Explained: Distribution woes, inventory correction hit Mamaearth stocks

Once a glowing unicorn trying to compete with legacy players like HUL, Marico, and ITC, Mamaearth’s parent Honasa Consumer's shares fell below its IPO issue price, closing around Rs 225 apiece on Friday. 

Honasa was valued at Rs 10,425 crore or $1.25 billion at the upper band of its IPO. However, the omnichannel beauty and personal care player’s market capitalization currently stands at Rs 7,308.5 crore. 

The decline in shares follows the company’s second-quarter earnings report, leading to a sharp drop in stock price.

Shares of Honasa Consumer plummeted below the company’s IPO issue price of Rs 324, after falling more than 20% on Monday, November 18. 

The stock hit a lower circuit limit on Monday , before recovering marginally from the sell-off. The stock closed at Rs225, showing slight recovery but still significantly lower than its IPO price of Rs 324.

What went wrong?

Things turned sour for the Varun and Ghazal Alagh-led company after it admitted to more than expected impact from its inventory correction project on its second quarter earnings. The company’s performance was heavily affected by Project Neev, a general trade distribution transition that was launched to improve margins. 

Under Project Neev, Honasa Consumer aimed to streamline its distribution network by removing the two-layered channel partner structure, which included super-stockists and sub-distributors in the top-50 cities. This transition was meant to simplify operations and improve efficiency by switching to a single-layered distributor structure.

So far, the company has successfully completed the transition in 70% of these cities, but the restructuring has contributed to operational disruptions and an inventory overhang, impacting its financial results. 

Project Neev, which is part of Honasa Consumer’s broader House of Brands strategy, aims to accelerate its omnichannel plans and streamline its distribution network. This shift would enable the brand to be closer to the consumer, allowing it to gather more accurate data on consumption behaviour and better understand product sales.

“The type of distribution system we have had, we have ended up carrying relatively higher inventory in the system compared to other industries, which does take investment from our distribution system into our inventory rather than in-market and in-market resources,” Varun Alagh, Co-founder and CEO, Honasa Consumer, had noted during the company’s first quarter earnings call. 

Inventory Correction goes south

The company had initially estimated that this would have an impact of around 150 basis points (bps) due to rightsizing on inventory. However, the number was much higher by the time the project was near completion. 

“The impact of the sales return and the inventory correction that has come through, which is higher than what we had imagined it to be because as we went into executing that, we clearly realised that there were pockets of sub-distributors or in-market credits which we had not taken into account and given these are all full and final parting exercises and the impact has turned out to be higher than what we had imagined it to be,” noted Varun Alagh in the company's latest post earnings analyst call.

The company ended up taking a Rs 63 crore hit to its Q2 FY25 revenue due to the inventory correction. The losses from inventory correction further dragged the P&L down in red after the company's previous profitable quarters. 

Honasa Consumer posted a loss of Rs 18.71 crore in the July-September 2024 quarter, a sharp decline from a profit of Rs 29.78 crore in the same period last year.

Moreover, on the flip side of its inventory correction, distributors are stuck with unsold inventory with looming expiry dates, according to media reports. 

In an exchange filing made on Monday, Honasa clarified that total inventory in its distribution value chain stood at Rs 40.69 crore, against the quoted figure of Rs 300 crore of near-expiry inventory by the All India Consumer Products Distributors Federation (AICPDF).

The company went on to further clarify that it has already received returns worth Rs 41.21 crore out of the total returns of Rs 63.52 crore. 

According to a report by The Ken, Mamaearth, in its bid to ramp up its offline play, focused only on primary sales, that is getting stock to distributors rather than creating a demand at the retail level. 

Demand concerns

Honasa Consumer’s flagship brand, Mamaearth, has also been a significant source of disappointment for investors. The demand for the brand has been muted as shifting consumer preferences and changing consumption patterns have impacted sales. 

By focusing on launching more SKUs to cater to a variety of consumers, Honasa spread itself too wide. 

“Most importantly, on investment allocation, I think our learning is that we have gone too wide and we need to narrow our focus onto a few categories and go deep within them with our hero SKUs,” Varun Alagh said during second quarter earnings.

He further flagged that the brand requires strong pivots across product mix and SKU sizing, along with a sharper communication. 

Changing consumer preferences 

There has been a growing traction for active ingredients-based products rather than natural ingredients. Active ingredients refer to chemical components like vitamin C, Hyaluronic acid, Salicylic acid, and others, which have become increasingly popular among consumers.

In contrast, Mamaearth’s core product range has largely been focused on natural ingredients such as onion extracts, beetroot, multani mitti, ubtan, etc. 

While this prompted Honasa to shift towards new-age active ingredient-based lines like The Derma Co, Aqualogica, and Dr. Sheths, these brands are still in their early stages, and it will take time for them to mature and gain significant market share.

The Derma Co is the only brand from its new age bets that has clocked Rs 500 crore annual run-rate in actives category during first quarter. 

“Younger brands like The Derma Co., Aqualogica, BBlunt, and Dr. Sheth’s achieved more than 30% growth in 1H along with improvement in margin profile (mgmt. expects TDC to deliver double-digit EBITDA in FY26) which is a key positive," noted JM Financial in a post earnings note. 

While other beauty and personal care peers are optimistic about demand picking during the back half of the year, Honasa remains cautious due to concerns around muted consumer spending. Bigger giants like Hindustan Unilever Limited (HUL), ITC, and Nestle India also flagged impact from urban demand slowdown. 

What do experts think?

Just days after Honasa’s second-quarter earnings, Emkay Research downgraded the stock from Buy to Sell, cutting its target price in half to Rs 300 in its research report dated November 17. 

“Mamaearth is likely to see decline in FY25E (where online growth slumped and general trade in 30% of Top-50 cities await distribution) and aims to recover base in FY26E,” stated Emkay Global in the report. 

The brokerage slashed Honasa’s topline for FY25 by 9% citing it awaits “proof of execution as the management aims for a business turnaround.” 

While JM Financial reiterated its buy rating for the stock, it also reduced its price target by 22% to Rs 410 from Rs 530. 

“We like the management’s intent in terms of identifying execution gaps. However, given the tough environment and various pilots/transitions underway, the ramp up in offline channel will be gradual and take few quarters before reverting to normalised growths,” stated the report.

(Design and feature image: Nihar Apte)