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Experts put Mamaearth valuation at 1,666 times its annual profits, Twitter debates whether it’s overvalued

Personal care brand Mamaearth, which became a unicorn in January 2022 with the valuation of $1.2 billion, filed its Draft Red Herring Prospectus (DRHP) with market regulator Securities and Exchange Board of India (SEBI) to raise around ₹2,900 crore through an initial public offering (IPO).

On December 29, popular brand Mamaearth’s owner Honasa Consumer filed its Draft Red Herring Prospectus (DRHP) with market regulator Securities and Exchange Board of India (SEBI) to raise around ₹2,900 crore through an initial public offering (IPO). 

In its Draft Red Herring Prospectus, Mamaearth said it is planning to raise as much as Rs 2,400 crore through its IPO. It expects to raise about Rs 400 crores through a fresh issue of shares and the rest through an Offer For Sale (OFS) of about 4.7 crore shares.

Honasa Consumer, the parent company of Mamaearth, said it plans to use the proceeds of the IPO towards advertising expenses to improve awareness and visibility of the brands, for coming up with new salons via its subsidiary BBlunt, inorganic acquisitions, and setting up new exclusive brand outlets. 

Founded in 2016, Honasa Consumer currently operates of group of brands under its umbrella, with Mamaearth being its flagship brand and the fastest growing beauty and personal care brand in India to reach an annual revenue of Rs 10 billion (in the preceding 12 months) within six years of launch. In January 2022, it became a unicorn with a valuation of $1.2 billion. 

At the end of FY22, Mamaearth posted a net profit of Rs 14.4 crores and the revenues of Rs 943 crores. With speculations abound that the organisation is looking at $3 billion market capitalisation (Rs 24,000 crores), the organisation’s price-to-earnings ratio would be about 1,666x, raising caution among investors and market experts, who assert that the valuation of the brand is exorbitant.

Twitter users slam Mamaearth IPO, raise question over company’s valuations and ad spend

Several social media users raised the alarm over Mamaearth IPO and exercised retail investors to exercise caution over applying for the Initial Public Offering in an already volatile market, especially after their unpleasant experience with Zomato and PayTM shares, which have had similar over-valuation concerns.

Many on Twitter said they would steer clear of the Mamaearth IPO over its sky-high valuation. The loss of ₹1,332 crore in FY21 and ₹428 crore in FY20, as per company’s DRHP, have also added to the anxiety among the investors.

A Twitter user asked his followers to not invest in Mamaearth IPO, describing its Initial Public Offering as a pump and dump scheme.

Several others also pointed out another metric, the company’s Return On Advertising Spend (ROAS), that they claimed had massively influenced their decision on Mamaearth IPO. ROAS is a metric that measures the amount of revenue earned for every rupee spent on advertising.

The company had spent Rs 391 crores in advertising, a staggering 40 per cent of its net sales of Rs 932 crores. The metric was similar for FY21, when it spent Rs 178 crores on ads against a net sales of Rs 460 crores, and in FY20, when it splurged Rs 46 crores compared to net sales of Rs 110 crores. 

The company’s ROAS has hovered around 2.6 in the past three years. The more an organisation has a repeat customer, the less it has to spend on advertising its products. The fact that ROAS has remained close to 2.6 means the company has less repeat customers, market analysts claim.

By contrast, HUL has ROAS of 10.6 while Nykaa’s FY22 ROAS stood at 7.8. 

Some social media users call outrage over Mamaearth IPO premature and baseless

However, many other Twitter users and market analysts dismissed the social media outrage on IPO valuation of Mamaearth as overreaction and baseless. 

Mangalam Maloo, Assistant Editor at business news channel CNBC TV18, said he could not understand the outrage surrounding the Mamaearth IPO. “The DRHP doesn’t speak of valuations, there’s no official info on the price they’re seeking. The IPO hasn’t even opened, nor do we know the issue dates,” tweeted Maloo, advising to wait and analyse in entirety before taking a decision.

Another Twitter user, Ashish Mishra, seemed bemused with the valuation of Rs 24,000 crores being thrown around. “Sorry late to it but where is it from that Mamaearth is seeking 24000 crore valuation?” Mishra tweeted.

A market analyst, declining to identify himself, said Mamaearth has a positive outlook in a field where companies take years to enter profitability. Against this background, the organisation’s profitability in FY22 is commendable, he added. 

“The IPO is scheduled to be released somewhere in mid-2023. The document shared by the organisation is a draft prospectus. The price will be revealed once it releases its offer document. Let the company share the details of its financials before being targeted for its valuations through the Initial Public Offering. Once everything is in the public domain and the company’s expectations from the IPO, one can form an informed opinion on whether it is worth investing or not,” he added. 

The company’s revenues are close to touching the Rs 1,000 crores mark, and its total income rose 101% to INR 952.4 Cr in FY22 from INR 472.1 Cr in the previous financial year. The startup, which has the backing of Tiger Global, had its revenue from operations soar 2X to INR 931.7 Cr from INR 459.9 Cr in FY21.

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Jinit Jain
Jinit Jain
Writer. Learner. Cricket Enthusiast.

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