Mamaearth IPO: What You Need to Know Before Investing

Mamaearth IPO opens Tuesday: Should you subscribe to the Rs 1,701 crore  issue?

Mamaearth is the primary brand under Honasa Consumer Ltd, alongside other brands like The Derma Co, Aqualogica, Ayuga, BBlunt, and Dr Sheth’s. It was established in 2016 by the duo Varun Alagh and Ghazal Alagh; the company’s primary goal was to establish a secure and health-conscious environment for mothers and infants. The Mamaearth IPO served as a promising investment prospect within the consumer sector. A Financial advisor in India recommended the IPO of Mamaearth.

The brand is renowned for its natural and chemical-free beauty and personal care products; Mamaearth stood out as a famous brand in this space.

Mamaearth’s inaugural public offering (IPO) was anticipated to be among the highly anticipated IPOs 2023.

Here are pertinent details about the Mamaearth IPO that potential investors consider essential before investing.

Mamaearth subscription details

The Mamaearth IPO involved an offer for sale (OFS) of approximately 4.12 crore shares and a fresh issuance of shares that amounted to up to ₹365 crore. Projections indicated that the company anticipated raising about ₹1701.44 crore at the upper price band. Consequently, this valuation placed the company at around ₹10,424.53 crore.

IPO Valuation of Mamaearth and Peer Comparison

The Mamaearth IPO was priced at a premium valuation compared to its beauty and personal care peers. At the upper end of the price band, the company is valued at Rs 10,424 crore, which translates to a price-to-earnings (P/E) ratio of 208.6 based on FY21 earnings.

However, some analysts believed the premium valuation was justified, given the company’s strong growth potential, differentiated product portfolio, loyal customer base, and asset-light business model. The company also showed a higher gross margin of 66.8% in FY21 compared to its peers, which ranged from 48% to 60%. Moreover, the company rejected a lower debt-to-equity ratio of 0.02 as of June 30, 2021, indicating a healthy balance sheet.

Mamaearth IPO Review and Recommendation

The Mamaearth IPO represented an attractive opportunity for investors eyeing long-term involvement in the direct-to-consumer (D2C) beauty and personal care sector. The company garnered strong brand recognition and customer loyalty, particularly among millennials and Gen Z, emphasizing natural and effective products.

“It is crucial to clearly understand one’s strengths and weaknesses.” company while analyzing the IPO.

Shareholding Pattern of Mamaearth

Source: DRHP

Mamaearth Revenue Break-up

Source: DRHP

 Strengths of Mamaearth:

  1. Exceptional Brand Recognition: Mamaearth achieved the highest search rankings in the Beauty and Personal Care sector between January 2020 and November 2022, indicating strong brand visibility and consumer interest.
  2. Increasing Revenue from New SKUs: Over the years, revenue has consistently risen from newly introduced SKUs, showcasing a progressive approach toward product innovation and market expansion.
  3. Brand-Building Expertise: Mamaearth exhibited strong brand-building capabilities within its current domains and those it aims to venture into, indicating a capacity for growth and adaptation.
  4. Customer-Centric Innovation: The company’s focus on customer needs reflected its product innovation and a strategic House of Brands approach, bolstering its position in the market.

Risks of Mamaearth:

  1. Reactivity to Changing Consumer Preferences: The inability to promptly identify and respond to evolving consumer preferences and market trends adversely affected product demand and overall business performance.
  2. Brand Maintenance and Marketing Expenditure: Failure to sustain brand reputation impacted the business. High marketing spending, constituting approximately 40% of revenue, increased competition posed a financial risk.
  3. Product Concentration Risk: The company is dependent on a few products only. According to the revenue report, the top 10 products comprise 30% of the total revenue, while the top 2 individually contribute 13%. It exposes a vulnerability in revenue streams.
  4. Rapid Scaling in Offline Channels: Rapid expansion into offline channels carried inherent risks associated with rapid scaling, necessitating efficient management and strategic implementation.

 Key Risks of Honasa Consumer IPO:

  1. Historical Losses: Previous financial years and specific periods saw substantial losses that impacted the company and the value of its equity shares in the future.
  2. Dependence on Mamaearth Brand: Much of the company’s revenue comes from Mamaearth-branded products. Any decline in the market for these goods affected the company’s financial performance.
  3. High Advertising Costs: Historically, high advertising expenses contributed to revenue growth. Reducing these costs impacted future revenue growth, posing uncertainties.
  4. Reliance on Celebrity Marketing and Social Media Influencers: Heavy dependence on celebrity endorsements and social media influencers might negatively affect the company’s business and product demand.
  5. Online Sales Dependency: Reliance on specific marketplace agreements and web traffic sources for online sales impacted the brand.
By Teresa Hinze