Mamaearth’s setback, Zee & Goenka's drama, Elon Musk & India’s internet
Hey Big Bulls,
Welcome back to yet another episode of Bull's Eye.
?And today, we dive into,
Standard disclaimer: This is not investment advice.
But before we dive in, here's some news – catch Bull's Eye on YouTube too. In English and Hindi!
Subscribe to our English channel here – https://www.youtube.com/@InsightsbyWealthy
And for Hindi, click here – https://www.youtube.com/@WealthyInsightsHindi/videos
Honasa's ‘Mama’ needs a bigger push
Everyone knows Mamaearth, right?
It’s one of those beauty brands that say they’re toxin-free and built especially for India’s babies and people like us too. So they’ve got products for our skin, hair, everything – like the onion hair care range that made them a household name.
Anyway, in the past week, its parent company’s shares – which is Honasa Consumer – have crashed by nearly 30%.?
What’s going on? Ok, so this Honasa Consumer is what everyone calls a D2C or Direct to Consumer brand. They sell stuff under multiple brand names – Mamaearth, Derma, Aqualogica. And they sold these to customers online at the start of their journey. That was a massive success. Then, when they went the offline route later, their distribution strategy was to use super stockists – these are middlemen who passed products to smaller suppliers and stores.
But then…Honasa decided that they didn’t need these middlemen anymore. Varun Alagh, who’s the CEO, said they were facing problems with sales and even data with them. So they began ‘Project Neev’ to help them go the D2C route completely. Honasa’s own sales team would do all the dirty work.
And the result of this…is quite bad? Well, Honasa’s taking a loss on its inventory of a massive ?70 crores. They thought it would be ?50 crore but looks like they underestimated it. Its sales have dropped 9% and it reported a ?15 crore loss too. And since this is the first loss since its IPO last year, investors aren’t happy.?
But are the problems over? Maybe not. Because Honasa’s also admitted that they screwed up in terms of their investment allocation. They were underfunding their focus products, and they didn’t create the right messaging for the hero product for its offline business.?
Also, the brand's pricing sits right between mass and premium, making it extra competitive. Breaking into a market with different income groups is never easy.
And on top of all this, the distributors’ body in India claims that they have unsold stock worth Rs 300 crore that’s nearing expiry too..
Of course, Mamearth has disputed this, but you see where this is headed.?
At the end of the day, Honasa’s in a rut. Its flagship Mamaearth is struggling against competition.?
So, is there any hope at all? But there might still be light at the end of the tunnel. At least if you go by investment house Jefferies. Here’s something they wrote:
“Honasa is not the first to go through this pain. History suggests that companies do come back on track, and we are hopeful. In this context, it is useful to note that several large FMCG firms have gone through distribution realignment, despite decades of existence,”.
So, maybe Honasa can too?
Zee & Goenka’s drama
Punit Goenka, Zee’s MD resigned, and it seems like everyone was waiting for this. Zee shares, which are down 57% this year, jumped 7% after the announcement.
And it’s all because Zee's story, which began in 1992 with Subhash Chandra, has only faced ‘family’ challenges of late.? His son, Punit Goenka, joined the board in 2005, becoming CEO in 2008.
What numerous challenges? In the past four years, Zee’s dealt with an investor revolt, big foreign investors bailing, a failed merger with Sony, lawsuits, and a market regulator probe.
But it was the Zee-Sony merger drama – all that back-and-forth of "will they, won't they" – really tested everyone's patience.
Sony Pictures Network India decided to merge with Zee in December 2021. At the time, Invesco, Zee’s largest shareholder with 18%, pushed for a board change and Goenka's resignation.
Despite Goenka being set to lead the merged entity, Sony was later uneasy about his leadership following SEBI's clash with him and Subhash Chandra where the market regulator accused them of fund diversions and barred them from key positions.
So, Sony cancelled the merger in January, citing unmet conditions. Zee then sought to push it through via the NCLT, which is like a company court. But by September, both sides agreed to withdraw, and the approval was reversed.
But Zee’s struggles continue: Despite a healthy cash balance and low debt, profits have dropped due to tough industry conditions.
It’s not just stuck in legal battles over the failed Sony and cricket deals – but also faces new competition from the mega Disney-Reliance merger that just happened.
Wait, there’s more – Zee has a low promoter holding of 0.4%, which also puts the company at risk of a hostile takeover.
*A hostile takeover is when a company/individual acquires control of another without its management's consent.
Under Goenka's five-year tenure, Zee's profits have halved, and proxy firms like IiAS have raised governance concerns, recommending investors reject his reappointment as MD.
For now, there’s a catch: The board has accepted his resignation as MD but retained him as CEO. And, he will stay on Zee’s board if his appointment is ratified at the AGM on November 28.
Musk seems to have got a hold in India
The rules for how it's decided who provides India’s internet have changed, and here’s the behind-the-scenes drama of it all.
For years, India has been allocating spectrums to telecom players via auctions.?
But first, what is a spectrum auction? Spectrum is invisible radio frequencies that carry wireless signals. The government auctions it off like land or oil, as it’s valuable and limited, used for telecom, TV, radio, and defence. With the rise of 4G and 5G, demand for spectrum has increased.
To manage this, the government divides the spectrum by regions and assigns it to different users. The auction winner secures exclusive rights and a head start in attracting subscribers.
However, Elon Musk questioned this auction process, calling spectrum a “natural resource” that companies should share in a rational, efficient, and economic manner.
So Musk wanted licensing, but Ambani wanted auctions.
India’s very own Jio and Bharti Airtel argued that offering satellite broadband airwaves at a fixed price by the government is unfair, as they had to bid billions in auctions for spectrum for their wireless networks, creating an uneven playing field.
But the International Telecommunications Union (ITU), which sets the rules for satellite spectrum on the global stage, is clear: spectrum should be allocated, not auctioned. And almost every country follows that.
Now, India has sided with Musk. Communications Minister Jyotiraditya Scindia recently announced that the spectrum for satellite broadband will be allocated administratively, rather than through an auction, as requested by Ambani and Mittal.
What’s next? India, with 42 million wired broadband users and 904 million 4G/5G users, is the world’s second-largest telecom market after China.?
As of early 2024, internet penetration in India is at 52.4%, with 25,000 villages still lacking internet access, according to DataReportal. Even in cities, many areas still lack fibre-based fast internet. And, Musk aims to ensure that the network reaches even the remotest regions.
For that to happen, Starlink has applied for a licence to operate in the country, but the government’s decision is still pending.?
For now, Ambani has lost the battle over India’s satellite spectrum rules, and if Starlink launches, he could face tough competition in a market he's long dominated.
See you next week for another exciting edition of Bull's Eye.