Mamaearth IPO: Should you subscribe to Honasa Consumer's primary offering?

Honasa Consumer, the parent company of Mamaearth, will be coming with its initial public offering (IPO) on Tuesday, October 31. The issue, which is being sold in the fixed price band of Rs 308-324 per share and a lot size of 46 equity shares, can be subscribed by the investors until Thursday, November 2.

Honasa Consumer provides beauty and personal care products through its digital platform serving more than 500 cities in India. It has various consumer brands including Mamaearth, The Derma Co, Aqualogica, Dr Sheth's, and Ayuga.  Honasa Consumer's product portfolio includes baby care, face care, body care, hair care, color cosmetics, and fragrances.

Honasa Consumer is looking to raise Rs 1,701 crore via IPO, which includes a fresh share sale of Rs 365 crore and its existing shareholders and promoters of the company will offload 4,12,48,162 equity shares via offer-for-sale (OFS) route. Eligible employees of the company, who have a reservation of Rs 1 crore, will get a discount of Rs 30 per share.

The Gurugram-based company allocated 2,36,17,228 shares to 49 anchor investors to raise Rs Rs 765.2 crore on Monday. The anchor book included marquee names like Smallcap World Fund Inc, Fidelity Funds, Abu Dhabi Investment Authority, Caisse De Depot ET Placement,  Government Pension Fund Global, Goldman Sachs, Fundpartner Solutions and Hornbill Orchid India Fund.

The net proceeds from the fresh issue shall be utilized towards advertisement expenses towards enhancing the awareness and visibility of the brands; capital expenditure to be incurred by the company, investment in the company's subsidiary, BBlunt; general corporate purposes; and unidentified inorganic acquisition.

The company has reserved 75 per cent of the net offer for the qualified institutional bidders (QIBs), while non-institutional investors (NIIs) will get 15 per cent of the allocation in the issue. Only 10 per cent of the net offer shall be reserved for the retail investors of the issue.

Kotak Mahindra Capital Company, Citigroup Global Markets India, JM Financial and JP Morgan India are book-running lead managers for the issue and Kfin Technologies is the registrar for the IPO. Shares of the company will be listed on both BSE and NSE.

Majority of the brokerage firms are not very positive on the issue citing its aggressive pricing, high portion of OFS in the IPO, outsourcing the products, loss making nature of the business and weak financial of the company. However, a few are positive on growing demand for BPC products among the consumers. Here's what brokerage firms say about the issue of Honasa Consumer:

Swastika Investmart
Rating: Avoid
Honasa Consumer has brand building capabilities and it follows data-driven, contextualized marketing. The company does not manufacture its products and also does not hold any patents over its product formulas. However, the financial performance of the company has been inconsistent, and reported losses Subsidiaries that it has acquired have also incurred losses, said Swastika Investmart.

The business' return on advertising has also been consistent for a few years, that is, 2.5 per cent, thus the company's client retention is very low. As it is a loss-making company, we cannot derive its actual P/E, but even after considering its outflow in the latest investment, the company is coming at an extremely high valuation, said the report with an 'avoid' rating on this IPO.

Canara Bank Securities
Rating: Subscribe for long-term
Honasa Consumer is the largest personal care and digital first beauty company in terms of revenue as of FY2023. The company has established a digital first omnichannel distribution network across online and offline channels. The revenue for the company has grown at a CAGR of 80 per cent over FY 21-23 with a volume growth of 102.28 per cent, said Canara Bank Securities.

"The company has an adjusted EBITDA of 3.4 per cent as of FY23 with negative working capital on account of the asset light model that enables them to invest more on marketing, technology and product innovation . The company continuously strives for expansion of distribution by creating brand awareness," it added with a 'subscribe for long term' recommendation for the issue.

Sushil Finance
Rating: Neutral
The company operated on an EBITDA margin of 1.52 per cent and a negative PAT margin for year ended FY23 and EBITDA margins of 6.31 per cent and PAT Margin of 5.32 per cent for quarter ended 30 June,2023. The company is asking for a PE multiple of 97.59 times annualizing diluted EPS for Q1FY24, said Sushil FInance.

"Looking at all the factors, risks and opportunities we are neutral on the company. The investors may observe a few upcoming quarters for consistent profitability and may apply for the issue with a medium to long-term view," it said.

StoxBox
Rating: Avoid
"Based on its annualized FY24 EPS, the IPO appears to be aggressively priced at 97 times, discounting all immediate positive factors and seems like the company is leveraging its proven track record to justify a premium valuation. We recommend an 'avoid' rating and would revisit the company following consistent and sustainable improvement in profitability," said StoxBox by BP Equities.

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