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Mamaearth IPO
Mamaearth, the Gurgaon, India-based D2C brand has made quite an uproar over the last few years.
From introducing organic skincare products to becoming a unicorn, it’s commendable how it has created a powerful presence all over India.
Toward the end of 2022, Mamaearth’s parent company, Honasa Consumer Limited filed the Draft Red Herring Prospectus (DRHP) for an initial public offer (IPO). (You can read the DRHP that was filed with the Securities and Exchange Board of India (SEBI) here.)
According to the draft, Mamaearth’s IPO will include a new share issue of 400 Cr INR. The Offer For Shares (OFS) will consist of 46.82 million equity shares.
Reportedly Mamaearth is seeking a $3 billion IPO valuation, which is 1000x its profits.
Finance professionals/ entrepreneurs/ investors on social media didn’t hold back on calling the startup out. They have seen other startup IPOs in India, such as Zomato, Nykaa, and Paytm, performing poorly. Their stock prices fell drastically.
A draft red herring prospectus is a preliminary document that contains information about a company that plans to go public. However, it omits some key information, such as the price range of the offering and the number of shares to be sold.
Let’s see what the people on Linkedin are saying
Nikhil Kuruganti, Techno-marketing professional and Director of Marketing at Qentelli probed into the IPO document and revealed something striking.
Nikhil says that the valuation that Mamaearth is asking for is 16x their FY23 Revenues.
FY23 Revenues – Revenue recorded in the first half of FY23 (H1-FY23), Rs 722 crore*2, and 25x of FY22 Revenues, Rs 943 crore.
It’s at a P/E ratio of 3000x (considering H1-FY23 PAT (Profit After Tax) of Rs 3.67 crore *2) and 1500x considering FY22 PAT of Rs14.44 crore.
(The price-to-earnings (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings). At this P/E ratio, Mamaearth will have to grow at least 50 times (in profits) to deserve the current valuation.
This unrealistically High Revenue Multiple is not the only thing that got caught his attention. He had another point, “How much does Mamaearth spend on marketing?”
Mama Earth’s Marketing expenditure for FY22 was Rs. 391 crores (approx 47.3 Mn USD), whereas their Sales from this marketing spend was Rs. 932 crores (approx 112 Mn USD).
“Their gross revenue over the last three and half years has been around Rs. 2000 Crore and they are spending around 40% of their revenue on marketing. To top it all off Honasa, stated that it plans to use roughly ₹186 crores (approx 22.5 MN USD) that will be gained from the IPO for Marketing.” Explained Nikhil.
He also stated that Mamaearth is not a D2C Brand anymore.
“The company has been aggressive in the past few months on offline distribution. The company’s contribution from offline channels has increased from 9% in 2020 to ~35% in the last 6 months.
You cannot ask for a D2C valuation when you intend to achieve 70% of the business from offline sources in the near future,” concluded Nikhil.
Mamaearth’s revenue over the years
Anamika Rana, a Chartered Accountant and Founder at Arika Consultancy stated that Honasa Consumer has quoted a valuation that seems to be 1000x its profits. (reported a net profit of Rs 14 crore in FY22).
This amount is likely to be spent on advertising expenses, opening new salons through its subsidiary BBlunt and setting up new exclusive brand outlets. The revenue of Honasa has only increased by 4.2x from FY 20 to FY 21 and by 2x from FY 21 to FY 22.
The revenue stats from operations (in million INR.)
– 1097.84 in 2020 year-end
– 4599.9 in 2021 year-end
– 9434.65 in 2022 year-end
She clarifies that the above-mentioned revenue is not just from Mamaearth. It is from a total of 6 units of Honasa whose revenue has also increased by 2.5x from 2020 to 2023 (ascending order 2-2-5-6).
“Even though the online BPC (Beauty and Personal Care) market is expected to grow at a 27% annual rate reaching approximately US$8.4 billion by 2026, I personally feel that this IPO is way overpriced given all the fundamental parameters.” Anamika signs off.
Is another Paytm in the making?
Anurag Singal, Chartered Accountant, and Owner at Betafin Partners, mentioned how Sharks (Investors) in Shark Tank India, negotiated on valuation with entrepreneurs.
Shark Tank India is an Indian TV Series where aspiring entrepreneurs from India pitch their business models to a panel of investors and persuade them to invest money in their idea.
Gazal Alagh, Co-founder of Mamaearth appeared on the show as one of the investors.
Anurag continues, “Remember how on Shark Tank the Sharks were like – “You don’t deserve such a high valuation.” But when it comes to their own startup, look at the dichotomy in thoughts.
Mamaearth as per the DRHP seeks a value of $3 bn ( Rs 25,000 cr) as it seeks to raise $48 mn from the public. If you see the numbers, the contrast will be evident.
Another Paytm.”
Mamaearth IPO review
Pavan Sathiraju served at McKinsey & Company as both a Marketing Specialist and a Management Consultant.
He prefaced his Mamaearth LinkedIn post by saying “As an entrepreneur, I am inspired by their journey & vision. A lot to learn & Respect. But being emotionally connected to a product is different from investing in a company!”
Having worked in the marketing industry for 10 and he pointed out:
“Return on advertising spend (ROAS) – For every rupee invested in Ads, right now Mamaearth is getting 2.5 Rs in return. Not a bad number for a startup.
But, the number has been the same for the last 4 years.
There is an advertising concept called “Adstock behavior”, i.e. the ability of the advertisement to create residual impact. So, ROAS being flat for Mamaearth indicates that there is ZERO stock, which means that either there is a problem with their products or their marketing is inefficient.
They want to invest 180 crores in marketing, of the 400 crores they are raising through IPO. So if the marketing is not effective why would they spend 180 crores on marketing?
There is some ineffectiveness in the way they are running the company and the repeatability of the customer journey.” Said, Pavan.
The second issue that Ex-McKinsey brought to light was the nature of the business, “30 to 35 percent of Mamaearth’s revenue comes from their top 10 products.
If something goes wrong with regard to their top 10 products, the revenues will fall drastically. On the other hand, 70 percent of their revenues are coming from selling on Amazon and Flipkart.
If tomorrow Amazon or Flipkart decide to increase the commissions that they currently charge Mamaearth, what would they do?”
Mamaearth does recognize this problem and that’s why they are selling through offline retail channels as well.
In fact, 30% of their revenues are now coming through offline retail channels. Now the question is, “If you have an offline business model, you can’t command this amount of valuation in the name of a D2C brand.” Concluded Pavan.
Pavan made a short case study on why this IPO could be a disaster. You can find his video here – https://www.youtube.com/watch?v=dNQOf78rprY
Recently, Ghazal Alagh, the co-founder of the Sequoia-backed startup has denied all these IPO valuation rumors in a Twitter thread.
What are your thoughts?
