Honasa Consumer Limited - Mamaearth ( IPO Analysis)

Summary

The company is the largest digital-first beauty and personal care (BPC) company in India, based on revenue from operations in the Financial Year 2022 according to a RedSeer Report. Their primary goal is to create products that address beauty and personal care issues faced by consumers. Their flagship brand, Mamaearth, is dedicated to providing safe-to-use, natural products, with a focus on toxin-free beauty products made from natural ingredients. Mamaearth achieved significant growth, reaching an annual revenue of ₹10 billion in the 12 months leading up to September 30, 2022, within just six years of its launch.

About the Company

The company is the largest digital-first beauty and personal care (BPC) company in India, based on revenue from operations in the Financial Year 2022 according to a RedSeer Report. Their primary goal is to create products that address beauty and personal care issues faced by consumers. Their flagship brand, Mamaearth, is dedicated to providing safe-to-use, natural products, with a focus on toxin-free beauty products made from natural ingredients. Mamaearth achieved significant growth, reaching an annual revenue of ₹10 billion in the 12 months leading up to September 30, 2022, within just six years of its launch.

Since the launch of Mamaearth in 2016, the company has expanded its portfolio with the addition of five new brands: The Derma Co., Aqualogica, Ayuga, BBlunt, and Dr. Sheth's. This has allowed them to adopt a 'House of Brands' architecture, covering a wide range of products, including baby care, face care, body care, hair care, color cosmetics, and fragrances.

The company's success with Mamaearth and its ability to identify and respond to emerging trends have enabled them to develop effective brand-building strategies. These strategies are powered by a consumer-centric approach and encompass various aspects of their business model, such as an innovative engine, a digital-first omni-channel distribution system, and a technology and data-driven marketing and consumer engagement model. This consumer-focused approach and diversification of brands have contributed to their position as a leading player in the Indian BPC industry.

Business model

The company has established itself as a prominent player in the Indian beauty and personal care (BPC) market through its robust approach in brand building, product innovation, distribution, and marketing:

1. Product Innovation: They have developed a strong consumer insights-led product innovation engine, introducing a significant number of new SKUs (Stock Keeping Units) in the BPC market, contributing to substantial revenue growth. Their dedicated in-house innovation team collaborates with ingredient suppliers to create new formulations, and they use an asset-light contract manufacturing model for production.

2. Distribution: The company employs an omni-channel distribution strategy, making products available through both online and offline channels. They strategically utilize online platforms to generate trials, engage directly with consumers, and test for product market fit. As products mature, they introduce them to offline stores to reach a broader consumer base. They leverage customer feedback and insights from their online channels to guide their offline store expansion and portfolio strategy.

3. Marketing: A data-led contextualized marketing approach is employed to drive brand and product consideration and purchase. They use data-driven insights to create authentic content through in-house studios and a network of digital influencers. Their data ecosystem enables them to understand consumers across various variables and segment their user base into micro-cohorts for personalized user experiences.

4. Strong Position: The company's focus on the BPC category, combined with their strengths in brand building, innovation, distribution, and marketing, has allowed them to establish a strong presence in the Indian BPC market. They have achieved substantial growth and positioned themselves as a leader in the digital-first BPC industry in India, recording the highest revenue from offline channels in the past financial year.

About the Promotors:

The organization is led by visionary founders Varun Alagh, who serves as the CEO, and Ghazal Alagh, who is the CIO. Varun has gained significant experience from prominent companies in India such as Hindustan Unilever Limited, Diageo India Private Limited, and Coca-Cola India Private Limited. Ghazal, with a background at NIIT and prior experience with dietexpert.in, joined the company as a promoter and director in 2016. Their extensive knowledge of the consumer packaged goods and BPC products space in India has been instrumental in the company's development and growth.

The founders are supported by a professional leadership team with a collective experience of over 100 years in consumer packaged goods, e-commerce, and direct-to-consumer (DTC) companies in India. This team benefits from guidance and advice from a board of directors comprised of respected individuals with extensive experience in consumer businesses.

The company has received funding from reputable investors, including SCI, Stellaris, Sofina, Evolvence India Fund III Ltd, and Evolvence India Coinvest PCC through its Cell E and Fireside Ventures Fund. These investors continue to provide strategic guidance.

