Mamaearth parent company Honasa Consumer’s proposed Rs 2,900 crore IPO has raised valuation concerns among investors and market experts. Honasa has filed DRHP with SEBI for an IPO with a combination of a fresh issue of Rs 400 crore, and an offer-for-sale (OFS) of 46.8 million shares, reportedly totalling up to Rs 2,900 crore. The company was valued at $1.2 billion in January 2022 when it raised $52 million in a funding round led by Sequoia. One year later, Honasa is seeking a valuation of $3 billion through its IPO. The valuation target of Shark Tank India fame Ghazal Alagh’s Mamaearth is more than 1,000x its profits.

Mamaearth’s valuations have been questioned by many on social media. Some have even compared the lofty valuation of the Mamaearth IPO to that of Paytm. Some of the main concerns for investors include sky-high valuation, exorbitant advertising spends, and inconsistent profit has caught the attention of investors, and analysts. At the end of FY22, Honasa Consumer posted a net profit of Rs 14 crore and revenues of Rs 943 crore. For the six months ending September 2022, the company posted revenues of Rs 722 crore and profits of Rs 3.6 crore. The company reported a loss of Rs 1,332 crore in FY21 and Rs 428 crore in FY20, according to the DRHP.

With lofty valuation, will Mamaearth go Paytm, Zomato way after listing?

There is a lot of conjecture about the price Mamaearth will set for its initial public offering. Normally, the merchant banker would determine the price closer to the IPO date. Right now, everyone is making assumptions based on publicly available information. “We doubt that management will go ahead with the higher price because there has been a lot of backlash on social media, especially given the amount of money Mamaearth is asking; whether you look at the market cap to sales ratio or the price to earnings ratio, which appears to be a little high,” said Sunil Damania, Chief Investment Officer, MarketsMojo.

It has been seen in the recent past that many IPOs, including Zomato, Paytm, and others, have not been able to sustain their high valuations, and have dropped significantly since the listing. “Something similar could occur if Mamaearth opts for such a high valuation. However, these are all speculative at the moment because neither the merchant banker nor the company has confirmed that they will proceed with this pricing,” said Damania.

“Mamaearth has been successful in establishing itself as a formidable D2C brand, perfecting both its product and distribution strategies. But it’s important to note that large FMCG players such as Unilever and P&G have taken decades to reach where they are now, which means Mamaearth has a long way to go,” Ankit Kedia, Founder and Lead Investor at early-stage venture capital firm Capital A was quoted saying in a YourStory report.

Mamaearth IPO’s concerns aside from high valuation

Mamaearth’s reliance on certain marketplaces to drive sales

Mamaearth relies on relationships with certain marketplaces and web traffic drivers for sales through online channel. The company in its DRHP said, “For Financial Years 2020, 2021, and 2022 and the six months period ended September 30, 2022, our revenue from online channels across all our brands amounted to Ra 998.43 million, Rs 3,742.93 million, Rs 6,595.34 million and Rs 4,291.15 million, respectively, representing 90.94%, 81.37%, 69.91% and 59.37% of our revenue from operations, respectively.”

Mamaearth’s marketing spend high, No improvement in ROAS in 3 yrs

The amount spent on advertising and influencer marketing also stands out in the DRHP. As of September 30, 2022, Mamaearth worked with 3,958 influencers. The company spent about Rs 391 crore on advertising against net sales of Rs 932 crore meaning it 40% of revenue was spent on marketing in FY22. The quantum was similar for FY21, FY20 and the six-month period ended September 2022. Aditya Kondawar of Complete Circle Capital in a tweet said, “This is way too high.” Experts have the marketing spend number high given that the return on ad spend (ROAS) has not improved from 2.6 over the past three years. In contrast, Nykaa’s FY22 ROAS stood at 7.8 and big boy Hindustan Unilever’s at 10.6.

Paytm, Nykaa stocks with lofty valuations nosedive in 2022

Paytm’s IPO valued the firm at about $19.5-$20 billion. The company had termed the valuation “rational and fair” at the time even as it maintained that it could have priced itself higher based on interest from external investors. FSN E-Commerce Ventures Ltd, the parent of cosmetics e-tailer fixed the price band of its IPO at Rs 1085-1125 a share as it sought a valuation of around $7.4 billion or Rs 52,574 crore. 

PB Fintech or Policybazaar sought a market cap of Rs 44,041 crore post listing at the upper band of Rs 980, which was termed expensive by experts. Food delivery company Zomato’s IPO was oversubscribed 35 times, giving it a valuation of $12 billion.  All these four stocks have seen sharp decline since listing. Paytm shares have fallen over 65% from IPO price, Zomato down around 55%, PB Fintech down 66%, and Nykaa shares have fallen over 65% from the IPO issue price.