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Mamaearth IPO 1000x valuation raises concerns; ‘Another Paytm in the making’?

Mamaearth parent company Honasa Consumer’s proposed Rs 2,900 crore IPO has raised valuation concerns among investors and market experts. Honasa has filed DRHP with SEBI for an IPO with a fresh issue of Rs 400 crore, and an offer-for-sale (OFS) of 46.8 million shares, reportedly totaling up to Rs 2,900 crore. The company was valued at $1.2 billion in January 2022 when it raised $52 million in a funding round led by Sequoia. One year later, Honasa is seeking a valuation of $3 billion through its IPO. The valuation target of Shark Tank India fame Ghazal Alagh’s Mamaearth is more than 1,000x its profits.

Mamaearth’s valuations have been questioned by many on social media. Some have even compared the lofty valuation of the Mamaearth IPO to that of Paytm. Some of the main concerns for investors include sky-high valuation, exorbitant advertising spending, and inconsistent profit has caught the attention of investors, and analysts. At the end of FY22, Honasa Consumer posted a net profit of Rs 14 crore and revenues of Rs 943 crore. For the six months ending September 2022, the company posted revenues of Rs 722 crore and profits of Rs 3.6 crore. The company reported a loss of Rs 1,332 crore in FY21 and Rs 428 crore in FY20, according to the DRHP.

With a lofty valuation, will Mamaearth go Paytm, or Zomato way after listing?
There is a lot of conjecture about the price Mamaearth will set for its initial public offering. Normally, the merchant banker would determine the price closer to the IPO date. Right now, everyone is making assumptions based on publicly available information. “We doubt that management will go ahead with the higher price because there has been a lot of backlash on social media, especially given the amount of money Mamaearth is asking; whether you look at the market cap to sales ratio or the price to earnings ratio, which appears to be a little high,” said Sunil Damania, Chief Investment Officer, MarketsMojo.

It has been seen in the recent past that many IPOs, including Zomato, Paytm, and others, have not been able to sustain their high valuations, and have dropped significantly since the listing. “Something similar could occur if Mamaearth opts for such a high valuation. However, these are all speculative at the moment because neither the merchant banker nor the company has confirmed that they will proceed with this pricing,” said Damania.

Will be challenging to see any upside in the Mamaearth stock price
“The 1600x PE multiple is an unrealistic expectation, even in the middle of a bull run. Therefore, in the current market mood, this insane valuation requires an insane explanation. When I think it through, I wonder why I should not invest in Dabur or Marico, which are trading at 50-60 PE and have deeper distribution and higher brand recall. I am jittery about all IPOs where more than 25% of the money getting raised does not go to the business, i.e., it is an OFS from early investors and celebrity backers of the platform. I have understood that almost 80% of this IPO will go towards OFS, which does not bode well for public market investors. It will be challenging to see any upside in the stock price with so many questions on super-premium valuation that will primarily provide exits to current shareholders,” said Anirudh A Damani, Founder – of Artha Group.

“Mamaearth has been successful in establishing itself as a formidable D2C brand, perfecting both its product and distribution strategies. But it’s important to note that large FMCG players such as Unilever and P&G have taken decades to reach where they are now, which means Mamaearth has a long way to go,” Ankit Kedia, Founder and Lead Investor at early-stage venture capital firm Capital A were quoted saying in a YourStory report.

Mamaearth IPO’s concerns aside from the high valuation

Mamaearth’s reliance on certain marketplaces to drive sales
Mamaearth relies on relationships with specific marketplaces and web traffic drivers for sales through the online channel. The company in its DRHP said, “For Financial Years 2020, 2021, and 2022 and the six months period ended September 30, 2022, our revenue from online channels across all our brands amounted to Ra 998.43 million, Rs 3,742.93 million, Rs 6,595.34 million and Rs 4,291.15 million, respectively, representing 90.94%, 81.37%, 69.91% and 59.37% of our revenue from operations, respectively.”

Mamaearth’s marketing spend is high, No improvement in ROAS in 3 yrs
The amount spent on advertising and influencer marketing also stands out in the DRHP. As of September 30, 2022, Mamaearth worked with 3,958 influencers. The company spent about Rs 391 crore on advertising against net sales of Rs 932 crore meaning 40% of revenue was spent on marketing in FY22. The quantum was similar for FY21, FY20, and the six-month period ending September 2022. In a tweet, Aditya Kondawar of Complete Circle Capital said, “This is way too high.” Experts have the marketing spend number high given that the return on ad spend (ROAS) has not improved from 2.6 over the past three years. In contrast, Nykaa’s FY22 ROAS stood at 7.8, and big boy Hindustan Unilever’s was at 10.6.

