On December 29th, Honasa Consumer Ltd, the parent company of India’s leading D2C brand Mamaearth, submitted its Draft Red Herring Prospectus (DRHP) to SEBI. The valuation of this digital-first, substantial, and rapidly expanding Beauty and Personal Care (BPC) conglomerate created quite a buzz in anticipation of the forthcoming Mamaearth IPO.

Before we dive into the details of the Mamaearth IPO, let’s take a brief glance at the performance of IPOs introduced over the past two years. Indian stock exchanges, namely BSE and NSE, were ranked 12th globally in terms of the number of IPOs up until the second quarter of 2021. India stood out as one of the few bright spots amidst the bearish market sentiments caused by the global economic slowdown.

In 2022, only three out of the eleven startups that submitted DRHPs to SEBI proceeded with their IPOs: Delhivery, Tracxn, and DroneAcharya. The remaining eight startups either abandoned their IPO plans, withdrew their DRHPs, or are still awaiting approval.

Many startups that went public in 2021, such as Paytm, Policybazaar, and Nykaa, experienced declines ranging from 25% to 75% post their stock market debuts. Even Delhivery, India’s largest and most profitable logistics company, witnessed a significant correction, with its stock falling approximately 30% from its initial listing price.

Given the general market downturn that has disrupted startup IPOs in 2022, investors are now paying closer attention to a company’s underlying fundamentals and market valuation. With these mounting concerns and the less-than-stellar track record of recent startup IPOs, the Mamaearth IPO may encounter significant challenges.

Key Details: MamaEarth IPO

The Mamaearth IPO is a combination of a fresh issue of shares valued at Rs. 400 Crores and an Offer for Sale (OFS) amounting to Rs. 4.68 Crores. Within the OFS, company promoters and select investors are divesting part or all of their equity shares or Non-Convertible Compulsorily Convertible Preference Shares (NCCCPs).

Category Based offered Share in MamaEarth IPO

Shareholding Pattern

The startup’s co-founder and Chief Executive Officer (CEO), Varun Alagh, possesses a 34.30% stake in the company, holding a total of 10,67,37,650 shares. On the other hand, the co-founder and Chief Innovation Officer (CIO), Ghazal Alagh, holds a 3.23% stake with ownership of 1,00,65,200 shares in the D2C brand. Together, they collectively own 37.53% of the startup. The promoter group, consisting of three members, maintains a 37.6% ownership interest in the company.

Venture capital firm Sequoia India is the second-largest shareholder, boasting a 24.01% stake in the company. Through its two funds, the SCI Investment VI fund and SCI Investment III fund, the VC firm possesses 80,10,900 shares of Honasa Consumer Limited.

In December 2022, Honasa achieved unicorn status by securing $52 million in a funding round led by Peak XV Partners (Sequoia Capital), valuing the company at $1.2 billion.

Other notable investors in Honasa include Sofina Ventures, Fireside Ventures, Kunal Bahl, and Rohit Bansal.

Read Also: IPO Alert: List of Upcoming IPO in November 2023

Financial Assessment of Company Before MamaEarth IPO

Mamaearth’s strategic focus on crafting purpose-driven, thoughtfully designed brands has been instrumental in fostering trust, building brand resonance, and cultivating a strong connection with its consumers, resulting in remarkable business growth. According to a RedSeer report, Mamaearth has achieved an astonishing Compound Annual Growth Rate (CAGR) of 193.15% in its revenue from operations, surpassing the industry average of 13% for the same period.

Mamaearth leads the Beauty and Personal Care (BPC) sector in Direct-to-Consumer (DTC) revenue, which accounts for 52.37% of its total revenue during the six months ending on September 30th. In FY 2021, Mamaearth ranked second among digital-first BPC companies in India, boasting a gross profit margin of 71.15%. This success is underpinned by a customer-centric, agile, technology-driven, and distinctive business model.

Remarkably, Mamaearth is one of only two digital-first BPC companies in India that achieved a positive adjusted EBITDA margin (6.82%) in the fiscal year 2021. Furthermore, the company has demonstrated consistent growth in its adjusted EBITDA across consecutive quarters.

MamaEarth Company’s Strengths and Weaknesses

Strengths:

1. Outstanding Brand Recognition: Mamaearth has consistently ranked as the most searched Beauty and Personal Care Brand from January 2020 to November 2022, highlighting its strong brand presence.
2. Product Portfolio Expansion: The contribution of sales from new Stock Keeping Units (SKUs) to the company’s revenue has steadily grown over the years, increasing from 39.75% in FY 21 to 42.17% in FY 22, showcasing its ability to diversify and innovate.
3. Brand-Building Expertise: Mamaearth possesses robust brand-building capabilities, both within its existing domain and in areas it aspires to expand into, demonstrating its adaptability and market knowledge.
4. Customer-Centric Approach: The company prioritizes customer-focused product innovation and employs a House of Brands strategy, which contributes to its growth and customer loyalty.
5. Focus on Beauty and Personal Care: Mamaearth maintains a strong emphasis on the Beauty and Personal Care category, positioning itself as a significant player in this market.

Weaknesses:

1. Market Responsiveness: Inability to swiftly identify and respond to shifting consumer preferences, evolving spending patterns, or changing trends in the Beauty and Personal Care sector could adversely impact product demand and overall business performance.
2. Brand Management: Neglecting the maintenance of brands and their reputation could potentially harm the company. High marketing expenditures, accounting for approximately 40% of revenue, represent a considerable cost burden.
3. Product Concentration: Mamaearth faces a risk associated with product concentration, with the top 10 products contributing 30% of revenue, and the top 2 products accounting for 13%. This poses a vulnerability in the event of a decline in the performance of these key products.
4. Offline Expansion: The rapid expansion of the offline channel presence presents challenges and requires effective management to ensure its success.
5. Intense Competition: The company faces competition from new entrants and existing players entering similar categories, which may intensify competition in the market.

Is Investing in the MamaEarth IPO a Good Choice?

The Beauty and Personal Care (BPC) product segment in India is forecasted to experience a robust 12% Compound Annual Growth Rate (CAGR) and reach $30 million by 2026. With this industry’s considerable potential, the Mamaearth IPO has the potential to capture investor attention. Nevertheless, forecasting the Mamaearth IPO’s success is a challenging task. Therefore, conducting comprehensive research before making a decision is imperative.