JM Financial initiates buy on Mamaearth owner; expects stock to gain 27% in a year

Domestic brokerage firm JM Financial recently initiated a ‘Buy’ call on Honasa Consumer, owning the beauty and personal care (BPC) products brand Mamaearth.

The brokerage, in its report issued on December 15, said the company’s adoption of a digital-first but omnichannel approach has delivered strong results so far. In this backdrop, JM Financial estimates Mamaearth to be a brand worth around Rs 2400–2500 crore by FY24 end, with nearly 49 per cent of sales accounted for by physical channels.

“Interestingly, Varun’s initial investor pitch had estimated net sales of Rs 100 crore in five years; reality was 7-8x better,” added the report. Varun is the co-founder and CEO of Honasa Consumer.

At around 12:17 pm in Monday’s deal (December 18), the stock traded in the red, with a cut of 0.43 per cent or Rs 1.75 at Rs 405 apiece on the BSE.

JM Financial highlighted that the company’s gross margin is higher than the listed FMCG players given its pure-play BPC characteristics and its masstige-to-premium space of operation. While the company has delivered positive EBITDA in each of the last three financial years, its scale was small due to disproportionate investments in brand-building and channel-related spends.

Three key drivers for Honasa's stock

The brokerage has listed three prime drivers for the stock:

>> Honasa's success in general trade extends the growth runway for the brand. "With general trade becoming a more dominant channel (we forecast >50% of Mamaearth’s sales to be offline from FY25E), we expect channel spends to come off as a percentage of revenue, even as the company continues to deploy incremental resources into brand-building given its long-term mindset," said the brokerage.

>> A  possible repeat of Mamaearth’s success with The Derma Co (Rs 3.8 billion in annual recurring revenue, or ARR) and Aqualogica (Rs 1.8 billion in ARR).

>> Lastly, continued improvement in margin and cash flow profiles will also provide a boost to the company, as per the brokerage.

At the suggested target price of Rs 515, the stock would be trading at an FY26 EV to sales of 5.1x, EV-EBITDA of 48.6x, and 72x on a PE basis. "We see huge headroom for growth for the company on both topline and profitability, which, in our view, justifies the premium valuation," the brokerage added.

Since its listing in early November, the stock has zoomed over 25 per cent in comparison to its issue price of Rs 324 apiece.

Honasa Consumer is a small-cap scrip commanding a market valuation of Rs 12,393 crore. The company operating as Mamaearth is an India-based company engaged in developing, manufacturing, and marketing baby care, women's, and men's care products under the brand name Mamaearth.