What Could Be Mamaearth Parent Honasa Consumer’s Fair Value

Honasa Consumer Ltd., the parent of Mamaearth, recently filed a draft red herring prospectus with the market regulator to raise up to Rs 400 crore in fresh equity and an offer for the sale of 4.37 crore shares. The company also plans a pre-IPO placement.

Of the proceeds of the fresh issue, Honasa Consumer will spend around Rs 186 crore on advertisement and Rs 62 crore on capex and new BBlunt saloons over the next three years.

Honasa Consumer derived over 69.9% of its sales from online sales—direct-to-consumer and e-commerce—for the year ended March 2022 and 59.4% for the half year ended September. Its flagship brand, Mamaearth, is focused on developing safe-to-use, natural products in the beauty and personal care segments. The company has five other brands: The Derma Co., Aqualogica, Ayuga, BBlunt, and Dr. Sheth’s. The last two were acquired in 2022.

The company makes its products under an asset-light model through 37 contract manufacturers.

Honasa Consumer recorded a revenue of Rs 943.5 crore in FY22 and Rs 722.7 crore for the half year ended September 2022. Ebitda or operating margin stood at 1.2% and 1.9%, respectively.

It posted a profit of Rs 14.43 crore in FY22 and Rs 3.66 crore in April–September 2022.

The company will have an equity shareholding of 30.67 crore shares of Rs 10 face value each, including shares on the conversion of 13,213 non-cumulative, compulsory, convertible preference shares, or NCCCPS, issued to investors. The NCCPS will be converted into 17.04 crore shares at the time of filing the RHP. The promoters hold 38.14%, while other investors own 61.86% on a fully diluted pre-IPO basis.

The preferential allotment was made on Sept. 13, 2022, to Bollywood actor Shilpa Shetty Kundra at Rs 262.40 apiece in lieu of a brand endorsement fee worth Rs 6 crore. Shetty Kundra is also selling up to 5.5 lakh shares as part of the OFS, and the weighted average price of her shares is 41.86 apiece.

Honasa Consumer, in its DRHP, has defined itself as a beauty and personal care company that has a revenue of over Rs 100 crore. While there are no direct-to-consumer listed peers, it competes with listed consumer goods makers in the beauty and personal care segments, including Hindustan Unilever Ltd., Colgate-Palmolive India Ltd., and Dabur India Ltd., among others.

In the online market, it competes with Nykaa, which owns BPC brands with an annual sales run rate of over Rs 100 crore.

At the allotment price at which shares were issued to Shetty Kundra, the company is valued at Rs 8,036 crore, or nearly a billion dollars.

But what would be the valuation pitch? The company will seek to increase its valuation in the pre-IPO round between now and the filing of the RHP.

The prospectus does not give other operational details or more financial metrics, or how it was valued in the last 18 months when it issued shares through preferential allotment to Shetty Kundra.

Based on the last share issuance price, the minimum issue size will be at least Rs 1,628.5 crore, including a fresh issue of Rs 400 crore.

An Ebitda or price multiple may not hold as the company reported its first operating and net profit in FY22. Assuming a sales multiple similar to that of HUL, which trades at around 10 times its FY23 sales, Honasa could be valued at close to Rs 15,000–16,00 crore.

That valuation assumes Rs 1,500–1,600 crore in sales in FY23, going by the half-yearly number of Rs 722.7 crore.

But then comparing it to HUL's sales multiple would be unfair as India’s largest consumer goods maker enjoys a premium and has very high Ebitda margins and profitability for its BPC segment, which reported a revenue of Rs 20,000 crore in FY22 and around Rs 10,000 crore in the first half of FY23.

A 6–8-times sales multiple, provided Honasa Consumer continues on its path to profitability and improved Ebitda margin, seems a reasonable valuation for the company.

The company also issued ESOPs at a fair value of Rs 291.86 apiece, implying a sales multiple of six times. At this price, the company would be valued at close to Rs 9,000 crore.

And at the upper end of 8 times its FY23 sales multiple, the valuation goes up to Rs 12,000 crore.