Mamaearth IPO: Gauging The Investor Sentiment & Market Dynamics

Mamaearth, a prominent D2C player in the Indian consumer goods market, has unveiled its plans to raise INR 1,700 Cr in primary capital through an initial public offering (IPO), a combination of fresh share issuance and offer for sale (OFS). The seven-year-old beauty and personal care brand will sell 4,12,48,162 equity shares to the public. 

Its parent company, Honasa Consumer, will launch the three-day IPO on October 31 (Tuesday). The issue opened for anchor investors on October 30 and the startup has reserved up to 60% of the QIB (Qualified institutional buyers) portion shares for them.  

Share allotment will be done by November 7, and the stock is likely to be listed on the BSE and the NSE on November 10.

Mamaearth’s valuation was pegged at $3 Bn, or roughly INR 24,000 Cr, in June 2022. However, the brand put its IPO on hold amid subdued market conditions. It is now set to be listed at a valuation of $1.2 Bn, which is just 40% of the previously reported valuation. 

The IPO floor price is 30.80 times the face value of the equity shares, with a cap price of 32.40 times the face value of the equity shares. The lot size of Mamaearth’s IPO is 46 equity shares and bids can be made in multiples of 46 equity shares. 

At least 75% of the shares are reserved for qualified institutional buyers (QIB), with a maximum of 15% for non-institutional investors (NII). Retail investors will be allocated 10% shares.  

Eligible employees opting for the employee reserve portion will get a discount of INR 30 per equity share.

As Mamaearth is a major new-age consumer brand listing on Indian bourses, it is set to attract a wide range of investors.

Girish Vanvari, founder and CEO of the Mumbai-based tax, regulatory and business advisory firm Transaction Square, thinks Mamaearth IPO is a “test case”, as it will show how many people are keen to bet on a D2C brand. 

“As you see, all the IPOs in recent months were from established companies with good price-to-earnings (P/E) multiples. But a loss-making or break-even company has come up for an IPO after a long time. This has got to be a test case for how people react. This is going to be a significant and defining trend for all ‘unicorn’ IPOs, which have taken a backseat. This is more than just Mamaearth,” he added.

What Works In Favour Of Mamaearth’s Listing

According to RedSeer, Mamaearth had a 1.5% market share of the total beauty and personal care (BPC) market in CY2022. 

The BPC segment in India was a $26.3 Bn market opportunity in 2022 and is estimated to reach $38 Bn by 2028. Globally, this sector will likely touch $783.49 Bn by that time.

Given the size of the Indian BPC market and Mamaearth’s relatively short-term but impressive presence (think of its specialisation in all-natural products), the brand has cornered considerable success. Analysts believe the brand’s strong market presence and value proposition will be critical drivers. Here are the top three factors that may boost Mamaearth’s IPO.

Brand presence: The company has a presence in more than 500 cities in India. Its online distribution network has covered 18,000+ pin codes nationwide, with products accessible in more than 715 districts. Besides, the BPC startup also retails through more than 100,000 outlets. 

In the past few years, Mamaearth has rapidly emerged as one of the top natural skincare and haircare brands in India. “The company’s visibility is further enhanced through its participation in shows like Shark Tank India and its aggressive social media marketing,” said Umesh Chandra Paliwal, founder and CEO of Unlisted Zone, a Ghaziabad-based marketplace for unlisted shares.

Right timing: According to analysts with whom we spoke, Mamaearth’s IPO appears to be well-timed, given the positive market sentiment in the past two quarters and the recent trend of IPOs providing good returns. “However, managing the grey market premium will be essential for a successful IPO,” said Paliwal.

D2C opportunity: Mamaearth, known as the face of D2C brands in India, provides a unique opportunity for retail investors, family offices and HNIs keen to invest in direct-to-consumer companies, although it sells approximately 60% of its products through online marketplaces like Amazon and Flipkart. To date, no pure-play Indian D2C brand has been listed on stock exchanges.

What May Go Awry For Mamaearth In The Long Run

Several factors may hinder the brand’s IPO success starting with its financials.

Mamaearth reported losses due to the impairment loss on goodwill and other intangible assets of INR 154 and high advertising costs (around INR 500 Cr ) in FY 23 which may worry potential investors. Compared to other FMCG incumbents like Hindustan Unilever (HUL), this level of ad spending is disproportionately high. For context, HUL invested INR 4,859 Cr in advertising and promotional activities in FY23, just 8.3% of annual turnover (INR 58,154 Cr, FY23).

More importantly, it faces tough competition from peers like The Moms Co, Wow Skinscience and mCaffeine like brands and a large chunk of its promotional expenditure includes influencer marketing, celebrity endorsements and gaining traction on social media.

Between FY21 and FY23, the company spent INR 22.74 Cr, INR 39.93 Cr and INR 67.14 Cr, respectively, on promotions featuring celebrities and social media influencers.

According to Santosh N, managing partner of the Mumbai-based valuation firm D&P Advisory, “While the losses indicate that the company’s valuation is steep, it is also unfair to directly compare these valuations with larger FMCG companies that have been in existence for 50 to 100 years and the P/E ratio at which FMCG companies are valued.”

In the unlisted market, Mamaearth shares have faced tepid demand, being offered at around INR 350. “Given the IPO price band of INR 308-324 and the company’s financials, this did not attract buyers,” said Paliwal of Unlisted Zone.

Promoters selling their shares: Another red flag for investors could be promoters selling shares worth INR 100 Cr. Although Vanvari of Transaction Square believed it was a small amount, several analysts found it a cause for concern.

The D2C brand’s high dependence on third-party manufacturers has also raised eyebrows, as it currently works with 37 contract manufacturers. But at a press conference during the IPO launch, Mamaearth founders Ghazal and Varun Alagh emphasised that the company’s current focus is on innovation, new products, growth and scaling to new markets. 

“Manufacturing is capital-intensive and it will limit our resources. On the other hand, outsourcing manufacturing will help us move quickly at this growth stage,” the founders added. 

The Bottom Line: IPO Oversubscription Likely

Despite many challenges, the IPO market momentum is expected to work in Mamaearth’s favour. “With anchor investors already lined up, there is a high chance that the IPO would be oversubscribed,” said Vanvari. 

This will lead to short-term success, allowing the brand to invest IPO earnings into growing its offline reach.

However, there will still be challenges to maintain its D2C identity in a fiercely competitive market. In fact, its IPO outcomes may face a litmus test in the coming days, depending on how fast it can grow its offline sales network to reach every corner of Bharat.   

Given this context, potential investors will have to weigh the risks and rewards carefully despite Mamaearth’s unique position as a D2C player in the IPO market.

With inputs from Meha Agarwal, Sanghamitra Mandal