More Mamaearth, MapMyIndia Like Corrections in the Offing?

40% correction in one stock, 20% in the other.

The stocks of Mamaearth (Honasa Consumer) and MapMyIndia (C.E Info Systems) have served a crude reminder to investors in recent times.

For a while now, investors in Indian stock markets did not mind paying even triple digit earnings multiple for new age businesses or recently listed stocks.

But such sharp correction in valuations on the back of negative updates showed the vulnerability of the earnings multiples.

Now, there are usual cases of several stocks that get dumped due to poor quarterly earnings. Especially after the September 2024 quarter results, we witnessed several stocks facing investor apathy for not meeting lofty high earnings expectations.

But the case for Honasa and C.E Info Systems was different.

Investors got a peek into the failing corporate governance in the relatively newly listed stocks when the management transparency was found lacking.

Honasa Consumer (parent entity of Mamaearth) sells beauty and personal care products branded Mamaearth, Dr. Sheth's, Aqualogica, and BBlunt.

Distributors of Honasa Consumer recently raised concerns over excessive inventory. It seems the personal care company had dispatched excessive inventory to the market. Plus, there were delays in replacing damaged, unsold, and expired stock.

According to the All India Consumer Products Distributors Federation (AICPDF) goods worth up to Rs 1 bn were stuck with distributors. The inventory pile-up happened as Honasa, which started out as an online venture, attempts at building a wider offline presence.

The federation claimed distributors are saddled with 90 days' worth of stocks from Honasa. Against this most FMCG companies' stock for 20 to 30 days. Distributors then replenish the stock with retail outlets.

Honasa refuted the association's claims that there was a high-risk of stock expiry at warehouses and retail outlets. Moreover, substantial volumes of unsold inventory were being returned by retailers.

Turns out this was a case of change in distribution strategy gone awry. Honasa wanted to move to a direct distribution model in the top 50 cities.

This was after phasing out its previous reliance on super stockists. This transition, though implemented in the third quarter of FY24, had not been smooth. A communication with regard to the same to investors could have saved the stock from the sharp slide after the negative news.

Similarly, C.E Info Systems (MapMyIndia), which provides data to Apple Maps and Amazon's Alexa, recently informed stock exchanges that chief executive officer Rohan Verma would step down and start a new business-to-consumer (B2C) venture. The company will transfer its Mappls Mall and Travel app for hotel and flight booking to the new company.

The current CEO, Rohan Verma would own 90% of the new venture, while MapMyIndia will spend Rs 1 m to acquire 10% equity and invest Rs 350 m through compulsorily convertible debentures (CCDs).

On the face of it, the transaction seems completely against the interest of minority shareholders of MapMyIndia in the near term.

The best alternative would have been to set up a 100% subsidiary to create value for existing shareholders and have the CEO compensated for managing both.

So, the sudden decision to transfer the CEO of the company to a new entity and also use company funds to start a private venture did not go well with minority shareholders of MapMyIndia. The stock bore the brunt.

Now both the cases of Mamaearth and MapMyIndia were not instances of fraud or outright breach of law.

This is unlike the cases like Manpasand Beverages, wherein SEBI had barred the entity

from the securities markets for a period of three years for manipulating and mis-reporting the company's financial statements.

The Vadodara-based company had been at the centre of controversy since Deloitte resigned as its auditor in May 2018. Things went downhill after its top brass was arrested for the goods and services tax (GST) fraud of Rs 400 m in 2019.

Therefore, unlike Manpasand Beverages, the stocks of Mamaearth and MapMyIndia are unlikely to face a permanent damage to reputation or loss of valuations. However, the latter could have certainly avoided losing investor trust with more transparent communication.

This also raises the question of the role of independent directors in such cases of governance failure.

Back in 2009, when the chairman of Satyam Computers was suspected of falsifying the company's books of accounts over several years, the independent director's responsibility came into question for not identifying the misrepresentation made in the company's books.

Similar concerns emerged during the Tata group (Ratan Tata-Cyrus Mistry) boardroom dispute.

A few years back, Infosys, revered for its governance standards, faced regulatory scrutiny, with SEBI highlighting issues like ineffective audit committees and lack of independence among directors.

Further, the role of auditors in reporting the cases that seem a breach of corporate governance are few and far between. However, like I pointed out in my video, auditor resignations in smallcap entities have been an important reason to be sceptical about the quality of management.

So, are there more Mamaearth and MapMyIndia like shocks in the offing?

Well, when stocks are priced to perfection, any wrongdoing on the part of the management, whether deliberate or not, is bound to be punished.

So even though there may not be cases of outright frauds, companies that fail to live up to the desired standards of corporate governance can get rerated lower.

It is therefore, up to investors to ensure that they do not overpay for stocks that do not have a long history quality governance standard.

Also, managements that fail to keep the interest of minority shareholders in mind deserve to be passed.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)