As it believes the risk-reward for the company has turned unfavorable, Antique company Broking has started covering Honasa Consumer Ltd. with a Hold recommendation and a target price of Rs 400 based on 60 times FY26 expected profits. The Mamaearth parent company may face difficulties in the medium run in maintaining robust sales growth and significantly increasing profitability, according to the local brokerage business.

The stock was trading at Rs 408 on Monday, up 1.49 percent. The crip has decreased 4.28 percent so far this year.

Though Antique thought the retail growth would take time, it recognized Honasa's ability to build brands through its creative product releases and early concentration on the web channel.

"The company's current goal is to replicate Mamaearth's brand creation playbook's success in order to propel growth for both its new and existing brands. We think Mamaearth has grown to a significant size (Rs 1,200 crore), and a significant portion of its future growth will need to come from retail development, which might take some time," the statement said.

According to Antique, there is little economic potential in the web channel. Furthermore, it stated that Honasa will need to keep up its aggressive A&P spending (35 percent of sales) in order to spur greater development in new brands, which would short-term limit profitability.

The brokerage company projects earnings to reach Rs 210 crore by FY26 and a revenue CAGR of 25% during FY23–26, driven by stronger development in developing brands. 

It stated that despite the rapid development, it assigned a valuation multiple of 60 times, taking into account the difficulties in growing the offline company and increasing profitability, which calls for higher levels of expenditure.

Antique stated that Honasa's cutting-edge digital-first goods, with an emphasis on natural/toxic-free products, have allowed the company to upend the beauty and personal care (BPC) market, which has hitherto been dominated by major multinational corporations.

"Mamaearth has found success with its early product and brand launches on the internet, followed by an expansion into physical locations to increase market share. The first and fastest digital-first brand to reach a turnover of Rs 1,000 crore is Mamaearth. But in our opinion, 

Mamaearth has achieved scale, and in order to remain competitive with well-established, sizable FMCG companies, the brand will now need to be pushed by retail development.

According to Antique, Mamaearth's development has slowed down due to the present slump in the FMCG industry, which is indicative of the brand reaching a mature stage. Profitability may be limited if rising businesses tried to replicate Mamaearth's winning formula.

In the past two years, the firm has introduced five brands in the infant care, face care, body care, hair care, and color cosmetics and fragrances areas, each with a unique value proposition. 

It would be essential to replicate Mamaearth's trustworthy and effective brand creation strategy for other companies. In our opinion, these up-and-coming brands will play a significant role in the growth that lies ahead. Over FY23–26E, we project these brands to expand at a 54 percent compound annual growth rate (CAGR), with a 22–40% increase in contribution. We think it takes a lot of time and enormous promotional and advertising efforts to create new brands," the statement read.

According to Antique, this may limit the business's total profitability in the foreseeable future. 

The brokerage stated that as Honasa will be fighting against established, sizable FMCG corporations as well as other D2C competitors, growing up the offline channel would take time. 

According to Antique, Honasa's sales are expected to increase at a compound annual growth rate of 25% over the course of FY23–26. This growth will be primarily driven by a 54% increase in developing brands, whose share will rise from 22% to 40%.

Furthermore, as per the statement, the Mamaearth brand will reach a mature stage and its growth rate would probably slow to 14% between FY23 and FY26. Operating leverage should increase Ebitda margin from 7.2% to 10.6% over FY24–26, even with high levels of A&P spending.

We think the optimism is priced in and the risk-reward is unfavorable at the present level. Based on a 60x PER on FY26E profits, we commence coverage on Honsasa Consumer with a HOLD rating and a target price of R 400," the statement stated.