06 December 2023
Mamaearth, a well-known brand celebrated for its natural and eco-friendly personal care products, has not only captured the hearts of millions but has also made a significant impact in the business world. The company's recent IPO, launched on October 31, 2023, marks a pivotal milestone in its journey.
While many potential investors eagerly await their chance to secure shares in the IPO, it's essential to consider four compelling reasons why one might want to exercise caution
1. Consumer Preference and Market Perception: Despite robust brand awareness and widespread availability of Mamaearth's products in retail outlets, consumers display a perplexing reluctance to make purchases. The products are perceived as relatively expensive, and the promised attributes of being natural, safe, and eco-friendly are deemed unconvincing. In contrast, premium brands like Forest Essentials and Kama Ayurveda, albeit pricier, consistently deliver on their commitment.
2. Financial Performance Challenges: Mamaearth grapples with significant financial challenges. Despite experiencing a surge in revenue, the company faces the hurdle of low profit margins. Before FY22, Mamaearth incurred losses, and its FY23 results unveiled a modest profit of just 4 crores, which was promptly overshadowed by a substantial loss of 151 crores following the accounting for the impairment of goodwill.
3. Excessive Marketing Expenditure: Mamaearth's enormous marketing expenditures raise valid concerns about sustainability. In FY23, the company allocated a staggering 530 crores for marketing, constituting a substantial 36% of its total revenue. This allocation significantly exceeds industry standards.
4. Key Financial Metrics: Mamaearth's financial metrics indicate a trend of decline. Their EBITDA margin for FY23 stood at a mere 1.52%, signifying low profitability. Furthermore, the Return on Capital Employed (ROCE), a measure of capital efficiency, dwindled to approximately 2.94%. In comparison, parking funds in a standard savings account could yield a 6% return, underscoring inefficiencies in Mamaearth's capital utilization. These financial indicators raise concerns about the company's financial stability and operational efficiency.
To put Mamaearth's financial performance into context, a comparison with industry giants such as Hindustan Unilever (HUL) becomes necessary. The glaring disparity emerges in the EBITDA margin, with Mamaearth's EBITDA at a meager 2%, while Unilever PLC sustains an EBITDA margin of 23.6%, highlighting the significant gap between Mamaearth and HUL.
Furthermore, Mamaearth's Earnings Per Share (EPS) for FY23 were negative, rendering them incomparable to companies like Hindustan Unilever, which boasts an EPS of 37.8.
In summary, Mamaearth confronts numerous challenges encompassing market perception, profitability, financial performance, and valuation metrics. To thrive and maintain investor trust, the company must address these issues.
