Honasa Consumer: Honasa stock plunges after poor Q2 show

Concerns over a likely decline in sales in its flagship brand, Mamaearth and earlier expectations of strong earnings growth have made investors sceptical about the stock’s prospects.

“The concerns on distribution model stability and rise in quick commerce have been cited as the main drivers for the losses, but that doesn’t seem plausible as both factors existed in the previous quarters as well,” said Hemang Jani, director at Finazenn, an investment advisory. “In the last two to three quarters, Honasa reported decent numbers. However, this quarter, the revenue and loss were shocking, especially as the management had implied a bullish outlook.”

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Goldman Sachs downgraded its rating on Honasa to ‘neutral’ and set a price target of ₹375 on the stock. Emkay Global also downgraded Honasa to ‘sell’ from ‘buy’ and slashed the target price to ₹300 from ₹600.”As the natural trend waned, Mamaearth as a brand has seen growth slowdown,” said Emkay. “This was further accentuated by execution lapses offline, leading to a brand decline in Q2, which should persist in FY25 given distribution gaps in top-50 cities.”Honasa shares hit an all-time high of ₹546.50 on September 10 after listing at ₹337. Since then, the stock has dropped 45%.

“Investors should remain cautious and avoid the stock as the management doesn’t seem confident on the growth prospects of the company,” said Jani. “Since the company is trading at around 60 times price to earnings already, significant derating is likely to follow.”

Jani said that investors can monitor the company’s performance in the next few quarters before considering buying.

Kotak Institutional Equities said the company is taking the right steps to scale up offline but would wait for the turnaround of Mamaearth before turning “constructive”.

“Honasa’s transition into a formidable BPC player from a challenger has met with a hurdle, with the flagship brand Mamaearth (60% of sales) declining, despite significant inventory correction, and management calling out the need to alter the ME playbook for further scale-up,” said the brokerage, while downgrading the stock to ‘reduce’ from ‘add’ and cutting the price target to ₹340 from ₹475.