Background

‘Honasa’ is derived from Honest, Natural, and Safe. We believe the flywheel of ‘Mamaearth’ is replicable in other brands (demonstrated by the success of ‘The Derma Co’, etc.). It is the first digital beauty and personal care (BPC) market.

The company seemed to connect better with its consumers and strengthen the company's brand equity by building ‘purpose-driven’ brands that are associated with environmental and social impact causes.

For instance, through the Mamaearth ‘Plant Goodness’ initiative, the company works with a non-government organisation to plant trees for orders placed on its direct-to-consumer (“DTC”) platform and share geo-tagged images of these trees with its consumers.

Similarly, The Derma Co. is associated with a ‘Young Scientists’ programme wherein children in certain rural parts of India are provided with access to education in science, and Aqualogica is associated with a ‘Fresh Water for All’ initiative wherein companies help enable access to clean drinking water for marginalised communities.

I. Business Segment

Honasa Consumer Limited is taking the Indian BPC market by storm and thunder. It was established in 2016 with a unique niche to focus on a digital-first approach and cater specifically to millennial customers.

The company’s focus on building thoughtfully designed and purpose-driven brands has helped cultivate trust, brand resonance, and affinity amongst the company's consumers and has enabled it to grow its business, as demonstrated by the following:

II. Revenue Analysis

Honasa has been aggressive on the offline channel for the Mamaearth brand, where consumer repeats further boost supply chain morale. Its focus on beauty outlets has been yielding strong throughput per outlet, which also helps in onboarding new users and upselling existing consumers. As the company scales down discounting on the D2C platform, offline beauty outlets will be key for new consumer additions.

In its offline journey, Honasa has been attracting trade partners with a healthy trade margin and higher credit terms. With scale, the company has optimised its distributor margin (from 10% to 8%) and retail margins (23% now from 25%) for the Mamaearth brand while sustaining the credit days. Given that the bulk of business is managed by super stockists, credit is at ~45 days, while the same with distributors is at ~30 days. Although the company monitors the ageing of receivables and limits billing as the credit period overshoots, we see a creditdriven, scalable business as the key concern.

With scale, the company should optimise credit days. The experience with FMCG companies suggests that credit in the system slows down intensity where trade looks to push for inventory procured on cash. Offering credit initially would be a strategy to drive product visibility, but sustained credit with scale would be seen negatively. The company has maintained negative working capital in the business, which is a factor of minuscule receivable days in the online channel, where growth is healthy. In case offline growth grows at an accelerated pace, we fear for the working capital funding requirement in the business.

III. Expenses Analysis

According to investor details on their website as per Q3 FY24 as per 9 months:

IV. Profitability

The BPC market in India is large (~USD 21bn in 2023) and expected to grow in double digits.2 HONASA concentrates on the faster-growing segments within BPC, including face care, body care, and colour cosmetics. It caters to the'masstige’ and premium price segments, which are witnessing faster growth (~15% CAGR) compared to the mass market (7% CAGR). 3

Hence, Honasa Consumer Limited is the correct company with the correct portfolio for the growth to be witnessed in the BPC market in India.

Reference