Daybreak - Why retail investors showed little interest in Mamaearth's IPO

Episode Date: November 2, 2023

Yesterday, November 2, 2023, was the final day of Mamaearth-parent Honasa Consumer's IPO. The digital-first D2C sailed through with the price band fixed at Rs 308-324 per share.With this, Mamaearth has become the first digital-first D2C company to take the public route. It is also the first unicorn company to do so it the last 18 months. From 2020 to 2022, Honasa saw its revenues double every yea and in 2022 it also became profitable. Compared to other established beauty and personal care brands, it also stands out because of how "aggressively" it has been launching new products or SKUs. This year, it's already shown a 25 crore rupees profit. If we go by these metrics alone, things looked quite promising for Mamaearth.But its public issue was oversubscribed by 7.61X on the last day. And this was only because of the huge demand from qualified institutional buyers (QIBs). Retail buyers seemed quite uninterested in Mamaearth's IPO. Why?Tune in to find out.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

to the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert, as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcast. or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode.

It's been a year and a half since any unicorn company went for an IPO in India. And rightly so, considering how shaky the public market has been lately. We've been hearing about companies deferring their plans to go public. There's Ola, Swiggy and Snap Deal, to name a few. And then came along Mama Earth and changed them. that. The beauty and personal care company had shot to fame in 2020 after Sequoia Capital, the investment powerhouse had backed it. Soon of course, it became an investor's favorite. Now, while the IPO plan was in the works for some time, the company was in a wait-and-watch

mode until three days ago. On 31st October, Honasa Consumer, which operates Mama Earth, went live with the IPO. The price band for the offer was fixed between 38,000. to 324 rupees per share. And with that, Mama Earth is now the first digital first D2C company to take the public route. From 2020 to 2022, it saw its revenues double every year. And then in 2022, it also became profitable. Compared to other established beauty and personal care brands, it also stood out because of the number of new products that it was launching. This year, it has already shown a 25-crow-rupeas profit. So when rumors of a $3 billion dollar valuation started doing the rounds,

it didn't seem that unlikely. So if we go by these metrics alone, things looked quite promising for Mama Earth. But its public issue was oversubscribed by 7.61 times on the last day, which was yesterday. And this was only because of the huge demand from qualified institutional buyers. Retail buyers seemed quite uninterested in Mama Earth's IPO. The portion of shares reserved for them was oversubscribed by only 1.35 times. How come? Welcome to Daybreak, a business podcast from the Ken.

I'm your host, Nekda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday, the 3rd of November. To start with, let us look back at Mama Earth's story. It actually began as a mom and child care product range back in 2016. But around that time, the beauty industry in India was right in the middle of quite the transformation. The best example of this is how regularly we read and hear the word skincare routine now.

And it's not just women. Even men care about their beauty regimen. there is no shame around it anymore. And a lot of it is associated with what we call self-care. So now, the Indian skincare industry is split into two very distinctly different directions. One is the one that targets our love for all things natural and also Ayurvedic products, and the other is all about what the dermatologist would recommend. Products with specific formulations.

The best example of this is the brand minimalist, also the ordinary, but then again, it's not an Indian brand. Things that we would find once upon a time in doctors' prescriptions have now become mainstream. And of course, Indian brands have embraced both these trends. Mama Earth, for example, did both. It took the house of brands approach. Mama Earth's range had products made with ingredients like onion juice, coffee, rice water, apple cider vinegar, tea tree oil, you get the drift.

They even had products with grandma's favorites, like, turmeric, saffrin, and gram flour. Meanwhile, the Dermar Company, which is Mama Earth's sister brand, has products with ingredients straight out of a chemistry lab. It has serums made of ingredients like neosymeid, alpha-arbutin, cleansers containing all kinds of acids, moisturizers with collagen, and a lot more. And what Hounasa, which is Mama Earth's parent company, chose, was not to promote Derma company as Mama Earth's sister brand.

It wanted to let the brand grow on its own. The turning point for Mama Earth came in 2020 when it caught the attention of Sequoia Capital, which led a Series B fundraise of 130 crore rupees. With the fundraise, it went on a spree of launching new products, along with full-blown marketing campaigns. Word-of-mouth support from its existing user base also helped it to quite an extent. It used a very consumer insights focused innovation approach and eventually the company built an in-house portfolio of digital first D2C brands like Mama Earth, the Dermar Company, Aquilogica and Ayuga. Apart from the owned brands, the firm also acquired stakes in B-Blunt and Dr. Sheds. Now, the key word to remember here with Mama Earth is Digital First Direct to Consumer brand.

