Honasa Consumer IPO: Should you subscribe to Mamaearth’s Rs 1,701 crore issue?

Ahead of the IPO, Honasa Consumer raised Rs 765.2 crore from 49 anchor investors

Mamaearth’s parent Honasa Consumer IPO opened for subscription on October 31. The Rs 1,701 crore offer consists of a fresh issue worth Rs 365 crore and an offer-for-sale of 4.13 crore shares.

Several analysts have advised investors to ‘Avoid’ subscribing to the issue owing to its high valuation, over Rs 150 crore loss in FY23, high spending on marketing and dependence on third-party manufacturers and its flagship brand Mamaearth.

The price band for the issue, which will close on November 2, has been fixed at Rs 308-324 per share. At the upper end, the company is valued at Rs 10,425 crore or $1.25 billion which is slightly higher than the $1.15 billion valuation at which it last raised $52 million through private funding in January 2022.

Anchor Investors

Ahead of the issue, the company raised Rs 765.2 crore from 49 anchor investors. Smallcap World Fund Inc, Fidelity Funds, Abu Dhabi Investment Authority, Government Pension Fund Global, Caisee De Depot ET Placement, FSSA India Suncontinent Fund, Carmignac Portfolio, Goldman Sachs, Fundpartner Solutions, and Hornbill Orchid India Fund invested in the company via anchor book.

Mutual Fund houses like ICICI Prudential Mutual Fund, Aditya Birla Sun Life Trustee, Nippon Life India, Axis Mutual Fund, Whiteoak Capital MF, Invesco, Kotak Funds, and Franklin Templeton Investment Funds also participated in the book.

Insurance majors namely SBI Life Insurance Company, Aditya Birla Sun Life Insurance Company, ICICI Prudential Life Insurance Company, Max Life Insurance Company, Bajaj Allianz Life Insurance Company, and Bharti Axa Life Insurance Company also invested in the Varun Alagh and his wife Ghazal Alagh promoted company.

Also Read: Mamaearth IPO opens today: Ten things to know before you buy it

Financials

The company reported a net loss of Rs 150.9 crore during the year ended March 2023, impacted by the impairment loss on goodwill and other intangible assets, against a profit of Rs 14.4 crore in the previous year. The volume growth has significantly fallen to 68.23 percent in FY23 from 143.3 percent in FY22 and 298.42 percent in FY21. However, revenue from operations grew at a CAGR of 80.14 percent during FY21-FY23, to Rs 1,492.75 crore in FY23.

The loss in FY23 was primarily due to the company’s decision to scale down the majority of the business verticals of Momspresso, a content platform operating under the subsidiary Just4Kids Services.

Key Concerns

While the company has no long-term borrowing and has a very low short-term gross debt of Rs 7 crore (as of June 23), the major concern is the high spending on marketing. Its total advertising expenses have increased at a CAGR of 68 percent over FY21-23 and the company plans to use 50 percent of the IPO proceeds on advertisement expenses.

Another concern is, that out of the 6 companies it owns, Honasa Consumers generates most of its business from Mamaearth. Honasa’s revenue dependence in FY23 on Mamaearth stood at 82 percent. “As this brand gradually sees growth moderation on a high base, it is critical for the company to scale other brands faster for sustaining revenue growth momentum,” said analysts at Stoxbox.

Honasa Consumer outsources the manufacturing of all its products to third-party manufacturers and does not own any manufacturing facilities. Also, the company does not hold any patents over its product formulas. Since the company is fully dependent on third-party manufacturers, any disruptions or inefficiencies in operations may adversely affect business.

Also Read: Mamaearth IPO: Are you paying the right price to look good?

Should you subscribe to Honasa Consumer’s IPO?

Swastika Investmart: Avoid

The business' return on advertising has been consistent for a few years, i.e., 2.5 percent, thus the company's client retention is very low.

“As it is a loss-making company and after considering its outflow in the latest investment, the company is coming at an extremely high valuation. Thus, we will suggest to ‘Avoid’ this IPO,” said Shivani Nyati, Head of Wealth, Swastika Investmart Ltd.

Stoxbox: Avoid

Based on its annualized FY24 EPS, the IPO appears to be aggressively priced at 97x, discounting all immediate positive factors and seems like the company is leveraging its proven track record to justify a premium valuation.

“We, therefore, recommend an “AVOID” rating for the issue and would revisit the company following consistent and sustainable improvement in profitability,” said analysts at Stoxbox.

Emkay

Analysts at Emkay Research have assessed the Honasa Consumer’s stock valuation for three scenarios:

Scenario 1: Attractive, in a scenario where the company looks to double its turnover in the next three years.

Scenario 2: Fair, in a scenario when the company would register a 20 percent revenue CAGR with an EBITDA margin of 10 percent.

Scenario 3: Expensive, in a scenario where revenue CAGR would be 10 percent with EBITDA margin at 6 percent.

According to market expert, Hemang Jani, the company's earnings profile presents challenges. Given the current investment climate, where highly valued companies with inconsistent profitability face reduced demand, it's best to avoid this IPO.

The market is crowded, expansion costs are substantial, and achieving profitability will require time. “Looking at examples like Paytm and Zomato, even though they had solid foundations and platforms, it took time for the numbers to align with stock prices. With Honasa Consumer, it seems we are still in the early stages of the game,” Jani added.

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