Recently, New Delhi-based Honasa Consumer Ltd has filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) to raise funds through fresh issue of shares and offer-for-sale (OFS) component.
Honasa Consumer Ltd is the parent company of popular Indian personal care products startup Mamaearth.
Since launching Mamaearth in 2016, the company has expanded its portfolio to include five more brands such as The Derma Co, Aqualogica, Ayuga, BBlunt, and Dr. Sheth's. They have also created a 'House of Brands' architecture.
As of September 30, 2022, their portfolio of brands with differentiated value propositions includes products in the baby care, face care, body care, hair care, color cosmetics and fragrances segments.
Kotak Mahindra Capital Company, Citigroup Global Markets India, JM Financial and JP Morgan India Pvt Ltd are the book-running lead managers to the issue.
Here are five important details about the issue that retail investors should be aware of:
The IPO offer consists of fresh issue of equity shares worth ₹400 crore, and offer-for-sale (OFS) of 4.68 crore equity shares by promoters, investors and other selling shareholders. The equity shares have a face value of ₹10 each.
The net proceeds from the IPO would be utilised towards advertising to enhance the awareness and brand visibility, setting up new exclusive brand outlets, investment in its subsidiary BBlunt for setting up new salons, general corporate purposes and inorganic acquisition.
In the past, the company has carried out strategic acquisitions as a means of inorganic growth. In calendar year 2021 and 2022, the company completed the acquisitions of majority stakes in their subsidiaries, Just4Kids Services Private Ltd and Bhabani Blunt Hairdressing Private Ltd (BBlunt), as well as 100% of the shareholding of Fusion Cosmeceutics Private Ltd, which owns Momspresso and the BBlunt and Dr. Sheth’s brands in India, respectively.
Shares in the OFS are being offered by the promoters Varun Alagh and Ghazal Alagh, as well as investors Fireside Ventures Fund, Sofina, Stellaris, Snapdeal cofounders Kunal Bansal and Rohit Bansal, Rishabh Harsh Mariwala, and Bollywood actor Shilpa Shetty Kundra.
Additionally, the offer includes a reservation of up to ₹10 crore for subscriptions from eligible employees.
The company may consider a pre-IPO placement totaling ₹80 crore, according to DRHP. If such a placement is made, the fresh issue's size will be decreased.
What number of shares do investors intend to sell?
Varun Alagh, the company's co-founder and CEO, owns 10,67,37, 650 shares, or 34.30% of the startup, according to DRHP.
Ghazal Alagh, the company's co-founder and chief innovation officer (CIO), owns 10,065,200 shares, or 3.23%. They collectively hold 37.53% of the startup. The promoter group owns a total of 37.6% when including the other three members.
Varun intends to sell up to 31 lakh shares under the offer, while Ghazal plans to sell 1 lakh equity shares.
Fireside Ventures Fund, an investor, now has 18,44,700 shares, or 10.39% of the firm; Stellaris and Sofina each hold 9.5% and 9.49%.
With 1.91 crore shares, Sofina will be the highest seller. Through OFS, Stellaris intends to sell 1.27 billion shares. While Fireside Ventures intends to sell 79.72 lakh equity shares, Investor Evolvence India intends to sell up to 10.83 lakh shares through its various funds.
While Snapdeal cofounders Kunal Bahl and Rohit Bansal own 0.77% of the business, angel investor Rishabh Harsh Mariwala owns 2.93%, actress Shilpa Shetty Kundra who owns a total of 16,23,635 shares, or 0.52% of the company also plans to offload their shares.
Analysts claim that everyone involved with the company, including the promoter, angel investors, and brand ambassador, is selling their shares and planning to exit the company, which is not encouraging for new investors.
Financials and valuations are in doubt
After suffering losses of Rs. 1,332 crore in FY21 and ₹428 crore in FY20, the company turned a profit in FY22 with net earnings of ₹14 crore. The company reported a 4 crore net profit for the first half of FY23. It indicates that the company has just lately begun turning profitable.
Its gross profit margin improved by more than 3 percentage points from 66.5 percent in FY20 to 69.96 percent in FY22, which the company used to justify its value ambitions. Additionally, the company claimed that it is gaining from economies of scale in its IPO prospectus.
Mamaearth's most recent valuation was $1.2 billion in January 2022. The company is currently aiming for a $3 billion valuation for its upcoming IPO.
Analysts estimate that the amount of the upcoming IPO will be around ₹24,000 crore, but suddenly the company's request for a 3x increase in valuation makes it unacceptably expensive for the market. Retail investors should therefore avoid the public offer at all costs.
Mamearth's price to earnings ratio (P/E Ratio) is 1714x higher than that of other firms in the personal care and beauty industries, including Nykaa (979x), P&G (91x), Hindustan Unilever Ltd (62x), Godrej (57x), Gillette (56x), Marico (53x), Emami (23x), and Bajaj Consumer Care (18x).
High employee costs
The company in its DRHP stated that the employee benefits expense increased by 184.04% to ₹78.8 crore in FY2022 from ₹27.8 crore in FY2021, primarily due to an increase in salaries, wages and bonus to ₹56.1 crore in FY2022 from ₹21.6 crore in FY2021.
According to the company, this increase was primarily caused by an increase in senior management staff over the year as well as a growth in our sales team as it broadened its offline distribution network. By March 31, 2022, the company had 507 employees overall, up from 285 the previous year.
Advertising expenses exceed earnings
During the fiscal years 2020, 2021, and 2022 as well as the six-month period that ended on September 30, 2022, the company's advertising expenses were ₹45.85 crore, ₹177.9 crore, ₹391.5 crore, and ₹271.9 crore, respectively. On a consolidated basis, these expenses made up 41.76%, 38.68%, 41.49%, and 37.63% of our total revenue from operations for those periods.
This raises questions about the company's extensive marketing efforts, given that it is still losing money and has only recently started to earn a profit.