What you must know about Honasa Consumer IPO?

Honasa Consumer Ltd was incorporated in the year 2016 and it currently is one of the leading providers of natural beauty and personal care products through its digital platform. Currently, Honasa (better known by its flagship brand Mamaearth), serves over 500 cities in India. Among its major Indian brands are, Mamaearth, Derma, Aqualogica, and BBLUNT. Honasa Consumer Ltd has early funding support from Sequoia Capital, Sofina SA, Fireside Ventures, and Stellaris Venture Partners. Its product portfolio includes baby care, face care, body care, hair care, colour cosmetics, and fragrances. It has launched a slew of innovative products and it does its selling through multiple distribution channels to cater to customer needs online and offline.

Honasa has, over the years, launched products that has shown a strong commitment to people and to the planet. It attained unicorn valuations in 2022 and today Honasa Consumer Ltd is the largest digital-first BPC company in India. It has 6 marquee brands across beauty and personal care verticals. In addition, its marketing and distribution is handled by an omnichannel presence across more than 700 districts. Mamaearth has been a brand of Varun Alagh (a former FMCG senior honcho) and Ghazal Alagh. The issue will be lead managed by Kotak Mahindra Capital, Citigroup Global Markets, JM Financial and JP Morgan India. KFIN Technologies Ltd will be the registrar to the issue.

Highlights of the issue of Honasa Consumer IPO

Here are some of the key highlights to the public issue of Honasa Consumer IPO.

• Honasa Consumer IPO has a face value of ₹10 per share while the price band for the book building IPO has been set in the band of ₹308 to ₹324. The final price will be discovered within this band through the process of book building.
   
• The IPO of Honasa Consumer Ltd will be a combination of a fresh issue and an offer for sale (OFS). As you would be aware, a fresh issue tends to bring in fresh funds into the company, but is also EPS and equity dilutive. However, OFS is just a transfer of ownership and does not entail dilution of equity or of EPS.
   
• Let us start with the fresh issue portion first. The fresh issue portion of Honasa Consumer Ltd IPO comprises the issue of 1,12,65,432 shares (112.65 lakh shares approximately), which at the upper price band of ₹324 per share will translate into fresh issue size of ₹365 crore.
   
• The offer for sale (OFS) portion of the IPO of Honasa Consumer Ltd comprises the sale of 4,12,48,162 shares (412.48 lakh shares approximately), which at the upper price band of ₹324 per share will translate into an offer for sale (OFS) size of ₹1,336.44 crore.
   
• The promoter selling shareholders in the IPO include Varun Alagh and Ghazal Alagh. The non-promoter selling shareholders in the offer for sale (OFS) include Fireside Ventures, Sofina, Stellaris, Kunal Bahl, Rishabh Mariwala, Rohit Bansal, and Shilpa Shetty Kundra
   
• Therefore, the overall IPO of Honasa Products Ltd will comprise of the issue and sale of 5,25,13,594 shares (525.14 crore shares approximately), which at the upper price band of ₹324 per share will translate into total IPO issue size of ₹1,701.44 crore.

While the fresh issue will be capital and EPS dilutive, the offer for sale portion will only result in transfer of ownership. There will 9 shareholders offering shares under the OFS portion. This includes 2 promoter shareholders in the company and 7 non-promoter investor shareholders.

Promoter holdings and investor quota allocation quota

The company was promoted by Varun Alagh and Ghazal Alagh. Currently the promoters hold 37.41% of the company, which will get diluted post the IPO. As per the terms of the offer, 75% of the net offer is reserved for the qualified institutional buyers (QIBs), while only 10% of the total issue size is reserved for the retail investors. The residual 15% is kept aside for the HNI / NII investors . The stock of Honasa Consumer Ltd will be listed on the NSE and on the BSE. The table below captures the gist of the allocation to various categories.

It may be noted here that this allocation will be done on the quantity net of employee quota. Employees will have a discount of ₹30 to the IPO price. The anchor portion, will be carved out of the QIB portion.

Lot sizes for investing in the Honasa Consumer IPO

Lot size is the minimum number of shares that the investor has to put in as part of the IPO application. The lot size only applies for the IPO and once it is listed then it can be even traded in multiples of 1 shares since it is a mainboard issue. Investors in the IPO can only invest in minimum lot size and in multiples thereof. In the case of Honasa Consumer Ltd, the minimum lot size is 46 shares with upper band indicative value of ₹14,904. The table below captures the minimum and maximum lots sizes applicable for different categories of investors in the IPO of Honasa Consumer Ltd.

It may be noted here that for the B-HNI category and for the QIB (qualified institutional buyer) category, there are no upper limits applicable.

Key dates for Honasa Consumer IPO and how to apply?

The issue opens for subscription on 31st October 2023 and closes for subscription on 02nd November 2023 (both days inclusive). The basis of allotment will be finalized on 07th November 2023 and the refunds will be initiated on 08th November 2023. In addition, the demat credits are expected to happen on 09th November 2023 and the stock will list on 10th November 2023 on the NSE and the BSE. Honasa Consumer Ltd will be special for more than one reason. It will test the appetite for digital and ecommerce IPOs in a big way. But, more importantly, it is the first big digital IPO since Delhivery in May 2022 and will hold the key to many such digital IPOs that are still in the sidelines. Let us now turn to the more practical issue of how to apply for the IPO of Honasa Consumer Ltd.

Investors can apply either through their existing trading account or the ASBA application can be directly logged through the internet banking account. This can only be done through the authorized list of self-certified syndicate banks (SCSB). In an ASBA application, the requisite amount is only blocked at the time of application and the necessary amount is debited only on allotment. Investors can apply in the retail quote (up to ₹2 lakh per application) or in the HNI / NII quota (above ₹2 lakh). Minimum lot sizes will be known after pricing.

Financial highlights of Honasa Consumer Ltd

The table below captures the key financials of Honasa Consumer Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI (All ₹ figures are in crores)

There are few key takeaways from the financials of Honasa Consumer Ltd which can be enumerated as under

1. In the last 3 years, revenue growth has been very robust, which is evident from the sharp growth in the gross merchandise value in these years. Also, the digital first model is a scalable model where the sales can grow at a rate much higher than the costs. That would be the cutting edge for this company.
    
2. Profits and ROE are not really comparable. The big loss in FY23 is largely on account of a one-time write-off on account of depletion of asset values. However, this digital beauty business is a business that entails deep front ending of investments and hence traditional metrics cannot be the sold measure.
    
3. The company has maintained an impressive rate of sweating assets as is evident from the asset turnover ratio. It has consistently averaged above 1.5X, but that may be increasingly irrelevant when the benefits of scalable model kicks in.

While pricing of the IPO does matter here, it is hard to look at this company on traditional P/E metrics. This business has front-ending of costs and back-ending of returns, so it is a business that calls for a lot of patience and cost management. Hence the pricing must be looked at based on largely on the qualitative factors.

What are the qualitative factors to look at? In this case, investors must look at brand built, repeat playbook, product innovation, digital first omnichannel approach, contextual marketing based on data, capital efficient accretion of growth etc. Investors with patience and waiting period of over 2-3 years must consider this stock to add to their portfolio. However, this stock would rank higher on the risk scale.