Honasa's Share Price Drops by 20%: Is It Just Q2 Loss or More Factors at Play?

mamaearth share price: Honasa experienced a sharp decline in its share price on Monday after the BPC (Beauty and personal care) brand posted a loss of Rs 18.57 crore for the quarter ending September.

The revenue figure also fell below market expectations as it declined by nearly 6.9 per cent to Rs 462 crore as compared to Rs 496.1 crore reported in the corresponding period of the previous year.

In the last one week, the shares of the BPC brand have declined by almost 23 per cent on the National Stock Exchange. And this decline has been steeper in the last 6 months as the shares have plummeted by nearly 30 per cent.

What’s worth noting here is that mamaearth was one of the few new-age companies that managed to stay profitable before getting listed on the bourses. However, this is the first time in the last five quarters that the company has reported a loss on its balance sheet.

One of the major shocker came from inventory losses as the company switched its distribution model. Earlier, Honasa used to rely on the super-stockists model, wherein companies act as a large intermediary that would hold inventory and supply products to retailers.

This change meant that some of the inventory held by super-stockists became unnecessary, leading to unsold products that had to be written off. This one-time loss, amounting to Rs 63 crore, heavily impacted the company's revenue.

Despite, a decline in the overall revenue figure, if we adjust for the inventory loss, the revenue actually grew by 5.7 per cent to Rs 525 crore, according to a report by ICICI Securities. Plus, smaller brands under the company, like TDC (The Derma Co), Aqualogica and Dr. Sheth’s, grew by more than 30 per cent year-on-year, with improved profit margins.

During the earnings call, the management mentioned that Mamaearth is facing growth challenges as the trend for natural products has slowed down. Issues in offline sales has also added to the decline in the quarterly figures. "This (decline) was further accentuated by execution lapses in offline, leading to brand decline in Q2, which should persist in FY25 given distribution gaps in top-50 cities. Also, the online channel sales is under stress, where traction for actives has heightened," Emkay Global stated in its report.

What do the Brokerages say?

Emkay global has downgraded its rating to Sell with a new target price of Rs 300 citing corrections in the FMCG space and overall growth slowdown. "We downgrade to Sell (from Buy) with new Sep-25E target price of Rs300 (from Rs 600, earlier). We await proof of execution as the management aims for a business turnaround," the brokerage house said.

However, some analysts are expecting a turnaround in the upcoming quarters as they see the current headwinds as temporary factors acting as a barrier to Honasa's growth path.

While ICICI Direct has also lowered its rating from Buy to Add, the brokerage maintained a positive outlook on the share price, keeping the target price at Rs 400.

"Clearly, Honasa is now a 95 per cent 'show me' story and 5 per cent 'trust me' story. New brands are performing well, which account for nearly 35 per cent of the total revenue, and consensus appears to be ignoring this good performance. We reckon the stock faces near term tussle of emotions vs. long-term (probabilistic) fundamentals. We stay believers in the Honasa team," the brokerage firm stated.

However, what might act as a dampener for the BPC brand is heightened competition in the industry. Plus, execution challenges and limited success in scaling new brands might also make a positive trajectory difficult for the BPC company.