MamaEarth IPO: A valuation bubble or just a pessimistic Approach
Days after the Honasa Group (the parent company of MamaEarth) announced the launch of its IPO and released its DRHP, the financially diligent netizens couldn’t keep their calm. With a massive valuation of $3 billion (as per active media reports), MamaEarth doesn’t seem to justify the numbers. So, what should you, as Indian stock market investors, know about the MamaEarth IPO?
Considering the firm’s annual numbers, the net profit for FY22 stood at Rs. 14 crore, whereas it was valued at $1.2 billion after its last round of funding in January 2022. This made many investors doubt the grand valuation score of Rs. 24,000 crores at a time when it has been only a year since it became profitable, not ignoring their big chunk of ad spend that stood at Rs. 390 crores last year. This makes us wonder if MamaEarth’s IPO is really one of the most profitable stocks to buy in India.
Rewinding past IPO valuations in the Indian share market
Not many were shy to point out the similarities between MamaEarth IPO and other loss-inducing IPOs. The constant rocketing marketing costs, even in times of losses, reminded people of BYJUs. The company spent a whopping amount on advertising even when it was incurring heavy losses; forget about profits. And now, in FY21, MamaEarth has spent Rs. 180 crore on advertising at a loss of Rs. 1,332 crore.
Nykaa, which is one of the direct competitors of MamaEarth in skin care products, saw a drastic drop of 62% in its stock price in the Indian share market. Interestingly, the company was once referred to as the only profitable company among the few recently listed new-age firms. Moving on, Paytm shares saw a drop of 64%, and the firm was often criticized for its hard-to-find revenue model and unrealistic valuation. Even The Honest Company, a global retail competitor, experienced a drop of 84% in its stock price in the Indian share market.
The story of mispriced IPOs is not a new thing for the Indian stock market. It is quite evident from the price plays of past IPOs. One thing to keep in mind here is that if anyone has borne the brunt of merchant bankers’ miscalculations in DRHPs, it is retail investors who put their trust in such firms while looking for profitable stocks to buy in India.
If MamaEarth goes public at its target price, it will be valued at a multiple of 1,000 times its profit, given its P/E ratio in the Indian share market. Keeping in mind that the issue details consist of new equity shares worth Rs 400 crores along with an offer for sale, this is clearly a nightmare for retail investors but a cherry on top of the cake for current holders, including early investors, brand ambassadors, and angel investors, who are reportedly selling their shares.
The so-called profitability of MamaEarth IPO
When a firm places its products on e-commerce sites like Amazon and Flipkart, a small percentage of the revenue generated from sales is occupied by these e-commerce platforms. In MamaEarth’s case, Amazon seems to make an exception by discounting their selling expenses. These exceptions can significantly impact their revenue numbers. Things may go south if Amazon, which is one of the major marketplaces for the firm, puts a halt to such discounting. This fact not being mentioned in the DRHP is a considerable issue, raising questions over the transparency factor.
Then coming back to ad spending, which takes up roughly 40% of MamaEarth’s total revenue, the firm has spent heavily on influencer marketing and makes Rs. 2.5 for every rupee it spends on marketing. This bar is relatively low when compared with its competitors, including Nykaa, which generates around Rs. 12 for every rupee it spends on marketing.
A conflicting bright side of MamaEarth IPO
While countable issues appear in the valuation prospect, it is essential to note that the quality of MamaEarth’s product range is evidently appreciable. There is a solid need for non-toxic products in the Indian marketplace. MamaEarth proclaims to be India’s first and only certified non-toxic skincare brand. The company’s core concept is actually good.
Nevertheless, from a business perspective, the company just seems to dump its losses on retail investors of the Indian share market. Every now and then, it’s the common people who bear the sudden losses of overvalued IPOs. It often seems like big investors and VCs have made it a point to exit loss-incurring start-ups by transferring the risks to retail investors who aren’t so vigilant about the industry.
There is no harm in going public. But exploiting the obliviousness of the public just to turn the investments of a few rich investors profitable is unacceptable.
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