Darling to doubtful: The story of Honasa’s struggles

Honasa Consumer Ltd, the parent company of the well-known D2C brand Mamaearth, crashed 60% in the last few weeks. Here’s the story of what could have happened.

First, the basics. A D2C or direct-to-consumer brand typically reaches its customers through online channel–marketplaces, brand stores, etc. India has a young population with the participation of women in the labor force increasing. Meanwhile, India's wireless data subscribers have increased to 91.1 crore this year from 84.6 crore in FY24, according to government data. All these factors point towards a boom for D2C brands operating in beauty and skin-care niche, of which Mamaearth is a part.

But the capital flowing to this category and the competition in this industry are aplenty. In 2023, D2C beauty and skincare brands raised $160.1 million across 41 funding rounds, while a year earlier, the mop-up was a whopping $439.3 million across 73 rounds, according to data research and analysis firm Tracxn. Can Honasa, also the parent of brands including Aqualogica and The Derma Co, stand out amid all the competition? We believe there are signs that it might be struggling.

Inventory issues

That D2C channel is growing is well understood. That D2C brands catering to the beaty and skin care niche are growing is also well understood. What is not understood is how Mamaearth plans to grow, especially in the offline retail channel. To grow beyond ₹2,000 crore of revenue, it needs to master the offline game. It must rely on distributors and stockists & super stockists–the middlemen. However, as a part of its project Neev, it aims to reach consumers more directly, even offline, by removing the super-stockist layer. This has created some problems.

In July 2024, Mint reported that the company was burdening its distributors with excessive inventory. According to the All India Consumer Products Distributors Federation (AICPDF), goods worth ₹50-100 crore were lying with distributors as unsold inventory. In November, the AICPDF claimed an updated figure of ₹300 crore. It also alluded to credit notes worth ₹50 crore that are yet to be settled by the D2C brand.

AICPDF’s clarion call on excess inventory was proven right when, in Q2FY25, Honasa told its shareholders that it has taken an inventory write-down of around ₹62 crore. In a reply to AICPDF’s November statement, it said the unsold inventory was close to ₹50 crore as of October end against the ₹300 crore figure claimed by the distributors body. Who got it right?

Could Honasa be quoting written-down figures while AICPDF is quoting the retail price-based inventory values? What’s evident is that Honasa not only got its “demand planning” wrong, but also pushed inventory to its channel in a possible effort to jack up sales. We now know that it was essentially booking primary sales – sale to super stockists – a layer in the distribution channel – as revenue.

Because this ‘behaviour’ coincides with its listing timeline, one could question the motives behind such a push. It's always possible that this was business as usual, but then, given the context, it is bound to trigger questions.

But maybe that was not the intent, maybe it got its “demand planning” and product market fit wrong. In June 2024, it shut down its Ayurveda brand. It also wrote off ₹153 crore towards the acquisition of Mompresso–a content creation site targeting mothers. 

Also Read: Why Mamaearth needs to review its offline distribution strategy

It also missed the shift towards ‘actives’. Beauty and personal care market is witnessing a growing consumer preference for products formulated with active ingredients, often referred to as actives. These ingredients, such as hyaluronic acid, niacinamide, and retinoids, are recognized for their targeted efficacy in addressing specific skin concerns. This trend is driven by increased consumer awareness and demand for scientifically-backed skincare solutions. It has since rectified the error with the brands - Derma Co’ and Dr. Sheth, which are more geared towards actives.

Fundamentally, these recent episodes raised questions about the quality of products and demand in offline for them. It also raise questions about the quality of its earnings. For the five fleeting quarters that it was profitable, was it really profitable? 

Also Read: Honasa to cut inventory holding period for Mamaearth distributors by streamlining supply chain

Profit & loss

For the last six quarters, a bulk of the profit has come from ‘other income’, which is largely its investments in FD and other group companies.

If we look under the hood of the ₹111 crore of PAT reported in FY24, nearly ₹48 crore was other income and a bulk of that ₹48 crore came from deposits with banks, fair value gain on investments and gain on lease modification.

Growth

For a barely profitable D2C company, with an offline model under ‘experimentation’, to trade at 100X to earnings, it must promise growth.

That it had to write down inventory, that it has left distributors in a lurch, that there still might be more inventory write-downs on the way, are strong signals that management tried to ‘show growth’. And growth is becoming a problem at Honasa. No wonder the stock has tanked nearly 60% from its 52-week high.

Another fundamental question this episode raises is: In a market where launching a brand can be done as quickly as ten days or lower, where competition is plenty, where manufacturing is not the differentiating factor – Zudio, Caffeine, Mamaearth buy from the same manufacturer, how does one win?

To the company’s credit, it is rethinking its strategy. In the November analysts call, it stated that it will direct investments towards its ‘hero products’, products that are popular within a category. It also claims to have gained market share in facewash and shampoo categories by 125 basis points. According to a Euromonitor Report based on retail selling price for CY23, it is the third largest skincare brand in India. However, the report is not publicly available, and therefore we cannot comment on the veracity of this claim.

But if Google trends for the ‘mamaearth’ keyword is a reasonably accurate indicator of the brand's popularity, it’s been on a downtrend since 2022. So, there seems to be a disconnect between what the management is saying and what some of the on-ground facts are saying.

Nonetheless, the management has candidly acknowledged in its November analyst call that ‘What got us here won’t get us there’. To grow from here onwards ( ₹2,000 crore revenue), it needs its offline strategy on point, which is in ‘experiment’ mode.

Given where Honasa is in its journey, it’s no wonder the stock is hitting new lows.

For more such analysis, read Profit Pulse.

Note: We have relied on data from www.Screener.in and www.tijorifinance.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information. 

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only. 

Rahul Rao has been Investing since 2014. He has helped conduct financial literacy programs for over 1,50,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach as opposed to comforting narratives.

Disclosure: The writer and his dependents do not hold the stocks/commodities/cryptos/any other asset discussed in this article.