As expected during the listing stage of an IPO, Varun Alagh, CEO and co-founder of Honasa Consumer Limited, looked excited but tired when he spoke to Outlook Start-Up. Alagh has been juggling multiple things since the IPO for Honasa, which operates brands like Mamaearth, The Derma Co., Aqualogica, Dr Sheth's, Ayuga and BBlunt salons, opened on 31st October. It entered the unicorn club in 2022 after raising $52 million from Peak XV Partners (then Sequoia Capital) at a $1.2 billion valuation.
The company aimed to raise Rs 1,701 crore via the public listing through fresh issuance of shares worth Rs 365 crore and an offer for sale (OFS) of 4.13 crore shares by a few shareholders. These included Sofina, Stellaris, techpreneurs Kunal Bahl and Rohit Kumar Bansal as well as actor Shilpa Shetty Kundra, who is also Mamaearth's brand ambassador.
After a slow start, the IPO, set at a price band of Rs 308-324, received an overwhelming response from investors on its last day i.e. 2nd November, with 7.6x subscription. It received bids for 22 crore shares against the issue size of 2.89 crore shares. Of these, retail investors bought 1.35 times, high net worth individuals (HNI) bought 4.02 times and qualified institutional buyers (QIB) picked 11.5 times of the allotted quota.
Tuning out the naysayers who painted a gloomy picture for Honasa's IPO, Varun was unsurprised and unfazed by the delayed positive response. He claims this is the prevalent trend in most public listings as over 90 per cent of the shares are bought on the last day. This is because investors need to transfer substantial sums of money after placing their bids and prefer doing it on the last day of the listing to earn two more days of interest on their capital.
Getting Into The Market
Honasa's IPO was one of the biggest highlights of the past week with a roller coaster journey, mirroring what the company underwent over the past few months.
These are some of the many learnings Varun and his wife Ghazal, the company's co-founder, have picked up since Honasa decided to hit the IPO circuit last year. Many questioned the couple's prudence in going public at a time when markets were volatile, against the backdrop of global geopolitical issues and a looming recession.
However, they reasoned that there is no way to predict when the stock market would rebound from high volatility to more stability.
"We started working on our IPO process last June and just followed the process. Our DRHP approval came in August, and we started working on the next steps to go live. Structurally, as a country and a company, we are in a very good space from a longer-term perspective and keeping that in mind, I think no time is a bad time," he explains.
Varun also dismissed media reports that the company's valuation of $1.2 billion (around Rs 10,000 crore) in its current form was almost 60 per cent lower than its earlier projection of $3 billion (Rs 24,000 crore). "When we filed our draft red herring prospectus (DRHP) last December, there was no conversation about valuation during the process. This news was a media rumour, and everyone just picked it up as our valuation and started playing on it," he ruefully recalls.
This prompted Ghazal to put out a series of tweets to clarify the valuation, which only saw her getting further trolled by netizens. Having people second guess their every decision is yet another thing that the couple has learnt to take in their stride now.
How The Numbers Stack Up
In FY23, the company posted a loss of Rs 150 crore on a revenue of Rs 1500 crore, earning a 1.5 per cent EBITDA margin. Industry experts said the loss was because of the financial drag of the Momspresso, a female-oriented content platform it had acquired in 2012. The company's DRHP stated that Momspresso had underperformed significantly during Q4 of FY23. This forced the company's board to scale down its business verticals in March 2023.
In Q1 FY23, Honasa reported a Rs 25 crore profit after tax and its revenue has grown at an 80 per cent CAGR between FY21-23. This could well indicate that the decision to prune Momspresso was a well-timed one, especially with an IPO in the offing.
Another question that emerged about the company was about its Price to Earnings (PE) ratio. At 1714x, this was reportedly still higher than the industry average of 60x.
Varun believes that for companies that have not reached stable EBITDA, PE is not the correct ratio to judge their performance. He believes price to revenue, price to gross margin or PE adjusted for growth are some fair metrics to evaluate start-ups. However, he cautioned that applying these factors can be tricky because the PE can vary over the next two years, depending on whether the company is growing at a faster pace as compared to other players.
In its DRHP, Honasa has announced its plans to use Rs 182 crore for advertising to improve brand visibility. Currently, its advertising spend as a percentage of its revenue is approximately 30 per cent as per its FY 23 revenues, which is very high compared to that of industry veterans like Hindustan Unilever, which are still at 8 per cent.
Varun feels that this comparison is lopsided because it does not account for how the two entities have been growing in volume terms. He elaborates that the larger brands have been spending on the same range for the last 50 years due to their legacy.
"While we are competing with them to gain market share, our brands are young—Mamaearth is just under seven years old, while some of our other brands are less than three years old. And hence a lot of awareness needs to be driven," he adds.
Growing At All Costs
Given the youthfulness of the brands in its portfolio, Honasa's return on advertising spend is just 2.5x of the revenue, which translates to fewer repeat customers. A bigger advertising outlay could, therefore, significantly impact the company's bottomline performance.
He maintains that all this investment in brand building will pay off for a long time, so Honasa has adopted the strategy of investing in building the brand presence to grow faster now.
Varun, however, claims that this outlay used to be 40 per cent till two years ago when the company had two brands and has been steadily coming down. Today, it is at 35 per cent with six brands in the kitty.
"The outlay on younger brands is higher in percentage terms, because the mother brand—Mamaearth—is becoming even more efficient yearly. But since we are choosing to build younger brands and grow the business, we have to choose to invest into it. This is a strategy where we want to prioritize growth in building these brands so they can become growth engines and drive sustainable growth in the long term. And as they grow and become sizable, this percentage also decreases considerably," he explains. "We want to grow faster. If it means it's at the cost of our bottomline, we are fine with it."
This also means being judicious in the kind of advertising initiatives undertaken for each brand, especially in the increasingly crowded BPC market. Honasa's internal content studios generate over 2000 pieces of content monthly, to highlight the differentiated aspects of its products. It has also invested in building data science, CRMs and user experience to devise mixed media modelling and identify what kind of advertising works and what can be discounted.
Additionally, its 'why-based brands' attempt to have a purpose program that will appeal to its target audience. For instance, since Mamaearth offers plant-based products, every order on its site is succeeded by a tree being planted on the buyer's behalf. The company claims to email a photo of the plant along with its geo-location to customers within a week of the lined purchase.
Honasa's DRHP also claims to use a certain amount of the raised capital for inorganic acquisitions. Varun clarified that this is a general corporate-purpose vehicle that can potentially be used for acquisitions over the next three years. However, for now, the company will attempt to grow its business organically.
Talking about the white spaces it has identified in India's growing BPC market, he said Honasa would first evaluate if any of its current brands can cater to it or if it should craft a new brand to cater to it before considering acquisitions.
For now, Varun is just happy to luxuriate in the satisfaction of having closed an IPO successfully, and cocked a snook at all those people who were eager to write the company’s public listing debut off.