Is Mamaearth's IPO an exercise to give its private investors a handsome exit?

Mamaearth founders Varun Alagh and Ghazal Alagh.
Mamaearth founders Varun Alagh and Ghazal Alagh.


  • Present in the beauty and personal care space, Mamaearth’s climb to 1,000 crore annual revenue has been quick, within six years. But potential investors may need to look beyond that.

The rush for initial public offerings (IPO) continues even as broader markets are somewhat subdued. Honasa Consumer Ltd is the latest to join the bandwagon. The initial share sale opens on Tuesday.Present in the fast-growing beauty and personal care space, its flagship brand Mamaearth’s climb to 1,000 crore annual revenue has been quick, within six years. But potential investors may need to look beyond that.

Online channels contribute over 60% to Honasa’s revenue. A significant portion of Honasa’s online sales depends on third-party e-commerce marketplaces, which exposes it to risks such as changes in contractual terms.

Further, aggressive marketing has been a factor that aided in the scale up of Honasa’s brands, including Mamaearth. The company’s portfolio also includes other brands—The Derma Co., Aqualogica, Ayuga, BBlunt, and Dr. Sheth’s. In FY23, Honasa’s revenue stood at 1,493 crore, clocking CAGR of 80% over FY21-23. In the June quarter (Q1FY24), year-on-year revenue growth stood at 49%. To be sure, the company enjoys an eye-popping gross profit margin of about 70%. But since it is currently building its brands, a good chunk of the gross profit is invested in marketing, thus weighing on operating profit. Sure, reported operating profit margin in Q1 improved to 6.3% from a loss in the year ago period helped by a fall in advertisement expenses. “Post listing, investors will watch if its Q1FY24 performance will sustain," Arun Kejriwal, founder of Kejriwal Research and Information Services, said. In general, it is wiser to take isolated single quarter results declared before an IPO with large doses of salt, he added.


Spreading Wings | Mamaearth's revenue mix
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Spreading Wings | Mamaearth's revenue mix (Satish Kumar/Mint)

IPO Proceeds

A large part of the IPO’s proceeds will be for advertising. Honasa plans to raise 1,700 crore, including 365 crore from fresh issue and a large part from offer for sale (OFS) of 41.2 million shares. “Mamaearth’s IPO is an exercise to give an exit to its private equity investors who are walking away with handsome returns," said Kejriwal.

Under the OFS, the promoters and some existing investors are looking to monetize a part of their investments. The selling shareholders include the promoters Varun Alagh and Ghazal Alagh, followed by investors Fireside Ventures Fund, Sofina and Stellaris. Other selling shareholders include Kunal Bahl and Rohit Kumar Bansal (of Snapdeal), Rishabh Harsh Mariwala (of Sharrp Ventures), and Shilpa Shetty Kundra (Bollywood actress).

A price band of 308-324 means the enterprise value to sales ratio works out to almost seven times at the upper end based on its FY23 revenue. But remember, Honasa’s return ratios are muted given the thin profits.

Hereon, much will depend on how effectively Honasa expands the reach of its brands. Here, the scale up in the offline business is key. Commenting on the need for an offline journey for the brand, Nitin Gupta of Emkay Global Financial Services, said: “With the online channel’s penetration in single digits, scale up beyond a point is tough for any digital brand." He added, offline is also a better margin business.

Analysts said Honasa’s share sale will sail through. Recall that shares of tech-related companies such as Zomato, PB Fintech and One 97 Communications that hit the market in 2021 had fallen in the range of 55-70% within a year of listing. For Honasa, the proof of the pudding would lie in sustained growth in the coming quarters.

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