Mamaearth IPO – Is it Overvalued and Should Investors be Worried

Shark Tank fame Ghazal Alagh-led Mamaearth is the latest in line to join the bourses through an IPO. But, with a 1000x valuation as per its DRHP filings, both investors and market experts are raising caution even before this skincare start-up’s IPO issue opens. 

Let’s see why investors have started drawing parallels between Mamaearth and failed IPOs like Paytm.

Why is Mamaearth’s valuation considered high?

Mamaearth’s parent company Honasa Consumer, in its DRHP filing with SEBI, proposed an IPO of Rs. 2,900 crores. This IPO will include a fresh issue of Rs. 400 crores and an offer-for-sale of 46.8 million shares. That’s a total of Rs. 2,900 crores or $3 billion.

Only a year ago, in Jan’22, this company was valued at $1.2 billion as it raised funding of $52 million from investors like Sequoia. A year later, Mamaearth is asking for a valuation of $3 billion. That’s over 1,000x its profits. 

Well-established companies like Dabur and Marico are currently trading at a PE multiple of 50-60. In comparison, Mamaearth is setting unrealistic expectations with a PE multiple of 1600X.

Now, with this IPO filing, investors are concerned about:

1. Bloated valuation,
2. Inconsistent profits, and
3. Exorbitant advertising expenses

Mamaearth’s net profit trends have also not given any confidence to investors:

Net Loss (FY’20)	Net Loss (FY’21)	Net Profit (FY’22)
Rs. 428 crores	Rs. 1,332 crores	Rs. 14 crores

Mamaearth’s advertisement expenses v/s sales growth:

Rs. in crores	Rise in 3 years	FY’22	FY’21	FY’20
Ad spends	750%	391	178	46
Sales	757%	932	460	110

Mamaearth’s Return on Ad Spends (ROAS) v/s other companies:

	Mamaearth	Nykaa	Hindustan Unilever
ROAS	2.4-2.6	7.8	10.6

What to interpret of ROAS?

The higher the ROAS the better. If a brand manages to have more repeat customers, its ad spends will be lower.

Is Mamaearth IPO a repeat of Paytm and Zomato fiasco?

Mamaearth has achieved some level of success as a D2C brand with good quality products and well-established distribution strategies. However, it has a long way to go against FMCG giants like Unilever and P&G that have decades of experience.

If the recent past of IPOs is anything to go by, many like Paytm and Zomato have failed in sustaining high valuations. After listing, we have seen how the shares of these stocks have fallen significantly. If Mamaearth goes ahead with the high valuation mentioned in its DRHP, it may face similar consequences after listing. 

What are the other warning signs for investors?

1. Heavy reliance on few products and marketplaces – Apart from having a limited range of products, Mamaearth also depends on certain marketplaces for its sales such as 3rd party e-commerce sites like Amazon, Flipkart, etc. This risk has also been highlighted by the company in its DRHP.

2. Usage of IPO funds – Also, since Mamaearth IPO involves an Offer for Sale by early investors including celebrities like Shilpa Shetty Kundra, investors are unsure about the usage of funds after listing.

3. High marketing spend – The company is known to have significant influencer marketing spends. As of September 30, 2022, it had hired no less than 3,958 influencers.

Other start-up IPOs with high valuations that nosedived later

Paytm Fiasco

At the time of going public through an IPO, Paytm was valued at around $19.5-$20 billion, which was termed by the management as fair and rational. Paytm stocks have fallen more than 65% since its listing and even resulted in a share buyback recently.

Nykaa’s flop show

FSN E-Commerce Ventures Ltd, the parent company of Nykaa had fixed a price band of Rs. 1085-1125 per share in its IPO with a valuation of Rs. 52,574 crores. Since listing, Nykaa shares have fallen over 60%.

Policybazaar’s bloated valuations

Policybazaar also set an upper price band of Rs. 980, which was considered over-priced by experts. This company’s shares have dropped more than 65% since listing.

Zomato’s disappointment

Food delivery company Zomato’s IPO was oversubscribed 35 times, giving it a valuation of $12 billion.  Zomato stocks have fallen around 55% since listing.

Conclusion

Some experts are of the view that Mamaearth may reconsider its valuation before knocking the stock market doors with an IPO. The company or the issue’s merchant banker have not yet confirmed whether they will proceed with this valuation. Until then, investors can keep a close watch on the company’s IPO plans.

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