How Mama Earth IPO Making Fools of Retail Investors?
Personal care brand Mama Earth, which became a unicorn in January 2022 with the valuation of $1.2 billion, filed its Draft Red Herring Prospectus (DRHP) with market regulator Securities and Exchange Board of India (SEBI) to raise around ₹2,900 crore through an initial public offering (IPO).
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Mama Earth’s IPO and What it means for the Indian startups
Mama Earth upcoming IPO is making waves. Most people on social media are panning it for 2 reasons.
1. Other startup IPOs (Zomato, Paytm, etc.) in India have done poorly. The stock prices are down, and they have destroyed a lot of shareholders’ wealth.
2. Mama Earth is overvalued. The IPO is priced at more than 1,700x of the annual earnings (P/E), which, compared to traditional FMCG companies, is ridiculous.
I find the first point absurd. Not all startups are the same. People are clubbing all startups into the same category which makes no sense. You must evaluate the company’s business before passing any judgement.
The second point has some merit. The valuation is indeed crazy when we see it through the lens of traditional companies. But we should remember that startups take time to become profitable. VCs and other investors are fine valuing loss-making startups using a sales multiple (Price to Sales because Earnings are negative). The rationale is they will eventually become profitable with size.
If you see Mama Earth through this lens, it seems like a fine company. It has cut down its huge losses in FY21 to become profitable in FY22. We don’t know whether this trajectory will continue or not. The founders say it will. The critics say it won’t. The future is uncertain :).
I don’t have a horse in this race. I am not subscribing to this IPO. But I will be following it because its success means a lot for the Indian startup ecosystem. Global investors have pumped billions of dollars of venture capital into Indian startups with the hope that some of these startups will have successful IPOs, and they will make a lot of money.
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What is an IPO means?
IPO is one of the two exit options for late-stage VCs. The other is a successful acquisition. A stellar Mama Earth IPO means the Indian retail investors believe in the startup growth story and are fine waiting for them to become profitable. A bad IPO means a low appetite for high-growth but unprofitable businesses.
VCs will be watching this with bated breath. Let’s see what the public decides.
In the context of some of the recent and upcoming IPOs, two quotes are very relevant:
History is merely a list of surprises! It can only prepare us to be surprised yet again (Kurt Vonnegut). Our confidence that the world makes sense rests on a very secure foundation, namely our unlimited ability to ignore our ignorance (Daniel Kahneman).
How else can one explain the same irrational behaviour being repeated again and again on the stock markets, and investors believing that this time is different!
At this P/E ratio, Mama Earth will have to grow at least 50 times (in profits) to deserve the current valuation. And probably the same number of times in terms of revenue to nearly $3.0 billion (assuming economies of scale are not easy to come by)!!! If you think investment bankers could be trusted, just recall that the top 3 investment bankers in the world advised We work that a valuation in the range of $80-$100 billion was possible! Their commissions depend upon spinning such an unrealistic web.
It’s always nice to see small startups scale to being long-term sustainable and great companies. But when valuations get far ahead of the inherent values of businesses, they end up creating the wrong kind of role models and wrong notions on how to build a business. Building a long-term great company takes time, is boring, and needs patience, persistence and stamina, and above all done best away from the spotlight.
I hope this time the retail investors stay away from such hyped IPOs and let the institutional investors play this high stakes ‘greater fool’ game. And retail investors are better off sticking to investing in businesses that they understand and where there are REAL opportunities for an upside.
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Twitter users slam Mama Earth IPO, raise question over company’s valuations and ad spend
Several social media users raised the alarm over Mama Earth IPO and exercised retail investors to exercise caution over applying for the Initial Public Offering in an already volatile market, especially after their unpleasant experience with Zomato and Paytm shares, which have had similar over-valuation concerns.
Many on Twitter said they would steer clear of the Mama Earth IPO over its sky-high valuation. The loss of ₹1,332 crore in FY21 and ₹428 crore in FY20, as per company’s DRHP, have also added to the anxiety among the investors.
A Twitter user asked his followers to not invest in Mama Earth IPO, describing its Initial Public Offering as a pump and dump scheme.
Several others also pointed out another metric, the company’s Return On Advertising Spend (ROAS), that they claimed had massively influenced their decision on Mama Earth IPO. ROAS is a metric that measures the amount of revenue earned for every rupee spent on advertising.
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Some social media users call outrage over Mama Earth IPO premature and baseless
However, many other Twitter users and market analysts dismissed the social media outrage on IPO valuation of Mama Earth as overreaction and baseless.
Mangalam Maloo, Assistant Editor at business news channel CNBC TV18, said he could not understand the outrage surrounding the Mama Earth IPO. “The DRHP doesn’t speak of valuations, there’s no official info on the price they’re seeking. The IPO hasn’t even opened, nor do we know the issue dates,” tweeted Maloo, advising to wait and analyse in entirety before taking a decision.
Experts put Mama Earth valuation at 1,666 times its annual profits
On December 29, popular brand Mamaearth’s owner Honasa Consumer filed its Draft Red Herring Prospectus (DRHP) with market regulator Securities and Exchange Board of India (SEBI) to raise around ₹2,900 crore through an initial public offering (IPO).
In its Draft Red Herring Prospectus, Mamaearth said it is planning to raise as much as Rs 2,400 crore through its IPO. It expects to raise about Rs 400 crores through a fresh issue of shares and the rest through an Offer For Sale (OFS) of about 4.7 crore shares.
Honasa Consumer, the parent company of Mama Earth, said it plans to use the proceeds of the IPO towards advertising expenses to improve awareness and visibility of the brands, for coming up with new salons via its subsidiary BBlunt, inorganic acquisitions, and setting up new exclusive brand outlets.
Founded in 2016, Honasa Consumer currently operates of group of brands under its umbrella, with Mama Earthbeing its flagship brand and the fastest growing beauty and personal care brand in India to reach an annual revenue of Rs 10 billion (in the preceding 12 months) within six years of launch. In January 2022, it became a unicorn with a valuation of $1.2 billion.
At the end of FY22, Mama Earth posted a net profit of Rs.14.4 crores and the revenues of Rs.43 crores. With speculations abound that the organization is looking at $3 billion market capitalization (Rs.24,000 crores), the organization’s price-to-earnings ratio would be about 1,666x, raising caution among investors and market experts, who assert that the valuation of the brand is exorbitant.
The company’s revenues are close to touching the Rs.1,000 crores mark, and its total income rose 101% to INR 952.4 Cr in FY22 from INR 472.1 Cr in the previous financial year. The startup, which has the backing of Tiger Global, had its revenue from operations soar 2X to INR 931.7 Cr from INR 459.9 Cr in FY21.
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