Analysts flag caution on Mamaearth IPO: Here’s why

Beauty and Personal Care (BPC) e-retailer Honasa Consumer’s initial public offering (IPO) has failed to find backing from analysts due to the company’s weak financial track record and expensive valuation.

T Manish, research analyst at Samco Securities suggests avoiding the IPO as the company’s financial performance does not inspire confidence.

“The profit has been inconsistent and advertising and marketing expenses are incredibly high at around 40 per cent of the revenues.

“A clear growth strategy is also lacking, which would include reducing these expenses”, Manish said.

The valuation seems ‘unusually elevated’, considering the risks and lack of sustainable profitability, he adds.

At the price band of Rs 308-324, the company is valued between Rs 9,900 crore to Rs 10,400 crore, significantly lower than the firm’s earlier valuation ask of up to Rs 20,000 crore.

But analysts at Swastika Investmart still consider the current pricing as extremely high.

As of 2 pm on Tuesday, the issue had been subscribed by only 5 per cent.

“This IPO can be compared to that of Nykaa, which investors remember for the pain they bore from its overpriced issue,” said an independent analyst, who did not wish to be named.

The planned use of the issue proceeds for brand building and distribution is also unconvincing and dodgy, the expert said.

Uneven bottom-line

Mamaearth’s revenue has seen consistent growth rising from Rs 460 crore in financial year 2020-21 (FY21) to Rs 1,493 crore in FY23.

But the bottom line has seen recurring losses.

From a profit of nearly Rs 16 crore in FY22, it saw losses of Rs 143 crore in FY23 due to writing off its acquired entity Momspresso.

In the June quarter of the current fiscal, it posted a net profit of around Rs 26 crore, but analysts suggest waiting for a sustaining trend.

The company’s return on net worth was a negative of 23.57 per cent in FY23, starkly lower than the 20 per cent and 27 per cent of listed peers such as HUL and Emami.

Giving an avoid rating, Swastika Investmart has also flagged the business’ return on advertising, consistent at 2.5 per cent in the last few years, reflecting lower client retention.

The company’s high concentration on Mamaearth, which makes for over 80 per cent of its revenue is another key risk.

“As this brand gradually sees growth moderation on a high base, the company will need to scale other brands faster to sustain revenue momentum,” said analysts at Emkay Global.

Size reduction

The IPO size has been reduced to Rs 365 crore of fresh issue from Rs 400 crore.

The offer for sale (OFS) is now for 41 million (mn) shares from 47 mn.

However, even after downsizing, the OFS component is still 80 per cent of the IPO, which is a dampener, experts say.

Mamaearth said the IPO size has been reduced as its current investors did not find the valuation attractive enough to render their holdings.

Some investors are now selling fewer shares than previously planned.

Sofina Ventures is selling 9.6 mn shares, down from 19.1 mn planned earlier.

Evolvence Capital and Peak XV Partners have also reportedly opted out of selling their holdings.

On the other hand, Marico scion Rishabh Mariwala plans to sell 5.7 mn shares, up from 0.4 mn.

Snapdeal co-founders Kunal Bahl and Rohit Bansal are selling 2.4 mn shares, up from 1.6 mn before.

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