What Mamaearth IPO papers tell investors about ITC, HUL, Marico & other traditional FMCG players

New-age personal and wellness brands such as Mamaearth (Honasa Consumer), WowSkin Science, Plum, Sugar and Good Glamm gained high traction during the pandemic due to their digital-first approach, but traditional FMCG behemoths are no pushovers, Nuvama Institutional Equities said after collating key insights from the draft RHP of Honasa Consumer. The brokerage noted that traditional FMCG conglomerates such as HUL, ITC, Marico, Emami, Dabur India and Tata Consumer have doubled down on direct-to-consumer (D2C) sales and felt only stronger standalone D2C starts-ups would survive going ahead.

Traditional FMCG companies have begun acquiring, investing, or building D2C and online-first brands, Nuvama said adding that it is a major step forward—from selling their products on marketplaces to running ‘standalone’ websites and D2C operations.

Nuvama said FMCG majors have found it strategic to buy out D2C competitors in some cases. The brokerage noted that HUL has higher beauty exposure via iconic brands with turnover of more than Rs 1,000 crore-plus such as Glow and Lovely, Dove, Lifebuoy, Pond’s, Lux, Clinic Plus, and Lakmé. HUL has D2C websites for premium brands such as Lakmé, Indulekha and Simple, and a multi-brand platform UShop, Nuvama noted.

ITC, it said, too has been focusing on strengthening D2C platforms of distribution and has created a vibrant ITC eStore along with the acquisition of Ayurvedic D2C brand Mother Sparsh. Marico was among the first few traditional FMCG majors to invest in the D2C business with the acquisition of Beardo, and later Just Herbs, it pointed out.

"Over the past two years, several FMCG companies such as HUL, Marico, ITC, Emami, Reckitt and Colgate Palmolive have picked up stakes in DTC digital-led start-ups that had become popular during the pandemic. Most FMCG companies are also ramping up their own DTC websites," Nuvama said.

Nuvama said such such acquisitions act as a barometer for these companies to capture first-hand data and understand consumers better, adding that it is a “win-win” move for both the FMCG giants as well as startups, benefiting them in terms of scalability, wide customer base and distribution network.

Domestic portfolios of listed players such as HUL, ITC, Marico and GCPL are relatively less susceptible to D2C disruption, Nuvama said.

Besides, Nuvama said over-reliance on D2C could be problematic because traditional retail continues to

dominate on the customer experience front. Omni-channel retail could be the best solution, wherein FMCG brands are flourishing, it said.

India’s BPC market, eight-largest in the world, is expected to expand at a 12 per cent CAGR over CY21–26 with the online BPC market likely to outgrow at a 27 per cent CAGR. Nuvama said Honasa is the largest digital-first BPC company in India by revenue with a CAGR of 193 per cent over FY20–22.

"However, we expect traditional FMCG players to dominate D2C given their decades of first-hand intelligence on consumer needs and massive physical distribution—not to mention their learnings from evolving D2C start-up ecosystem, keen focus on D2C and M&A. With overall liquidity dull in the market, only stronger standalone D2C starts-ups would survive in our view," it said.

Nuvama said Mamaearth provides a dipstick into the strength of the raging trend of FMCG companies snapping up DTC start-ups to gain a competitive edge. For FY22, Mamaearth grossed margins of 70 per cent; Ebitda margin was markedly lower at 1.9 per cent, Nuvama said. Besides, the company had a market share of 5.3 per cent in the online BPC market in India and 26.4 per cent in the DTC BPC market. The company’s digital-first online channel makes up 60 per cent of revenues.

"We expect traditional FMCG players to dominate D2C given their decades of first-hand intelligence on consumer needs and massive physical distribution— not to mention their learnings from evolving D2C start-up ecosystem, keen focus on D2C and M&A. The BPC industry is likely to expand at a CAGR of 12 per cent over 2021–26. However, given much lower liquidity in market, only stronger standalone D2C starts-ups shall survive in our view," it said.

Nuvama said Mamaearth reported a net profit of Rs 14.4 crore in FY22 and it intends to utilise the funds raised from IPO towards advertisement to improve brand visibility, opening new salons and EBOs, and inorganic acquisitions.

There has been some backlash on social media for its high valuation but the company has not confirmed the pricing yet, Nuvama noted.

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