The shared vision and values of the leadership team, founders, and investors position the organization well to pursue its future plans and ambitions in the consumer packaged goods and BPC market in India.

Industry Outlook

The Beauty and Personal Care (BPC) market in India is experiencing significant growth and transformation due to a combination of factors. The market is expected to grow from around US$17 billion in 2021 to approximately US$30 billion in 2026, with a compound annual growth rate (CAGR) of about 12%. This growth rate is notably high, outpacing several other retail categories in India, including food and grocery, jewelry, fashion, and more.

Key drivers for this growth include:

1. Increasing Disposable Income: As incomes rise and consumer awareness grows, there's a trend towards seeking "masstige" brands that offer high-quality products at relatively affordable prices.

2. Brand Consciousness: Consumers are becoming more brand-conscious and are effectively targeted through social and digital marketing. Purpose-driven brands are gaining traction, appealing to consumers not only in metro cities but also in Tier-2+ cities.

3. Evolving Beauty Trends: India is seeing the emergence of advanced regimes in face care and makeup, similar to the trends in the United States and China. Consumers are increasingly looking for specialized products that address specific issues.

4. Digital Penetration: The BPC market is well-suited for digital penetration. The online BPC market is expected to grow at a rapid pace, driven by digital-first brands that are agile in meeting changing consumer demands.

The addressable market for Honasa, as a digital-first BPC company, is expected to be around US$45-50 billion by 2026. Honasa has exhibited strong growth in revenue, outperforming other BPC companies with a remarkable CAGR of 193.15% between Financial Years 2020 and 2022. The company has successfully leveraged a digital-first approach, technology, and a house of brands strategy.

In terms of the Indian economic context, India is poised to become a US$5 trillion economy by 2026, driven by private consumption, digitization, and other favorable factors. This rapid economic growth positions India as one of the world's largest and fastest-growing economies. According to IMF estimates, India's nominal GDP was around US$3.2 trillion in 2021, and it is expected to grow at approximately 10% annually to exceed US$5 trillion by 2026. This makes India one of the top economies globally, with forecasts suggesting it could become the 3rd largest economy in the world by 2031, according to the Centre for Economics and Business Research (CEBR). This economic growth is expected to further fuel the expansion of the BPC market in India.

Financials

Risk

Investing in the beauty and personal care (BPC) industry can be lucrative, but like any investment, it comes with its own set of risks. Here are some of the potential risks associated with investing in the BPC sector:

1. Market Saturation: In some markets, the BPC industry may be highly saturated with established brands, making it difficult for new entrants to gain a foothold and compete effectively.

2. Changing Consumer Preferences: Consumer preferences in the BPC industry can change rapidly. What's in vogue today may become obsolete tomorrow. Companies must continually innovate to keep up with changing trends.

3. Competition: The BPC industry is highly competitive. Established brands often have significant market share and can make it challenging for new or smaller companies to gain market traction.

4. Regulatory and Compliance Issues: The BPC industry is subject to various regulations, particularly related to the safety and labeling of products. Non-compliance with these regulations can result in fines, product recalls, and reputational damage.

5. Supply Chain Disruptions: Global events, such as natural disasters, pandemics, or supply chain disruptions, can impact the availability of raw materials and production capacity, affecting the industry's ability to meet consumer demand.

6. Currency Exchange Rate Fluctuations: For international BPC companies, fluctuations in currency exchange rates can impact profitability, especially when dealing with international sales and supply chains.

7. Brand Reputation: The BPC industry is highly reliant on brand reputation. Negative publicity, product recalls, or quality issues can damage a brand's reputation and result in a loss of consumer trust.

8. Commodity Price Volatility: Many BPC products rely on various natural ingredients. Fluctuations in the prices of these commodities can affect production costs and, subsequently, profit margins.

9. Environmental and Sustainability Concerns: Increasing consumer awareness of environmental and sustainability issues can lead to a shift in demand towards more eco-friendly and sustainable products. Companies that fail to adapt may face risks.

IPO Timeline

Source: Company Website, DHRP