Mamaearth IPO: A Disaster in the Making?

The first day of 2023 started with a minor earthquake in Haryana with tremors being felt in Delhi.

While I was browsing through twitter, I came across a hilarious reply to the news flash about the earthquake.

Somebody had commented,

• "Looking at the valuations of skin care company Mamaearth, even Mother Earth trembled and hence the earthquake".

It's amazing how people connect things.

So, why this trolling about Mamaearth?

Let me explain...

As per reports, Mamaearth is seeking a valuation of Rs 240 bn via its IPO sometime this year.

If this is true, I just have one thing to say, 'What the hell are these guys smoking?'

Looks like the investment bankers have learnt nothing from their past debacles of Paytm, Zomato, Policy Bazar, and Nykaa, to name a few.

If news reports have to be believed regarding the valuation they are seeking, let me just give you few statistics.

Insane Valuation

What kind of company making a Rs 140 m net profit, demands a Rs 240 bn valuation?

Ghazal Alagh, one of the cofounders of Mamaearth kept telling investors in the previous season of Shark Tank India...

"Aapka valuation jyada hai, mai invest nahi kar payungi" (Your valuations are high, I won't be able to invest).

Seems like Mamaearth Rs 240 bn valuation for barley any profit seems very fair (sarcasm intended).

Why should retail investors buy when everyone is selling?

If you look at the contours of the IPO, the existing investors are offering their stake worth Rs 20 bn while the fresh shares being offered are barely Rs 4 bn.

So basically, the promoters are selling, early-stage investors are selling, late-stage investors are selling, and even the brand ambassador is selling.

Brand ambassador Shilpa Shetty invested Rs 7.5 m in 2018 and is offloading her investments at Rs 800 m in 5 years.

All of this is going to be dumped to the retail investors at a ridiculous valuation.

In January 2022, Mamaearth was valued at US$1.2 bn. Now, the company is seeking a valuation of US$3 bn.

What has changed in less than a year, that the company is seeking a 2.5x increase in valuations?

Nothing.

Mamaearth's Valuations v/s FMCG Peers Below Rs 240 bn Marketcap

As Mamaearth has priced its issue at Rs 240 bn valuation, I analysed all the FMCG companies with a valuation below Rs 240 bn to get a reality check for the skin care brand.

Can we give Mamaearth the benefit of doubt?

Let us assume Mamaearth is a fast-growing company and its profits, which were at Rs 140 m in FY22, grow 3x by FY26 (an impossible task). The 3-years forward PE ratio still comes to over 500.

For benefit of optimists, let us take price to sales ratio going forward. Even if we assume sales will triple by FY26, the company's FY26 price to sales ratio is still 8.5.

Forget three years down the line, the best of FMCG companies are available anywhere between 5-7 times price to sales as of FY23.

So, in my view, the benefit of doubt cannot be given to Mamaearth.

Looks like if the IPO is priced at a Rs 240 bn valuation, the repeat of Paytm and Zomato is imminent. Time will tell if the management of Mamearth is cognizant of the outrage in valuations or will go ahead with its proposed valuation as per media reports.

Maybe when it corrects by more than 50%, we might review it.

In conclusion, let me leave you with a thought...

Many retail investors invest in the stock market via the SIP route by selecting mutual funds across various categories.

A good way to vet these mutual funds would be to make a list of all the funds that invest in Mamaearth's IPO...and then avoid those funds.

Warm regards,


Aditya Vora
Research Analyst, Hidden Treasure