Mamaearth IPO: A loud noise coming from an empty vessel?

 Mamaearth IPO: A loud noise coming from an empty vessel?

Considering the lackluster initial public offering subscriber statistics on Day 1, it seems that investors are purposefully avoiding taking any kind of risk.

Mamaearth has been operational for the last seven years. The firm, which began as a manufacturer of baby items devoid of toxins, has grown into a group of six brands today. But gaining the allegiance of customers has been difficult.

Mamaearth's parent company, Honasa Consumer Products, had a really historic initial public offering. In addition to being the biggest digital-first beauty and personal care (BPC) business, it is the first direct-to-consumer (D2C) company to open on Dalal Street. In other words, this is a business that developed its own brands inside the BPC industry and marketed them to consumers via its online platform.

If rumors circulating on the Street are any indication, other direct-to-consumer businesses will take a significant lesson from Honasa's IPO: to put it simply, gain consumers' confidence via your goods before going public to acquire capital, as one X user put it. There is logic to such cynicism.

Mamaearth has been operational for the last seven years. The firm, which began as a manufacturer of baby items devoid of toxins, has grown into a group of six brands today. But gaining the allegiance of customers has been difficult. Several of its products—particularly the onion hair growth oil—have been the target of social media jokes since they don't work.

Due of this, the business must spend money on advertisements in order to attract new clients. Its advertising expenditures are far greater than those of ordinary consumer corporations, ranging from thirty to forty percent of revenues.

As if this weren't enough, the business intends to use the revenues from the IPO of Rs 182 crore for brand exposure and advertising costs.

According to Sandip Sabharwal, a SEBI-registered financial adviser, Honasa's advertising costs ultimately become revenue costs, which are unsustainable beyond a certain point. Big consumer brands don't spend more than 11–12% of their budget on advertising. In a few years, even startups' advertising costs drop to 15–17 percent.

Nothing to gain?

Mamaearth has not received much attention from Amit Jeswani of Stallion Asset Management, who does not hesitate to invest in cutting-edge software businesses. "The market is overly competitive," he told Moneycontrol.

Redseer projects that the Indian BPC market would grow quickly, reaching $30 billion by 2027 and accounting for around 5% of the worldwide BPC industry. Honasa faces competition from both new and established companies as more people embrace beauty and self-care regimens and seek for higher-quality items.

HUL, for example, offers direct-to-consumer (D2C) platforms including Simple, Dermalogica, and Love Beauty and Planet. Analysts predict that in the future, Reliance Retail's omnichannel beauty retail platform, Tira, may introduce its own brands. There are companies like Plumm, Minimalist, and Chemist's Play in the digital sphere.

Sreedhar Prasad, an ex-partner at KPMG in India, said, "I would now expect that the organization's focus to shift to building hero items with R&D-led differentiation and perceived higher quality." This is in anticipation of the company's IPO.

After margins

According to RedSeer, BPC has the greatest gross margin among the major consumption categories at roughly 72%, which is comparable to jewelry and watches. Honasa's gross margins are 70%, however their EBITDA margin for FY23 was just around 2%. The firm will need to reduce commissions, concentrate on increasing sales via its own channels, and reach a larger audience in order to scale up the operating margin—all of which look like difficult tasks.

The percentage of Mamaearth's overall revenues that come from its own websites and applications is declining. In the June quarter of FY23, D2C sales made up 46.73 percent of total online sales; in the same time of FY24, this percentage fell to 35.65 percent.

During this time, the percentage of online sales from retailers like Amazon and Flipkart increased from 53.27 to 64.35 percent.

Profitability won't increase unless the product itself—mainly because of its trustworthiness and quality—drives sales with current clients and recommendations. Growth is not just reliant on marketing and pricing expenditures, Prasad said.

Market rumors suggest that the anchor investors in the Mamaearth IPO lack a positive long-term perspective and entered the deal hoping to profit quickly on listing profits. Under the condition of anonymity, the chief investment officer of a local mutual fund told Moneycontrol that "Rs 10,000 crore is too much." We may have assessed its value at Rs 7,000 crore.

Investors seem to have recognized these major risks in light of the outcry over X and the lackluster subscriber statistics on Day 1, and they are reluctant to place a blind bet on the company due to its digital concentration. It also indicates that there isn't a euphoric period in the market when everything is selling.