Mamaearth, a Good Company that's too early to IPO?

If you've been reading a lot about Mamaearth's upcoming IPO on Oct 31, and influencers basically ridiculing the company's valuation, you're not alone. So I thought of doing my own research, read the really long Draft Red Herring Prospectus, a number of videos for and against the company by Finshots, Backstage with Millionaires and LearnApp and then came to my own conclusions. Unfortunately, most of these concerns resonated with me. I will explain why.

Concern 1: There is really no moat/USP.

Mamaearth's positioning in the market is because its products are "safe." But if you read the fifth risk mentioned in the DRHP, it says that "We outsource the manufacturing of all our products to third-party manufacturers, primarily under non-exclusive contract manufacturing arrangements, and do not own any manufacturing facilities". What this means is that Mamaearth has no product innovation or intellectual property (basically, no R&D) or manufacturing prowess. The problem is twofold: (i) Anyone can copy your formula, and there's nothing to protect it from doing so, (ii) Without a strong R&D team, future product innovations are a moot point, and marketing can only grow you so much without a good product!

Concern 2: Why are they listing so fast, in just 6 years. Seems almost hurried.

Mamaearth products were launched to solve the issue of chemical-free baby skincare products only in 2017. From 20 lakhs, they've grown phenomenally to 900+ crores. But it's been only 6 years. Sure, the growth trajectory is fantastic, but what's the hurry to list? They're not even yet close to the revenue of the beauty and personal care competitors identified, in terms of revenues. Is it merely a fast exit option for the early investors? Just check out the operating revenue for the competitor companies mentioned for FY22.

HUL (only beauty and personal care): INR 21.8k crores

Dabur: INR 11.5k crores

Marico: INR 9.8k crores

Emami: INR 3.4k crores

Mamaearth: INR 1.4k crores

Undoubtedly, the company has fared phenomenally well in terms of growing their revenue. But, at the expense of VC funding. And, so have their costs, where margins are missing (its operating at a loss last year). So why not wait longer to perfect the business model?

Concern 3: Product assortment seems to lack the thoughtful strategic consideration. What is their hero product really? Brand equity is still WIP.

Marico has its Parachute hair oil. HUL has Surf. But which is Mamaearth's hero product - is it onion oil and baby skin care? Or are they still experimenting? Mamaearth started with baby skin products. Probably struggled to compete against Sebameds and the Himalayas and broadened their product assortment to include adult hair care products. "Honasa launched at least 2.6 times higher number of new SKUs than the BPC industry median during Financial Year 2022." How are they doing this - is it "Me-Too" products? And launching products so fast may not be that great - after all you want good research done for products claiming to be "much safer" than its peers.

Their revenue growth is a hockey stick, sure. But they were the first movers on influencer marketing (even bought a content platform momspresso for a whopping INR 152 crores). So, is it paid marketing or organic? Marketing 101 teaches you that paid can get you only so far. For the long term, you need brand equity and a great product that will do organic marketing for you. Especially since increasingly customers no longer trust influencers (81% of respondents said a brand’s use of influencers has either no impact or a negative impact on their perception of that brand, The Drum).

Concern 4: The D2C company is now a significant offline player. And, that's a whole different ball game.

As of Sep'22, 35% of Mamaearth's revenues came from offline. Yet, its calling itself a D2C brand. Ok, let's forget the "buzzwords" usage. But success in online is very different from offline. And that means: distribution, limited shelf space, and money to compete. So, it needs to perfect offline operations, and is only a year in. It takes over one year for an infant to learn how to walk. So how will they run?

Even in the online space, this space is quite crowded (high margins?) with D2C startups like Lotus Botanicals, Just Herbs, and WoW Skin, not to mention incumbents like Dove, Tresemme and Dabur.

Concern 5: It's not clear how the funding will drive impact

Maybe it's just me, but I do not understand what will they achieve by the funds they raise. Let's say the valuation is INR 2,400 crores (vs 24,000 crores doing the rounds). Of this, the DRHP outlines only 400 crores for expansion investment. That means 2000 crores to buy out existing shareholders?

I understand they want to grow brand awareness (more paid marketing), acquire new companies (M&A 101 teaches you most acquisitions fail, and they've already acquired three brands in six years) and expand offline. But to achieve what? And why this strategy, what's the proof this will be good bets? I would understand if they wanted to develop some product labs, but this is really not a "think big" IPO plan.