Honasa Consumer shares a 'Sell'; 18% downside likely: Emkay Global

Emkay Global has maintained its 'Sell' recommendation on Honasa Consumer after discussions with the company's management regarding current business conditions, GST revisions, and strategic priorities. The brokerage has set a target price of Rs 250 for September 2026, based on 3 times sales, with an implied P/E of 37 times and EV/Ebitda of 31 times. The target suggests 18 per cent potential downside over the prevailing price. 

Following a destocking exercise worth approximately Rs 63 crore in Q2FY25 and a revamp of its distribution in the top 100 cities, Honasa is now concentrating efforts on seven central categories: face wash, shampoo, sunscreen, moisturiser, lipstick, serum, and baby care. The strategy involves targeted innovation and a right-to-win approach as the company seeks to address core market demands.

Honasa's management is looking to expand its total addressable market through mergers and acquisitions, particularly in fragrance and feminine hygiene. There is also consideration of potential entries into oral care, beauty accessories, and nutraceuticals, in line with core segment alignment. The acquisition approach is to build scale before any majority stake investment.

The company's focus on consumer needs is underscored as a critical driver for future growth. Consultant insights have guided Honasa to key categories that collectively account for 80 per cent of total revenue and 72 per cent of Mamaearth's sales.

Recent slowdowns in Aqualogica and Dr Sheths have prompted Honasa to enhance product diversity. For Aqualogica, this includes extending beyond sunscreens to body mists and moisturisers, while Dr Sheth's portfolio is being broadened to cover moisturisers and serums.

A new distribution management system has been operational for 18 months, with most distributors in the top 100 cities being new. The churn rate for distributors is currently 15-20 per cent, especially in the West and South, but management expects this to decline. The top 50 cities contribute 60 per cent to general trade channel sales, and Mamaearths revenue split is 55 per cent via e-commerce and 45 per cent from offline channels, with modern trade accounting for a third of the latter.

Part of Honasa's product portfolio, particularly soaps, shampoos, and hair oil, stands to benefit from the GST rate reduction to 5 per cent. This segment represents a low-teen percentage of revenue. According to management, the demand outlook is positive, although with near-term supply-chain issues. Honasa is evaluating SKU-level price cuts to adapt to the new GST structure, given the absence of low unit packs (LUPs).

Emkay Global anticipates an improvement in Q2FY25 results due to the low base created by the previous destocking. Growth in the upcoming quarter is expected to be in high single digits on a like-for-like basis, although the recovery of the Mamaearth brand remains dependent on stabilising the supply chain.