Honasa Consumer stock hits 10% lower limit; down 36% in 3 days post Q2 show

The stock hit a new low even as the company denied allegations claimed by AICPDF around the company's practices with its distributors and distribution transition.

Shares of Honasa Consumer, the parent of skincare Mamaearth, hit a new low at Rs 237.40, and were locked in the 10 per cent lower circuit on the BSE in Thursday’s intra-day trade amid heavy volumes. The selling pressure was witnessed even as the company denied the recent misinformation being spread by All India Consumer Products Distributors Federation (AICPDF) around the company’s practices with its distributors and distribution transition.

 

According to reports, the AICPDF flagged the large unsold inventory of the company lying with distributors and retailers. According to AICPDF, the unsold inventory is reportedly causing a financial burden of Rs 300 crore.

 

 

However, Honasa in a clarification to the reports said that as of October 31, 2024, as per data from the Distribution Management System implemented at Honasa distributors currently active and associated with the company, the distribution value-chain, consisting of direct distributors, superstockists and sub-distributors, carried a total inventory of Rs 40.69 crore, (as against the quoted figure of ~Rs 300 crore of near-expiry inventory by AICPDF). CLICK HERE FOR COMPANY STATEMENT

 

Meanwhile, in the past three days, the market price of Honasa has tanked 36 per cent after the firm reported a net loss of Rs 19 crore for the second quarter ended September 2024 (Q2FY25) due to weak operational performance. The one of India's leading digital-first beauty and personal care (BPC) firm had posted a net profit of Rs 29 crore in a year ago quarter.

 

In Q2FY25, Honasa’s revenue from operations decreased 6.9 per cent year-on-year (YoY) at Rs 462 crore against Rs 496 crore in a year ago quarter. The company had reported a operational loss of Rs 31 crore against profit of Rs 40 crore in Q2FY24. 

 

The company said the drop in revenue and EBITDA in Q2 was due to one-time inventory correction amid distribution model shift. Mamaearth’s growth has been slower than management expectations, impacted by distribution transition, consumer shift towards active ingredient-based products in online channel and gaps in portfolio/ packprice architecture. Honasa said the company is making identified structural changes to bring it back to its growth trajectory in next few quarters.

 

Honasa’s Q2FY25 earnings print was below expectations due to higher than anticipated impact of inventory correction, weaker than expected performance in Mamaearth and challenging demand scenario. Weakness in Mamaearth was evident even after adjusted for inventory impact.

 

From a long term perspective, the management remains confident on growth runway of Mamaearth, continuation of faster growth (20 per cent plus) in young brands and achieving mid-high teen EBITDA margins. JM Financial Institutional Securities in the Q2 result update said that they like the management’s intent in terms of identifying execution gaps; however, given the tough environment & various pilots/ transitions underway; the ramp up in offline channel will be gradual & take few quarters before reverting to normalised growths, it added.

 

According to analysts at Emkay Global Financial Services, Mamaearth is likely to see decline in FY25E (where online growth slumped and general trade in 30 per cent of Top-50 cities await distribution) and aims to recover base in FY26E. Limited offline presence and slower growth in core brand may pave the way for the competition, where recouping in the long term would be daunting, the brokerage firm said.

 

Analysts have conservatively cut earnings expectations ~35 per cent over FY25-27E, where they have cut topline expectations by 9-16 per cent and reduced margin expectations given reduced operating leverage benefits. Bunched-up corrective actions are a bold call from the management which risks medium-term growth but is a positive move to build the offline franchise. Amid recent correction in the FMCG sector and growth slowdown ahead, the brokerage firm now value Honasa at 4x EV/Sales, which is ~50 per cent discount to sector average EV/Sales vs 6.5x earlier.