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Honasa Consumer’s September quarter (Q2FY27) update thrilled investors, lifting the stock 7% over the past two trading sessions. The company expects year-on-year net sales value (NSV) growth in the early 30s, with its largest brand, Mamaearth, growing in the high teens and younger brands at around mid-40s. It also expects an early double-digit operating margin. This is similar to Q1 when Mamaearth saw high-teens growth and younger brands were up over 40%. JM Financial Institutional Securities estimates Q2 consolidated revenue growth at 32%, and Ebitda margin 11.9%. Reported Ebitda margin in Q1 was 14.6%, aided by operating leverage and seasonal benefit; adjusted Ebitda margin excluding around 150 basis points impact of ESOP reversal in payroll cost, stood at 12.5%. Thus, Q2’s early double-digit operating margin is crucial, as it provides an early indication of whether operating leverage can be sustained and how much of the acceleration is sustainable. Distribution Honasa’s distribution is expanding, so consumer pull remains the test. “Our channel checks with distributors across key markets highlight that offline execution remains central to the next phase of growth. The offline channel accounts for ~35% of the business, while its contribution for Mamaearth is higher at 50%+,” said HDFC Securities. The company’s direct reach is around 120,000 outlets and is expected to reach 300,000 by FY31. However, a wider distribution needs to be backed by higher consumer demand. HDFC’s checks indicate that retail margins, including schemes, are in the 27-35% range, versus base margins of 15-23%. Higher trade incentives help drive offtake and support distribution expansion, but they also increase the cost of converting availability into sales. So, if Honasa increases advertising, trade schemes or promotions to maintain the current pace of growth, some of the operating leverage expected in FY27 could be absorbed by these costs. During the Q1 earnings call, management said the number of brands on quick-commerce platforms is rising rapidly. With limited physical space on these platforms, gaining share depends on brand strength, and consumer searches. This means Honasa needs its brands to generate stronger consumer pull. The stock currently trades at 54 times estimated FY27 earnings, as per Bloomberg. The Street already seems to be assigning a meaningful value to the expected earnings recovery. So, when Q2 results are announced, investors will see if there’s enough evidence that earnings can exceed what is already priced in.
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