Mamaearth’s parent company, Honasa Consumer, has launched its IPO for subscription starting on October 31. The IPO is valued at Rs 1,701 crore and consists of a fresh issue of Rs 365 crore along with an offer-for-sale of 4.13 crore shares.
However, the investment opportunity has stirred varying opinions among analysts. Some are advising investors to be cautious and ‘Avoid’ subscribing due to concerns about its high valuation, significant losses of over Rs 150 crore in FY23, heavy spending on marketing, and its reliance on third-party manufacturers and its flagship brand, Mamaearth.
The price band for the IPO, closing on November 2, has been set between Rs 308 and Rs 324 per share. At the upper end of this range, the company’s valuation would reach Rs 10,425 crore or $1.25 billion, slightly above the $1.15 billion valuation it achieved in its last private funding round in January 2022 when it raised $52 million.
Anchor Investors
In preparation for the IPO, Honasa Consumer raised Rs 765.2 crore from 49 anchor investors. Diverse institutions, including Smallcap World Fund Inc, Fidelity Funds, Abu Dhabi Investment Authority, and more, invested in the company via the anchor book. Prominent mutual fund houses and insurance giants also participated in the pre-IPO investment.
Financial Performance
The company reported a net loss of Rs 150.9 crore in the fiscal year ending in March 2023, primarily due to an impairment loss on goodwill and other intangible assets. This marked a sharp contrast to the Rs 14.4 crore profit in the previous year. While volume growth significantly declined to 68.23 percent in FY23 from 143.3 percent in FY22 and 298.42 percent in FY21, revenue from operations grew at a compound annual growth rate of 80.14 percent during FY21-FY23, reaching Rs 1,492.75 crore in FY23.
One key concern is the company’s substantial spending on marketing, with total advertising expenses increasing at a compound annual growth rate of 68 percent between FY21 and FY23. Honasa Consumer plans to allocate 50 percent of the IPO proceeds to advertisement expenses.
Another area of concern is the company’s high dependence on Mamaearth, which contributed to 82 percent of Honasa’s revenue in FY23. Analysts stress the importance of diversifying revenue sources as Mamaearth’s growth moderates, especially considering its already high base.
Manufacturing and Operational Dependencies
Honasa Consumer relies entirely on third-party manufacturers for its product manufacturing and does not possess any manufacturing facilities or product formula patents. This manufacturing dependency leaves the company vulnerable to operational disruptions and inefficiencies.
In conclusion, the Honasa Consumer IPO has garnered mixed opinions. While some urge caution due to its history of losses and valuation concerns, others believe there is potential. However, investors are encouraged to carefully evaluate these factors before making a decision on whether to subscribe to the IPO.
Should you subscribe to Honasa Consumer’s IPO?
As Honasa Consumer’s IPO enters the market, financial experts and analysts have varying opinions on whether investors should subscribe to this offering. Here’s a summary of their views:
Swastika Investmart: “Avoid” Shivani Nyati, Head of Wealth at Swastika Investmart Ltd, advises avoiding this IPO. Nyati highlights that the company’s return on advertising has been consistently low at 2.5 percent, indicating limited client retention. Given the company’s history of losses and its high valuation, Swastika Investmart recommends steering clear of this offering.
Motilal Oswal: “Avoid” Hemang Jani, Equity Strategist at MOFSL, also suggests avoiding this IPO. He points out challenges in the company’s earnings profile and the current investment climate. Highly valued companies with inconsistent profitability are facing reduced demand, making this a less attractive investment. Jani notes that the market is competitive, expansion costs are substantial, and profitability may take time to materialize, citing examples like Paytm and Zomato.
Stoxbox: “Avoid” Stoxbox analysts recommend avoiding this IPO, expressing concerns about its aggressive pricing. They note that the IPO is priced at 97x the annualized FY24 EPS, which discounts potential positive factors and suggests that the company may be leveraging its track record to justify a premium valuation. Stoxbox suggests reconsidering the investment only if the company demonstrates consistent and sustainable improvement in profitability.
Emkay Research: Evaluating Scenarios Analysts at Emkay Research have assessed Honasa Consumer’s stock valuation under various scenarios:
Scenario 1: “Attractive” – If the company aims to double its turnover in the next three years.
Scenario 2: “Fair” – If the company achieves a 20 percent revenue CAGR with a 10 percent EBITDA margin.
Scenario 3: “Expensive” – If the company experiences a 10 percent revenue CAGR with a 6 percent EBITDA margin.
In conclusion, while the IPO has generated mixed opinions, investors are advised to carefully consider these recommendations and conduct their own due diligence before deciding whether to subscribe to Honasa Consumer’s IPO.
