Mamaearth may see itself as a thing of beauty; it’s not so for investors yet

ET Intelligence Group: Honasa Consumer, popularly known by its flagship brand Mamaearth, is rolling out a ₹1,700 crore IPO that includes a fresh issue of ₹365 crore and the rest an offer for sale. The Peak XV (earlier Sequoia Capital)-backed company is touted to be India’s largest digital-first beauty and personal care company and has marquee backers such as Kunal Bahl, Rohit Bansal, Rishab Harsh Mariwala and Shilpa Shetty, who are partly selling their shares through this IPO.

Business: Incorporated in 2016, this seven-year-old company was formed to provide toxin-free, natural personal care products, especially for babies. But from a single flagship brand Mamaearth, the company has grown very fast in a short period to a house of five other brands – Mamaearth, The Derma Company, Aqualogica, Ayuga, Dr. Sheth’s and a salon chain BBlunt.

The company’s products are made by third-party manufacturers. It is omnichannel in its distribution – earning over 60% of its revenues online. Besides general and modern trade, Mamaearth has 85 exclusive brand outlets. Of the IPO proceeds, ₹20 crore has been earmarked for setting up new brand outlets and ₹26 crore for new BBlunt salons.

Financials & Growth Prospects: The company’s revenues have grown from ₹460 crore in FY21 to ₹1,492 crore in FY23. While it posted a net loss of ₹1,332 crore in FY21, it swung to a profit of ₹14.4 crore in FY22. The company shut down its content business Mompresso leading to a loss of ₹151 crore in FY23 on account of goodwill impairment of the closed business. While it is encouraging to see the Ebitda margin increase from 1.5% in FY23 to 6% in the latest June quarter, it is still much lower than the 20-22% margins common in the mainstream FMCG industry. As a direct-to-consumer business, the company spends 35% of its revenues on advertising. This is much higher than the FMCG industry benchmark of 10-12% of revenues.

Valuations: At an implied market cap of over ₹10,420 crore, the IPO values the company at 104 times its estimated annualised earnings for FY24 and 5.6 times its estimated FY24 revenues. These are rich valuations when compared to its larger FMCG peers, especially for a young startup that has only recently turned profitable. Besides, execution is the biggest risk for Honasa going ahead, given its different product and service brands.

Incidentally, most of the blockbuster unicorns that got listed during the Covid-19 pandemic such as Nykaa, Paytm and Zomato eventually dropped much below their listing prices. Only investors with a high risk appetite can consider this IPO.

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