Where is the pop? Mamaearth parent gets cold feet on debut

Honasa generates the bulk of its business from Mamaearth, with its revenue dependence at 82 percent in FY23.

Well, it may not be surprising for those tracking Mamaearth’s journey that its parent’s stock markets debut was nothing spectacular. Blame it on steep valuations, unstable financial performance or high advertising spends, analysts were not that persuaded by the digital-first, beauty and personal care (BPC) brand's pitch.

The stock debuted at Rs 330 on the NSE, almost flat, leaving hardly any money on the table for those who invested in the initial public offering (IPO) round. The issue price of Honasa Consumer was at Rs 324 a piece, which was overall subscribed 7.6 times. Qualified institutional buyers' (QIB) bid for the stock during the IPO was 11.5 times, non-institutional buyers' 4.02 times, while retail participation was tepid at 1.3 times. The stock was open for subscription from October 31 to November 2.

According to Prashanth Tapse, research analyst at Mehta Equities, the cold listing was expected even as risky investors felt the price is good for long-term, as the business model has high potential of growth despite aggressive pricing and high ask valuations. “We would continue to remain cautious on Mamaearth on the back of the loss-making nature of the business, high portion of OFS, high competition with margin pressure, low promoter stake, and weak financials, which suggest a cautionary stand as historical listings with high valuations have often faced post-listing challenges,” Tapse explains.

The issue size of Rs 1,701 crore was a mix of offer-for-sale (OFS) worth Rs 1,336 crore and fresh issue of Rs 365 crore. Selling shareholders in the OFS category include the promoter duo (Varun Alagh and Ghazal Alagh), followed by Sofina Ventures SA, Evolvence India, Fireside Ventures, Stellaris, Kunal Bahl and Rohit Kumar Bansal (of Snapdeal), Rishabh Mariwala (of Sharrp Ventures), and actor Shilpa Shetty Kundra.

Red flags!

Net proceeds of the fund raised will be used to increase its marketing efforts to enhance brand visibility, establishing new exclusive brand outlets and expanding the network of BBlunt salons.

However, therein lies the concern of investors about the company. Its key risks are high dependency on a single brand, Mamaearth, expensive advertising costs and its loss-making subsidiaries.

“The business' return on advertising has also been consistent for a few years, ie 2.5 percent, thus the company's client retention is very low. As it is a loss-making company, we cannot derive its actual price-to-earnings (PE), but even after considering its outflow in the latest investment, the company is coming at an extremely high valuation,” say analysts at Swastika Investmart.

The company does not manufacture its products and relies on third parties for that, and it also does not hold any patents over its product formulas. Honasa generates the bulk of its business from Mamaearth, with its revenue dependence at 82 percent in FY23.

Also read: Mamaearth's parent valuations fair play?

“The substantial majority of revenue from operations comes from the sale of products under the flagship Mamaearth brand. Any decrease in demand for Mamaearth branded products could have an adverse effect on the business, cash flows and results of operations,” says analysts at HDFC Securities. It adds that Honasa has, in the past, incurred significant advertisement expenses, which have contributed to the growth in its revenue from operations.

Honasa Consumer posted a net loss of Rs 151 crore in FY23 compared to a net profit of Rs 14.44 crore in FY22. It had closed FY21 with a net loss of Rs 1,332.21 crore. In the latest available financials, for the three months ending June, it reported a net profit of Rs 25 crore. Its revenue has grown at a CAGR of 80 percent over FY21-23, with a volume growth of 102.28 percent. As on FY23, it has an adjusted Ebidta of 3.4 percent, with negative working capital due to its asset light model.

According to Akshay R Pradhan, analyst at Canara Bank Securities, weakness in financial performance is one of the key risks of Honasa. The company has experienced negative cash flows from operating, investing and financing activities in the past. “It has recorded losses in the past. Any losses in the future may adversely impact their business and the value of the equity shares. Subsidiaries including Just4Kids, BBlunt, B:Blunt Spratt and Fusion have incurred losses for certain historical periods. There is no assurance that these entities will be profitable in the future,” he adds.

In Q1FY24, Mamaearth’s brand sales in the D2C channel have seen a decline (revenue contribution in online sales reduced to 36 percent in Q1FY24 compared to 47 percent in Q1 FY22), due to the company defocusing on the D2C platform for growth. The D2C platform saw revenue from existing customers rising to 63 percent, while any slowdown in new-customer recruitment will have a negative effect on its growth aspirations.

However, he feels the issue is fairly valued. “The company continuously strives for expansion of distribution by creating brand awareness. In terms of valuation, it is available at enterprise value-to-sales [EV/S] of 6.76 times, which seems fairly valued,” he explains.

In 2022, Honasa had a market share (in terms of gross merchandise value) aggregating to around 5.4 percent of the online BPC market. BPC in India is an approximately $20 billion market, and is expected to grow at 11 percent annually to be $33 billion by 2027, according to analysts’ estimates. The BPC products market in India is undergoing a fundamental re-industrialisation due to the convergence of technology, demographic dividend, and growing consumer aspirations. It is expected to grow faster than categories like food, grocery and consumer electronics.

According to analysts at HDFC Securities, Honasa’s failure to identify and effectively respond to changing consumer preferences and spending patterns or changing beauty and personal care trends in a timely manner may adversely affect the demand for products, impacting business, results of operations, financial condition and cash flows.

“Brands and reputation are critical to the success of businesses and may be adversely affected due to various reasons, which could have an adverse effect on the business, financial condition, cash flows and results of operations,” the brokerage firm says.

Meanwhile, anchor investors have poured in Rs 765 crore, allocated at Rs 324 per share. A clutch of 49 investors, which include Smallcap World Fund Inc, Fidelity Funds, Abu Dhabi Investment Authority, Government Pension Fund Global, Caisse De Depot ET Placement, FSSA India Suncontinent Fund, Carmignac Portfolio, Goldman Sachs, FundPartner Solutions, and Hornbill Orchid India Fund, invested in the company via anchor book. Mutual fund houses like ICICI Prudential Mutual Fund, Aditya Birla Sun Life Trustee, Nippon Life India, Axis Mutual Fund, WhiteOak Capital MF, Invesco Mutual Funds, Kotak Mutual Funds, and Franklin Templeton Investments have also invested via anchor book.