Honasa Consumer IPO review (May apply)

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Review By Dilip Davda on October 27, 2023

•    HCL is a speedily growing online beauty and personal care product marketing company.
•    It has posted speedy growth in its top lines with over 65% EBITDA margins.
•    Based on FY24 annualized earnings, the issue appears aggressively priced. 
•    Well-informed investors may park moderate funds for the medium to long-term rewards. 

ABOUT COMPANY:
Honasa Consumer Ltd. (HCL) is the largest digital-first beauty and personal care ("BPC") company in India in terms of revenue from operations for the Financial Year 2023 (Source: RedSeer Report). Since inception, it has worked with the primary objective of developing products that address beauty and personal care problems faced by consumers. Its flagship brand, Mamaearth, is built to service a core customer need for safe-to-use, natural products, and focuses on developing toxin-free beauty products made with natural ingredients. According to the RedSeer Report, as of the Financial Year 2023, Mamaearth has emerged as the fastest growing BPC brand in India.

Since launching Mamaearth in 2016, HCL added five new brands to portfolio, namely The Derma Co., Aqualogica, Ayuga, BBlunt and Dr. Sheth's, and have built a 'House of Brands' architecture. As of June 30, 2023, its portfolio of brands with differentiated value propositions includes products in the baby care, face care, body care, hair care, color cosmetics and fragrances segments. HCL's success with Mamaearth and ability to identify and cater to emerging trends has enabled it to develop repeatable brand building playbooks that have helped in scaling newer brands at a fast pace. These playbooks are powered by consume.

Each of its brands offer a differentiated value proposition as sought by consumers. Company's products portfolio includes products in the baby care, face care, body care, hair care, color cosmetics and fragrances segments. This product portfolio is supplemented by its professional salons chain, BBlunt Salons.

As of June 30, 2023, it had 993 permanent full-time in-house employees working for it in a range of business activities. These employees were supported by 1,767 contractors and consultants during the month of June 2023. The Company has entered into service and manpower agreements with various contractors to provide it with services inter alia manpower supply, outsourcing, payroll management services at locations mutually decided by the Company and the contractors. These services are provided by the contractors at a mutually decided fee ranging from four to five per cent of the cost to the contractor for such manpower and are payable by the Company within the timelines as prescribed under the respective agreements. The Service Agreements are valid for a term ranging from two years to perpetuity, unless terminated prior by either party in writing. Its workforce is diverse with 57.25% of employees being women.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden combo book building route IPO of fresh equity issue worth Rs.365.00 cr. (approx. 11265446 shares at the upper cap) and an Offer for Sale of 41248162 shares (worth Rs. 1336.46 cr. at the upper cap). The company has announced a price band of Rs. 308 - Rs. 324 per share of Rs. 10 each and mulls mobilizing Rs. 1701.44 cr. at the upper cap (with a total of 52513608 shares). The issue opens for subscription on October 31, 2023, and will close on November 02, 2023. The minimum application to be made is for 46 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 16.32% of the post-IPO paid-up capital of the company. From the net proceeds of the fresh equity issue, the company will utilize Rs. 182.00 cr. for marketing expenses for brand visibility, Rs. 20.60 cr. for setting up of new EBOs, and Rs. 26.00 cr. for investment in Blunt subsidiary for setting up new salons, and the rest for general corporate purposes.  

The company has reserved shares worth Rs. 1.00 cr. (approx. 30866 shares at the upper cap) and offering them a discount of Rs. 30 per share. From the rest, it has allocated not less than 75% for QIBs. Note more than 15% for HNIs and not more than 10% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this offer are Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt. Ltd., JM Financial Ltd., and J. P. Morgan India Pvt. Ltd., while KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 20.43 - Rs. 263565.86 between September 2018 and October 2023. It has also issued bonus shares in the ratio of 12899 for 1 in May 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. Negligible, Rs. 3.21, Rs. 6.05, Rs. 7.33, Rs. 7.82, Rs. 41.86, and Rs. 112.07 per share. 

Post-IPO, HCL's current paid-up equity capital of Rs. 310.48 cr. will stand enhanced to Rs. 321.74 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 10424.53 cr.  

FINANCIAL PERFORMANCE:
On the financial performance part, for the last three fiscals, the company has posted a total income/net profit/ - (loss) of Rs. 472.10 cr. / Rs. - (1332.22) cr. (FY21), Rs. 964.35 cr. / Rs. 14.44 cr. (FY22), and Rs. 1515.27 cr. / Rs. - (150.97) cr. (FY23). For Q1 of FY24, it earned a net profit of Rs. 24.72 cr. on a total income of Rs. 477.10 cr.

For the last three fiscals, HCL has reported an average EPS of Rs. - (18.55) and an average RoNW of - (11.04) %. The issue is priced at a P/BV of 15.97 based on its NAV of Rs. 20.29 as of June 30, 2023, and at a P/BV of 10.39 based on its post-IPO NAV of Rs. 31.18 per share (at the upper price band). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity, then the asking price is at a P/E of 105.54. Thus the issue is aggressively priced discounting all near term positives. 

According to management, the company has grown speedily in the last five years and for the last three fiscals it has posted on an average above 65% EBITDA margins and perhaps the first company to post such progress. With more products afoot, it hopes to maintain the tempo of its growth. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has adopted a dividend policy in December 2022, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
According to HCL, there are no peers in the world for the model of business done by the company. However, under beauty and personal care segment, the peers considered are Hind Unilever, Colgate Palmolive, P & G Hygiene, Dabur India, Marico Ltd., Godrej Consumers, Emami Ltd., Bajaj Consumer, and Gillette India. They are trading at a P/E of 56.91, 48.22, 81.26, 66.34, 63.31, 63.70, 11.46, 22.54, and 57.11 (as of October 27, 2023). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the issue have handled 63 public issues in the past three years out of which 17 issues closed below the issue price on listing day.

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