IPO Analysis: Honasa Consumer Ltd

IPO Rating: Avoid

About the Issue: 

Honasa Consumer Limited is focused on catering to a diverse spectrum of consumer preferences, ranging from natural personal care and science-backed skincare to a modern take on Ayurveda. The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 308 and Rs 324 per equity share, resulting in a total issue size of Rs 1,701 crore at the upper price band. 

The IPO is scheduled to commence on October 31, 2023, and will conclude on November 02, 2023. The anticipated listing on the exchange is set for November 10, 2023. The market lot size for the IPO is 46 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 598 shares or a total investment of Rs 1,93,752 assuming the upper price band.  

Objects of the Issue 

Considering the fresh issue size of Rs 365 crore within the overall issuance of Rs 1,701 crore, a significant portion of the generated funds will primarily benefit the selling shareholders, as opposed to being directed towards the company's future development and expansion endeavours. 

The company plans to allocate the net proceeds raised from the issue for the following purposes: 

1. Advertisement expenses towards enhancing the awareness and visibility of the company's brands 
2. Capital expenditure to be incurred by the company for setting up new exclusive brand outlets 
3. Investment in the company's subsidiary, BBlunt for setting up new salons 
4. General corporate purposes and unidentified inorganic acquisitions 

Promoter holding 

Varun Alagh and Ghazal Alagh are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 37.41 per cent in the company. 

Company Profile

Founded in 2016, Honasa Consumer Limited is a brand that targets the wide-ranging preferences of millennial consumers. Their offerings span from natural personal care and scientifically-supported skincare to a modern take on Ayurveda. The company's array of distinct brands encompasses various categories, such as baby care, facial care, body care, hair care, cosmetics, and fragrances, each presenting unique value propositions. 

Currently, the company's in-house brand portfolio features well-loved names such as Mamaearth, The Derma Co., Aqualogica, and Ayuga. Furthermore, the company has strategically expanded its portfolio through acquisitions, enhancing its offerings with the likes of BBlunt (offering products and services) and Dr Sheth's (a brand specializing in dermatologist-formulated skincare). 

Financials

Outlook and Valuation  

The primary and most significant risk factor lies in the fact that the company does not engage in the in-house production of its products, instead relying entirely on third-party manufacturers for the production of all its offerings. Additionally, the beauty and personal care (BPC) products market is marked by constant fluctuations, especially in terms of consumer preferences and the introduction of new products and product variations.  

In the event that the company fails to accurately anticipate or adapt to these shifts in market dynamics, emerging trends, and changing consumer demands, there is a potential risk of decreased demand and sales, which could lead to a reduction in market share and hinder the acquisition of new customers while retaining existing ones. The company has been allocating a significant portion of its budget towards marketing campaigns; however, the return on advertising expenses has been notably lower than expected. 

Examining the financial performance, the company has achieved a commendable track record of sustaining revenue growth in recent years, demonstrating a remarkable 58 per cent growth in FY23 compared to FY22. However, on the profitability front, the company has faced challenges, posting a substantial loss of Rs 1,332 crore in FY21, a modest profit of Rs 14 crore in FY22, and returning to a loss of Rs 151 crore in FY23. 

When we compute the PE ratio for the company by considering annualized Q1FY24 earnings to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 97. The company noted that its unique business model does not have any publicly listed peers in the market. However, there are listed companies in India that are of larger size with longer operating histories and varied business models and offerings, that operate in the fast-moving consumer goods space. As per its official documents, the company has referenced several companies, including Hindustan Unilever Ltd, Colgate Palmolive (India) Ltd, Dabur India Ltd, and Marico Ltd, which are currently trading at PE ratios of 56, 48, 54, and 49, respectively. Hence, it appears that the offering is aggressively priced. Therefore, we recommend investors to avoid this IPO, given its associated risks.