Paytm, and Nykaa stocks with lofty valuations nosedive in 2022
Paytm’s IPO valued the firm at about $19.5-$20 billion. The company had termed the valuation “rational and fair” at the time even as it maintained that it could have priced itself higher based on interest from external investors. FSN E-Commerce Ventures Ltd, the parent of cosmetics e-tailer fixed the price band of its IPO at Rs 1085-1125 a share as it sought a valuation of around $7.4 billion or Rs 52,574 crore.

PB Fintech or Policybazaar sought a market cap of Rs 44,041 crore post listing at the upper band of Rs 980, which was termed expensive by experts. Food delivery company Zomato’s IPO was oversubscribed 35 times, giving it a valuation of $12 billion. All these four stocks have seen a sharp decline since listing. Paytm shares have fallen over 65% from the IPO price, Zomato is down around 55%, PB Fintech is down 66%, and Nykaa shares have fallen over 65% from the IPO issue price.

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The rupee appreciates on a weak dollar, and a decline in crude prices; the USDINR pair to trade sideways in this range

The Indian rupee appreciated 9 paise to 82.69 against the US dollar in early trade as crude oil prices retreated from their elevated levels. Sustained foreign fund outflows weighed on investor sentiments and restricted the appreciation bias. At the interbank foreign exchange, the local unit opened at 82.69 against the dollar, registering a rise of 9 paise over its previous close. Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, rose 0.03% to 103.55.

“Rupee is likely to appreciate today mainly on the back of weakness in the dollar and optimistic domestic market sentiments. Additionally, improved economic data in India will continue to support the domestic currency. However, a surge in crude oil prices and ongoing concern’s about a global economic slowdown will hurt the rupee. US$INR (January) is facing strong resistance near 83.10 levels. As long as it sustains below this level it may slip back to 82.70 levels,” said ICICIdirect in its report.

US Jobs data may trigger volatility

“Market participants will keep an eye on Manufacturing PMI from the UK and US. In the previous session, PMI number on the domestic front was released, which were reported better than expectations suggesting that manufacturing activity is picking up. Higher inflation and uncertainty over the COVID-19 pandemic are further weighing on growth, hence along with the economic data points, updates from governors of major central bankers will be important to keep an eye on, going forward. Focus this week will also be on the US Jobs market data which could trigger volatility in the market. We expect the USDINR (Spot) to trade sideways and quote in the range of 82.40-83.20,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.

The rupee may break out of the three-week range

“Upside attempts looked resolute yesterday and we are bracing for a break of 82.84/ 88 region that could potentially open room for 83.25 views. But, as yesterday, we would begin the day inside the consolidation band of 82.75 – 82.59,” said Anand James – Chief Market Strategist at Geojit Financial Services.

“Spot USDINR is still in a three-week range of 82.50 to 82.95. We believe the said range could be resolved by the weekend as liquidity returns with traders returning to their desks after the New year holiday,” said Dilip Parmar, Research Analyst, at HDFC Securities.

Rupee to become stronger

“India’s manufacturing PMI rose to a 26-month high of 57.8 in December, marking the highest increase in new factory orders and production in more than two years. This indicates the underlying strength and resilience of the economy that can make India a favored destination for FII’s in 2023, thereby helping a stronger rupee. Globally too with a stronger Yuan, Japanese yen, and other majors, Rupee is more likely to follow the league though in lag. Though the rupee’s bias is fundamentally on the stronger side, given the divergence, it’s advisable for the exporters to follow the hedge ratio and importers to keep capturing intraday dips for near-term payments instead of hunting for levels,” said Amit Pabari, MD, CR Forex Advisors.

