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New Delhi: Honasa Consumer, the parent company of beauty and personal care D2C brand Mamaearth’s IPO is set to open on October 31. The company is planning to raise Rs 1,701 crore which includes a Rs 365-crore fresh issue and a Rs 1,336-crore offer-for-sale (OFS) component.
It is to be noted that the company has significantly slashed its IPO size as compared to its initial plans. According to Mamaearth’s DRHP filed with SEBI last year, the company was aiming to raise Rs 400 crore via primary capital along with OFS component for 4.68 million shares.
As per media reports, the husband-wife duo Ghazal and Varun Alagh-backed company was earlier targeting a valuation of USD 3 billion. However, now the company has adjusted its expectations to around USD 1.25 billion.
“In the initial stages, there were whispers in the industry that Mamaearth was looking to secure around $300 million at an impressive valuation of $3 billion. However, the company has made significant adjustments, slashing the capital raise by 33% to roughly $200 million, and reducing the valuation by a staggering 58% to $1.25 billion,” said Poornima Vardhan and Taponeel Mukherjee, Principals, AltG in a note.
This hints towards a flattish IPO as Honasa Consumer raised funds last year in January when it was valued at USD 1.2 billion. The D2C startup gained unicorn status by raising USD 52 million in that round led by Peak XV Partners, Evolvence Capital and Sofina Ventures.
“The cut in the issue size and the valuation reflects the perception of the merchant banker and promoters going by the way new age IPOs have listed/traded over the past two years (compared to the issue price) and the appetite of the investors – both institutional and non-institutional,” commented Deepak Jasani, Head of Retail Research, HDFC Securities.
During Mamaearth’s pre-IPO conference, commenting on the reduction in IPO size, one of the bankers clarified that the management team believes that at this point in time, the stated primary funding would be sufficient to support the company’s growth. He highlighted that the move reinstates the startup’s Capita-efficient business model.
However, according to the note by AltG, the company’s price-to-earnings (P/E) ratio for the IPO stands at 972 based on its 12-month earnings of around Rs 11 crore, which is 23.5 times higher than the industry median P/E ratio of 41.4 for leading Indian personal care and beauty companies.
Commenting on cuts in IPO size, Shriram Subramanian, MD, InGovern Research Services opined that Mamaearth is just riding the current bullish wave in mid and small-cap space. He noted that the company would need a big push to get fully subscribed and listed.
“The learning from 2021 startup IPOs has been that public markets apply the same filters to all companies ie current profitability is very important vs unrealised brand potential in the future,” stated Anup Jain, leading early-stage investor and senior retail professional.
Mamaearth’s late-stage investors seem cautious
According to Honasa Consumer’s RHP, key late-stage investors of the company have either reduced the shares they were selling or not participating in the sale.
While Peak XV is not participating, Evolvence which was earlier planning to offload its shares, has deferred the plans now, as per the updated RHP. Another key backer Sofina which was selling 19.1 million shares earlier, has cut the size to around 9.6 million shares.
Similarly, Stellaris Ventures which planned to offload 12.75 million shares, will now be selling only 10.94 million shares.
“The late-stage investors have come at valuations that were near the IPO valuations. They will find it difficult to convince their LPs why they offloaded shares at a loss. Early-stage investors and founders have made huge upside and hence are offloading” explained Subramanian.
While late-stage investors appear conscious, Mamaearth’s angel investors including Snapdeal founders, Shilpa Shetty, and Rishabh Mariwala have significantly increased their portion of the share sale
Fireside Ventures, another early backer of Mamaearth plans to sell around 7.97 million shares during the listing.
Commenting on the investor sentiment, an industry expert, on condition of anonymity, said that while it makes sense for angel investors to sell, it is noteworthy if there are any exit agreements with early-stage companies that may have come into effect. “There is no urgency to list the company if the profits are currently low and the brand is well-known. So, a lot of the brand potential is unrealised. This hints towards some other considerations which are not visible entirely.”
The expert explained that there is a lot of pressure currently on domestic funds to exit their first fund. The first fund distribution back to the LPs is under pressure. And mostly VC firms have exit clauses to recover their investment from the company.
Mamearth’s financials
As per its RHP, Honasa Consumer’s FY23 operating revenue stood at Rs 1,492 crore against Rs 943 crore a year back. The company reported a net loss of Rs 151 crore compared to a net profit of Rs 14.44 crore in FY22.
For the year-ended March 31, Honasa’s top 10 products accounted for 27.38% to its Rs 1,492.75 crore operating revenue, down from 30.17% of Rs 943.46 crore in the previous year, according to the RHP.
For the quarter ended June 2023, the Gurgaon-based firm saw its operating revenue increase 49 per cent to Rs 464 crore with a net profit of Rs 9.24 crore. Last year in the June quarter, Mamaearth saw losses accounting for Rs 2.51 crore.
“The company has acquitted itself well in terms of building a good brand. This is a positive. The low net profit to sales is a watch out on retail investor sentiment for the valuation and hence the IPO,” Jain said in his analysis of the market and the upcoming IPO.
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