The anticipated IPO of Honasa Consumer, the parent company of Mamaearth, has prompted valuation worries among investors and market experts. Honasa has filed a draught red herring prospectus (DRHP) with SEBI for an initial public offering (IPO) with a fresh issue of Rs 400 crore and an offer-for-sale (OFS) of 46.8 million shares, reportedly totaling up to Rs 2,900 crore.
In January 2022, the firm was valued at $1.2 billion after raising $52 million in a fundraising round led by Sequoia. A year later, Honasa is seeking a $3 billion valuation via its IPO. Mamaearth, owned by Shark Tank India star Ghazal Alagh, aims to be valued at over 1,000 times its profits.
Many social media users have questioned Mamaearth’s prices. Some have even compared the Mamaearth IPO’s high valuation to that of Paytm. Analysts and investors are concerned about sky-high valuations, excessive advertising expenditures, and unpredictable profits.
Honasa Consumer reported a net profit of Rs 14 crore and revenues of Rs 943 crore at the end of fiscal year 22. For the six-month period ending in September 2022, the company generated revenues of Rs 722 crore and net income of Rs 3.6 crore. According to the DRHP, the company reported a loss of Rs 1,332 crore in FY21 and Rs 428 crore in FY20.
With a high value, would Mamaearth compete with Paytm and Zomato after its IPO?
Regarding the price Mamaearth will set for its first public offering, there is much speculation. The merchant banker would typically establish the price closer to the IPO date. Everyone is currently making assumptions based on publicly accessible facts.
Sunil Damania, Chief Investment Officer at MarketsMojo, stated, “We doubt that management will proceed with the higher price because there has been a lot of backlash on social media, especially given the amount of money Mamaearth is asking for; whether you look at the market cap to sales ratio or the price to earnings ratio, which appears to be a little high.”
In the recent past, many IPOs, including Zomato, Paytm, and others, have been unable to maintain their high valuations and have experienced significant declines since their initial public offering.
Similar outcomes are possible if Mamaearth opts for such a high valuation. “However, these are all speculative at this time as neither the merchant banker nor the company has confirmed that they will proceed with this pricing,” Damania stated.
Will be difficult to envision a price increase for Mamaearth shares
Even in the midst of a bull market, the 1600x PE multiple is an unrealistic expectation. Therefore, given the current state of the market, this absurd valuation requires an absurd justification. When I consider it, I wonder why I shouldn’t invest in Dabur or Marico, which are trading at 50-60 PE and have a wider distribution and stronger brand recall.
When more than 25 percent of the funds raised do not go to the business, i.e., it is an OFS from early investors and celebrity backers of the platform, I am wary of the IPO.
According to my understanding, nearly 80% of this IPO will be allocated to OFS, which is not good news for public market investors. Anirudh A. Damani, founder of Artha Group, stated that it will be difficult to observe a rise in the stock price with so many uncertainties surrounding the super-premium valuation that will primarily provide exits for current shareholders.
“Mamaearth has established itself as a formidable direct-to-consumer (D2C) brand by perfecting its product and distribution strategies.” Ankit Kedia, Founder and Lead Investor at early-stage venture capital firm Capital A, was quoted in a YourStory article as saying, “Mamaearth has a long way to go, given that large FMCG players like Unilever and P&G have taken decades to reach their current status.”
In 2022, Paytm and Nykaa stocks with stratospheric valuations plummet
The IPO for Paytm valued the company between $19.5 and $20 billion. At the time, the company described the value as “reasonable and fair” while maintaining that it could have priced itself higher depending on external investor interest.
FSN E-Commerce Ventures Ltd, the parent company of the online cosmetics retailer, set the price range for its initial public offering (IPO) between Rs 1085 and Rs 1125 per share, seeking a valuation of about $7.4 billion or Rs 52,574 crore.
Experts deemed PB Fintech or Policybazaar’s request for a post-listing market cap of Rs 44,041 crore at the top limit of Rs 980 as excessive. The IPO of food delivery business Zomato was oversubscribed 35 times, resulting in a $12 billion valuation.
Each of these four equities has experienced a significant decrease since its first public offering. Paytm shares are down over 65% from their IPO price, Zomato shares are down approximately 55%, PB Fintech shares are down 66%, and Nykaa shares are down over 65% from their IPO price.