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Nifty must hold above 18081 to head towards 18350; buy these two stocks to pocket short-term gains

Equity benchmark Sensex climbed up nearly 1000 points or 1.7% to close at 60841 and Nifty advance 301 points to close at 18105 against the previous week’s close. On YTD bases, the BSE barometer closed the year 2022 with a 4.40% gain or 2,587 points while the Nifty ended the year higher by 4.30% or 751 points. Sensex touched its all-time high of 63,583 points on 1 December, after hitting its 52-week low of 50,921 points on 17 June. Sensex jumped 10,502 points or 22% last year. Sensex gained for seven consecutive years or 34723 points or 133% over the last seven years. Impressive quarterly results, strong domestic fund buying interest and higher govern spending (PLI scheme, higher spending in infra project) lifted the Indian market. GST collection run rate continues for the month of Dec as well with 1.5 lakh cr just above 2.5 percent above November

The year 2022 was extremely volatile not only for the domestic market but also across the global markets. Russia – Ukraine war, the energy crisis, the spiked in global inflation, the hike in interest rates across the world, US Fed’s hawkish stance, and a spike in China covid cases dampened the market sentiment. On the domestic front, RBI also kept an aggressive stance on its rate hike. Further, FIIs selling posted limited upside to the Indian bourses which resulted in a mere 4% gain in Sensex. However, Indian markets were much better than global markets. The US market fell to a decade low with S&P 500 losing over 20%, while European stocks posted their worst annual performance since 2018 as the Stoxx Europe index yearly losses by 13%. Asian markets like South Korea, Taiwan, and China Index slipped 20% each.

This week will be important in the market as the FOMC Minutes meeting will be announced on Thursday along with domestic GDP data and monthly auto sales data. When 2022 began, investors were looking forward to a rally similar to the past 2 years when the bulls were in charge. However, one month into 2022 and bears took over as markets reeled over uncertainties brought in by the Russia – Ukraine war. Global markets plunged into doldrums and struggled to recoup the losses for the most part of the year amid persistent inflation pressures, monetary policy tightening, global central bankers’ worries about a slowdown in growth, and fear of recession — all of it owing to the geopolitical crisis caused by the war along with surged in China covid cases.

Even though stock markets in India fell prey to such an uncertain global environment, both Sensex and Nifty still emerged as winners, performing better than any other indices globally. Domestic markets advance over 4% higher in CY2022 while US S&P 500 fell 20% to a 14-year low since 2008 and Bonds lost 16% of value, the biggest decline since at least 1990.

The year 2023 will be important for the domestic market with a series of events lined up to keep the market on its toes. 2023 will be a year when nine states and possibly the Union Territory of J&K will witness Assembly elections. These polls assume more importance because the Lok Sabha elections will be held in 2024. Union Budget will be announced on 1st Feb and will hold importance ahead of the Assembly election and next year’s Lok Sabha election. The Budget is likely to be more focused on the food and fertilizer sectors.

G-20 and SCO (Shanghai Cooperation Organization) meeting with leadership by Prime Minister Modi will be hosted on Indian grounds. India is likely to strengthen its leadership globally. From the economic point of view, the US Fed rate decision, global inflation, Fed commentary, and RBI policy will be in focus this year. Progress from China’s covid and the Russia-Ukraine war, global currency, and oil prices will be focused on next year. Domestic sentiment remains bullish due to favorable government policy, cool-down inflation data, and local funds & strong retail participation to support the market.

Nifty Outlook
Nifty has formed a Bullish candle or an Inside Bar on the weekly frame but continues to form lower highs from the last four weeks. Now, it has to continue to hold above 18081 zones, for an up move towards 18250 and 18350 levels whereas supports are placed at 18018 and 17950 levels.

Stocks to buy
Jindal Steel
CMP: Rs 580 | SL: Rs 568 | Target: Rs 615
Jindal steel has given a range breakout on the daily chart and managed to close above the same. Buying is visible across Metals space and small follow up can take it towards new high territories. Stock is making higher highs- higher lows formation from four trading sessions and supports are gradually shifting higher. Considering the current chart structure, we advise traders to buy the stock for an up move towards 615 with a stop loss of 568.

Titan
CMP: Rs 2597 | SL: Rs 2530 | Target: Rs 2720
Titan has surpassed the falling supply trend line on the daily scale and it has formed a bullish candle which indicates a positive price setup. It is forming a higher high since the last 3 sessions and it has given a close above the 20 DEMA indicating strength. RSI on the daily scale is reversing from the oversold territory and showing signs of reversal. Considering the current chart structure, we advise traders to buy the stock for an up move towards 2720 with a stop loss of 2560.

Eqwires Research Analyst

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