Honasa Consumer sees profit booking after over 13% gains in 2 days: Should you buy the dip?

From Friday’s close, shares of Honasa Consumer-owing the famous personal care brand Mamaearth has scaled higher in share price by over 13 per cent to Rs 438.7 per share on the BSE. Nonetheless, the stock in today’s trade is witnessing some profit booking and is down by as much as 3 per cent at Rs 426.2 per share.

The sharp spurt in the stock price of the consumer goods stock was triggered after the company’s other skincare brand The Derma Co. achieved a milestone of Rs 500 crore ARR or annual revenue rate, becoming the company’s second largest brand only after Mamaearth.

“Honasa, in a journey to gain scale in the Indian Beauty market, has built ‘The Derma Co’ — their second profitable brand, with ARR of Rs5bn+,’noted Emkay Global in its report dated April 22, 2024. 

The Derma Co, launched in 2020, offers science-backed products powered by active ingredients. It leads the market, sized at Rs20bn, with ~20% share. 

As the trend of products with active ingredients spreads, we see large traditional category incumbents joining in, further increasing the TAM or total addressable market. The brokerage  also expects innovations extending actives from face care currently to others, like hair and color cosmetics. With enhanced execution, the brand used Mamaearth’s playbook to not only scale fast, but profitably too. 

The brokerage expects the brand to see 50% revenue CAGR over FY23-26E, with steady improvement in profitability.

Emkay also stated that Honasa has created a playbook to help scale newer brands faster, which is likely to drive profitability in the business. The Derma Co is gaining scale fast with EBITDA margin in the low-single digits, unlike any other active brands. 

Though the brokerage anticipates some cannibalization, but active ingredient-based products are likely to enhance overall category consumption. Thus, maintaining its bullish stance, Emkay continues with its buy recommendation and a 1-year target set at Rs 500 per share at 6 times EV/ sales.

Honasa Consumer doing business as Mamaearth, is an India-based company engaged in developing, manufacturing and marketing baby care, women and men care products with brand name Mamaearth.