That's what has made it stand out so far. And when you think about these words, what's the first thing that comes to your mind? E-commerce, right? So, Mama Earth too was e-commerce focused until 2020. But now, that is not the case anymore. Something has changed and quite drastically at that. For Mama Earth, it was a necessity,

but it needs to be super careful about it now. Stay tuned to find out more. recent edition of his weekly newsletter, Trade Tricks, my colleague and the Kent's deputy editor, Sita Raman, wrote about something quite interesting that he noticed in Mama Earth's draft red herring prospectus, or DRHP. DIRHP is essentially a super detailed document that the company makes that tells people why they want to raise money from the public, how the money will be used and the risks involved in investing in the company. Now, Sita in his newsletter says that even a quick glance at the 378 page long document will make one fact quite clear

that brick and mortar or physical stores are no longer a nice little thing to have for Mama Earth. They are an absolute must. But hold on, aren't we talking about the first digital first D2C company to go public? We are. In fact, the words digital first are mentioned 79. times in the IPO filing. But as it turns out, in the year that ended in March 2020, Mama Earth's offline sales were just 9% of its total revenue. And for the six months that ended in September 2022, physical stores accounted for 35% of the company's total revenue.

Now, that is quite a big spike for a digital first brand. What is even more fascinating is that the share of the offline channel kept increasing even during the pandemic years of 2020 and 2021 when e-commerce or online was the hero. CETA says that even if one discounted this thanks to the offline business's low base back then, the trend has continued in 2022. But you know what? 85% of the personal care market was offline in 2021. If you take that into account, Mama Earth may be doing the right thing here.

In fact, the company mentions it itself in the filing. It says that the sale of BPC or beauty and personal care products through offline channels tends to be more profitable as compared to online channels. While Mama Earth has not disclosed online and offline profit margins, it is not hard to see why the offline profits are higher. For one, you can avoid discounting wars offline. In fact, most mom and pop stores do not discount at all and they sell products at the MRP or maximum retail price.

But again, here's the problem. Focusing more on offline also means higher wage bills. In the first half of 2022, Mama Earth spent 60 crore rupees on wage bills. That is more than what it spent on salaries in the previous 12 months. So, even though offline sales are getting it and will get at higher profit margins, brick and motor stores are cash guzzlers. And not to forget how Mama Earth's consumers have always seen it as a digital first brand. How will they react to this transition? Apart from this conundrum, there are also other factors that explain why Mama Earth did not turn out to be the retail investors' favorite in the public market.

Stay tuned to find out. The thing is, Honasa, which is the parent company of Mama Earth, slipped into red and posted a net loss of over 150 crore rupees in FY 2020. Plus, that $3 billion valuation that we were talking about? Turns out, that was just a rumour. The valuation has remained pretty flat since Mama Earth became the first unicorn of 2022. Then it was $1.2 billion. now it has valued itself at $1.25 billion, which is why many analysts were of the view that the issue

was overpriced. A few even gave it the avoid rating. And then there is the fact that Hunasa actually does not manufacture any of its products. It relies entirely on third-party manufacturers. In fact, in FY2023, the top three manufacturers contributed more than half of the total value of its purchase of traded goods. And then the other thing is that a good chunk of revenue for Honasa came from a limited number of products. The top 10 products contributed to around 30% of the revenue in FY2023. And again, a huge part of the revenue from operations come from the sale of flagship Mama Earth products. They actually contributed more than 80% to the total revenue from operations in that same year. The firm has experienced negative cash flows from operating, investing and

financing activities in the past. Plus, the company has been spending a lot of money on advertising and marketing. The expenses are actually going up every year. Even with the IPO proceeds, Honourza plans to spend nearly 200 crore rupees on advertising alone. And again, coming back to the conundrum of a digital first brand moving more and more towards offline sales. Mama Earth plans to spend 150 out of the 200 crore advertising budget just on television ads. So considering all these facts and that the company has been launching new products with what experts have called an aggressive rate combined with the fact that it is mainly Mama Earth that is bringing Honasa most of its revenue, it is not that.

That's surprising why retail investors mostly stayed away from MamaO's IPO. Daybreak is produced from the Newsroom of the Ken India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Sniqa Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.