Honasa Consumer, a digital-first beauty and personal care (BPC) brands owner, is coming out with a public issue to raise ₹1,701 crore. Out of this, ₹1,336 crore is an offer for sale (OFS) by the company’s husband-wife promoter duo (Varun and Ghazal Alagh), and seven other shareholders (will make between 3x and 100x returns) in the seven-year old company’s IPO.  

The public issue proceeds will be spent on advertisement expenses (₹182 crore), setting up new exclusive brand outlets (₹20.6 crore), investment for setting up new salons by subsidiary BBlunt (₹26 crore) and general corporate purposes and unidentified inorganic acquisitions. The IPO opens October 31 and closes November 2.

Along with Mamaearth, Honasa has five new brands, namely The Derma Co., Aqualogica, Ayuga, BBlunt  and Dr. Sheth’s. The high growth potential of the Indian BPC market is attractive. Honasa’s wide product portfolio, robust sales growth, and brand-building capability are definite pluses. Honasa’s omni-channel distribution makes it well-placed to capture growth.

However, while business opportunity might be a beauty, the valuation demanded by Honasa is a beast. Annualising the company’s declared Q1 EPS (₹0.83) for the rest of the year, its Price to Earnings (P/E) ratio works out to 98 times (at the upper price band). Excluding the impact of other income (~50 per cent of profit), the P/E based on core EPS would be around 195 times. This is too expensive compared to shares of listed personal products companies (available in the 35-60 times P/E range), even when considering Honasa’s growth prospects. Besides, there are risks and a few other factors to consider (explained below), that warrant assessment post its listing. Hence, investors need not subscribe to the issue, and can wait and watch for now.

Many would also recall BPC retailer Nykaa’s very expensive IPO in 2021. Honasa’s asking price calls for caution, especially as inflation and rising interest rates bring an end to cheap money, which used to previously support exorbitant equity valuation environment.

About the business

Honasa’s founder duo decided to sell products devoid of harmful chemicals for children when they could not find these in India for their son Agastya back in 2016. Thus was born the flagship: Mamaearth. It went on reach an annual revenue of ₹ 1,000 crore within six years of launch. A combination of traditional DIY beauty ingredients in modern and convenient formats, short product-development cycles, aggressive marketing spends, leveraging online channel (direct to consumer) and smart use of influencers made it a success. 

With 6 brands now under its belt, Honasa claims to have a ‘house of brands’ architecture spanning baby care, face care, body care, hair care, color cosmetics and fragrances segments, along with professional salons. It has a predominantly online presence (60-65 per cent of revenues). Its offline business is supplemented by 85 exclusive brand outlets.

What we like

Sales growth, buoyed by rise in volumes, has been rapid for Honasa in the last few years (see table).

In FY23, it launched 5.7 times more new SKUs compared to BPC industry median, helping growth. Aided by discounts, traction in third-party ecommerce marketplaces such as Amazon and Flipkart has played a big role in revenue rise. Sales commission and fulfilment costs account for 27 per cent (Q1FY24) of Honasa’s online revenue.

It has increased its revenue share from the more profitable offline channel from 19 per cent in FY21 to 33 per cent in 1QFY24. It intends to continue on this trajectory to improve the overall margin profile of business.

What we don’t like

Honasa remains a largely one-trick pony with Mamaearth (82 per cent in FY23) being the revenue driver. Other brands, including acquired ones, must reach that scale to justify Honasa’s ask of ₹10,400-crore valuation.

Shorn off all the glitz, Honasa is a marketing/brands company using inventory-based selling model. It outsources manufacturing of all products to third-party manufacturers. It does not hold any patents over product formulae. In comparison, cosmestics majors such as L’Oréal and Estée Lauder have thousands of patents globally. Thus there is nothing proprietary about Honasa’s offerings, making this a marketing play.  BPC market is extremely competitive, and Honasa’s reliance on third-party e-commerce marketplaces for growth is tricky. It’s profit-making track record is patchy (see table). It remains to be seen if Honasa can repeat Mamaearth brand’s success for newer brands.

While gross profit margins have remained steady at 70+ per cent, EBITDA margins have been volatile. High ad spends (35.5 per cent in FY23), promotions and discounts eat into profits. It is unclear if Mamaearth’s retention funnel (63 per cent direct-to-consumer revenue from existing customers) will remain strong when such spends reduce.   

Honasa’s future profitability hinges upon continued third-party ecommerce marketplace success and contractual terms. Its average revenue per unit sold (revenue/volume) has been stagnant at around ₹200 for three years, which could indicate heavy price competition.

Another important thing to note is that Honasa’s management expertise can be questioned with respect to Momspresso, a content platform. After acquiring it in December 2021, the management was bullish about it in the previous IPO document filed in 2022. Then, in latest RHP, Honasa said in FY23 it booked ₹155-crore impairment loss on goodwill and other intangible assets as it scaled down the majority of Momspresso’s business verticals. Besides market/economic changes, such quick turnaround in stance may indicate inaccurate valuation, poor forecasting as well post-acquisition integration.

Honasa’s public market valuation could, at a later stage, help the promoters (~35 per cent holding post-issue) sell brands or the business to acquirer(s).

But with 78 per cent of the IPO money now going to selling shareholders via OFS, long-term IPO investors should consider what’s in it for them for funding this cash-out opportunity.