Mamaearth IPO: Five key highlights from its DRHP

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Digital-led beauty and personal care company Mamaearth was the first unicorn of 2022.

As the year draws to a close, one may perhaps look at it in hindsight and say that it was a sign of things to come – as the first unicorn of the year was also a profitable company. In the last 12 months, the sheen has worn off many in the billion-dollar valuation club as investors, private as well as public, have checked out of loss-making-but-fast-growing companies.

Just before the end of 2022, Mamaearth also became the last unicorn of the year to file for an initial public offering (IPO). The company is now looking to raise as much as Rs 400 crore through a fresh issue of shares, apart from an offer for sale (OFS) of around 4.7 crore shares.

Here, we take a look at five such important things to note from its draft red herring prospectus (DRHP) that was filed with the market regulator yesterday (December 29).

Profitability matters

A lot of internet-led companies have suffered in the stock market this year as central banks tightened interest rates and investors fled from loss-making new-age companies. For this reason, startups like Snapdeal, Mobikwik and Boat have either postponed or shelved their IPOs.

Floating its IPO at such a time, Mamaearth seems to have taken confidence from its profitability. The company became profitable in FY22 with net earnings of Rs 14 crore, compared to losses of Rs 1,332 crore in FY21 and Rs 428 crore in FY20. In the first half of FY23, the company registered a net profit of 4 crore.

The company has claimed in its IPO prospectus that it is deriving benefits from economies of scale — as its gross profit margin improved over 3 percentage points from 66.5 percent in FY20 to 69.96 percent in FY22.

Ads and e-commerce fees are large cost centres

The rise of digital-first consumer brands like Mamaearth and Sugar have been dependent on two critical factors — a deft use of social media marketing campaigns and utilising e-commerce marketplaces like Nykaa, Amazon and Flipkart as sales channel.

But these instruments of growth don’t come cheap. Mamaearth’s ad expenses outstripped its sales growth as this cost centre expanded 120 percent to Rs 391 crore in FY22. Further, its sales commission to e-commerce marketplaces grew 114 percent to Rs 29 crore in FY22.

Growth is slowing

As the company is getting bigger in terms of scale, its growth machine appears to be slowing down. While Mamaearth’s revenue from operations rose 318 percent to Rs 460 crore in FY21, it registered a growth of 105 percent to Rs 943 crore in FY22.

In the first six months of the current fiscal, the company has logged operating revenue of Rs 723 crore. Assuming the same revenue run rate in the rest of the fiscal (as the company claims in its IPO prospectus that seasonalities do not impact its business), it would grow around 53 percent in FY23.

Over-dependence on a few products

The company’s IPO prospectus cautioned that the business has a significant dependence on the sale of its top 10 products. In fiscal years 2020, 2021, and 2022, and the six months period ended September 2022, Mamaearth derived Rs 42 crore, Rs 140 crore, Rs 285 crore and Rs 213 crore, or 38.40 percent, 30.38 percent, 30.17 percent and 29.45 percent of its revenue from operations, respectively, from the sales of these top 10 products.

Further, it made Rs 14 crore, Rs 66 crore, Rs 120 crore and Rs 91 crore, or 12.41 percent, 14.42 percent, 12.77 percent and 12.63 percent, of revenue from operations for financial years 2020, 2021, and 2022, and the six months period ended September 2022, respectively, from the sales of top two products.

Rising employee costs

Employee benefits expenses rose 3X in the past two fiscals — at Rs 79 crore in FY22, Rs 28 crore in FY21 and Rs 9 crore in FY20. The company has spent Rs 78 crore on employees in the first six months of FY23 which is almost the same amount paid in the entire FY22.

"This increase was mainly attributable to an increase in the number of senior management personnel during the year and also an increase in our sales force, as we expanded our offline distribution channel. Our total employees increased to 507 as of March 31, 2022, from 285 as of March 31, 2021," the company said in its DRHP.

Further, salary increments with effect from June 2021 and higher annual bonus payments in FY22 (as a result of a number of employees achieving performance targets), and an increase in share-based payment expenses to Rs 17 crore in FY22 from Rs 4 crore in FY21 also contributed to the increase in the employee benefits expenses.