Jefferies initiates ‘high-conviction’ buy call on Mamaearth with ₹520 target price; here's why

Global brokerage, Jefferies, has initiated a 'high conviction buy' on Honasa Consumer stock today, with a target price of ₹520, which indicates 73.85% upside from the current levels of ₹299.10 at 13:07 IST on Friday.

As a scaled-up internet-first franchise, Honasa, best known for its main brand "Mamaearth," enjoys a sizable moat, according to the brokerage's analysis. With 33% of its current revenue coming from newer brands, the company has successfully transformed into a house of brands.

Also Read: Mamaearth's parent Honasa Consumer share price cracks over 15%, down 21% from issue price

“While online remains at the core, Honasa derives a third of its revenues from offline now. We expect 27% revenue growth over FY23-26E with improving margins, which makes for a compelling story. Initiate at BUY with ₹520 price target,” Jefferies said it its report. 

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The brokerage in its report said that Honasa has managed to create a house of brand architecture with six brands portfolio, with salience of Mamaearth down to c65% and revenues of ₹1,200 crore in FY23, which puts it in the league of top BPC brands in India. Other brands are at different evolution stages and include: The DermaCo (science-based products with active ingredients) and Aqualogica (hydration), which have gained respectable scale, while Ayuga (Ayurveda), BBlunt (professional hair) and Dr Sheth (bio-actives) are at a nascent stage.

Also Read: Extending losses: Mamaearth-parent Honasa Consumer stock now down over 5% from IPO price

Product innovation and the capacity to spot new trends fast have been two of Honasa's primary differentiators from FMCG incumbents, the brokerage stated in its report. As a better margin channel than the internet, offline marketing is crucial, especially for the Mamaearth brand. The offline share increased to more than 35% in FY23 and is expected to continue rising. It is currently available at more than 150k GT shops and 31 MT chains.

Regarding profitability, Honasa recorded a 6% Ebitda margin in 1QFY24, putting growth ahead of profitability, which the global brokerage believes is the right approach.

A few risks that Jefferies identified were intense competition from top FMCG businesses, hasty M&A deals, and insufficient scale-up for the more recent brands.

Also Read: Mamaearth's parent Honasa Consumer IPO listing date today. What GMP, experts signal?

Let's look at the top six key drivers mentioned by Jefferies behind Honasa's success growth:

Operating in high-growth segments

Jefferies said that Honasa's core business is hair care, skincare, cosmetics, and fragrances—all of which are expanding at a faster rate than the market for beauty and personal care (BPC) as a whole. Its portfolio is primarily composed of masstige and premium price points, which are expanding faster than mass BPC. Ultimately, its market share in the online channel is greater than 5%, but its offline market share is less than 1%. It is also increasing its offline market share.

Also Read: Mamaearth has tepid debut in a year of many strong listings

Strong innovation engine

A significant advantage for Honasa, particularly when compared to more established FMCG companies, has been its innovative product line and ability to spot emerging trends fast. This has made it possible for them to launch specialised ingredient-based products like multani mitti for oil control, green tea for open pores, and ice water for frizzy hair. For the past few years, new goods that are introduced in the same year have accounted for 25–50% of incremental revenue, Jefferies said in its report.

Marketing excellence

“Honasa uses a contemporary millennial-focused marketing model, characterized by its focus on content and community. The company has an in-house Content and Creative Excellence (CCE) team that develops educational and engaging content that is relevant to consumers. Honasa engages with >4,000 influencers across social platforms to drive brand awareness and consideration. ~65% of ad-spend by the company is towards digital marketing (social & search), e-commerce platform marketing, and influencer spends,” the global brokerage said.

Category and brand expansion

According to the brokerage, Honasa has jumped at the chance to seize new chances. For instance, the Mamaearth brand swiftly changed from being a baby-care offering to a more comprehensive BPC brand. A third of its revenue now comes from new brands that it created in a similar proactive manner, spotting developing need gaps.

Omni-channel distribution

“Honasa has focused on building an omni-channel distribution network. Offline channel offers better profitability c.f. online. While online channels enable Honasa to quickly identify product-market fit, offline channels allow it to deepen penetration and reach. As per Nielsen, Honasa had an offline reach of ~154k outlets across India (as on Jul-23) and is also present in 31 modern trade chains. The share of offline revenue has grown from <10% in FY20 to >35% in FY23,” the brokerage said.

Profitability focus + capital efficiency

For the past three years, Honasa has turned a profit; in contrast, competitor digital-first firms have seen significant capital burn. Honasa has raised just ₹620 crore in equity capital (~US$80mn) across FY20–23, demonstrating a fairly capital-efficient growth trajectory while expanding to US$200mn in annualised revenue. As of June 23, Honasa's net cash was still ₹440 crore, and its total free cash flow (FCF) burn for FY19–23 was only ₹260 crore, Jefferies said in its report. 

Honasa Consumer Share Price

Mamaearth's parent Honasa Consumer share price continued reeling under selling pressure on Friday (November 10) as it cracked over 15% to touch its fresh all-time low in early trade on BSE. Honasa Consumer share price opened at ₹291.50 against the previous close of ₹302.15 and fell 15.24% to its fresh all-time low of ₹256.10.

Honasa Consumer share price was listed on the bourses at a premium on Tuesday. On NSE, Mamaearth share price was listed at ₹330 per share, 1.85% higher than the issue price of ₹324, and on the BSE.

Following the Jeferries rating, Honasa Consumer share price recovered and at 13:54 IST, the shares were trading at ₹297.90, down 8.8% from the issue price of ₹324. 

Also Read: Honasa Consumer IPO listing: Mamaearth share price debuts at a mere 2% premium at ₹330 on NSE

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.