAT with 25 crs.

Rising income levels of large middle-class population, which is a key driver of private consumption, and increasing brand consciousness among millennials also catalyze the company's growth. India’s retail consumption is US$891 billion as of 2022 and is expected to grow at 10% annually till 2027, India is the largest yet fastest-growing retail market.

This company cannot be compared directly with its listed peers because of the diverse product portfolios of the competitors. But to facilitate a comparative analysis and in understanding their relative performance, certain parameters can be used, revenue from operations of HONASA stands at Rs. 1,492 Crs, and exhibits a RONW of (23.57%). In contrast, HUL, Dabur, and Emami have revenue from operations of Rs. 60,580 Crs, Rs. 11,530 Crs, and Rs. 3,406 Crs, with RONW figures of 20.08%, 18.02%, and 27.13%, respectively.

Considering the company's financial performance, associated risks, valuations, and future outlook, the current expected market capitalization appears to be unusually elevated. Therefore, it would be wise to monitor the company's performance for a few quarters before making a decision.
 
So, we suggest our investors to “Avoid” this IPO