Will a Determined Skincare Company Revive India's IPO Market?

Indian startups have been struggling to raise money through initial public offerings (IPOs) for the past 12 months. A Sequoia Capital-backed beauty and personal-care-products startup is now hoping to break the curse. But success might have to come at the cost of a big compromise on valuation.

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At the end of 2022, the parent company of Indian personal-care-products startup Mamaearth, Honasa Consumer Ltd, plans to file for an initial public offering (IPO). The company plans to issue new shares worth 4 billion Indian rupees ($49 million) and sell 46.8 million existing shares. Investors including Sofina, Stellaris Venture Partners and Fireside Ventures would sell part of their stakes while Sequoia would stay put. Mamaearth started as a direct-to-consumer brand online but has now established a substantial footprint offline too—an inevitable choice as growth in online shopping slows postpandemic.

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The upcoming IPO is going to be a challenge. Tech listings and late-stage funding in private markets have both been declining. Many top Indian internet companies that listed in the last 18-24 months are now trading below their listing price. And according to Tracxn Technologies, funding for late-stage startups in 2022 was nearly half what it was in 2021. Honasa's draft prospectus doesn't mention a specific valuation, but last year Reuters reported that the company could be seeking around $3 billion—which would imply a price to sales multiple of around 25 for the year ending in March 2022. In comparison, Honasa's older, more traditional peers such as Hindustan Unilever and Colgate Palmolive are currently trading at 10.70 and 7.84 times sales respectively, according to FactSet. When asked for comment, Honasa's Chief Executive Officer Varun Alagh declined to comment on the company's IPO plans.

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Honasa is hoping for further rapid growth, but it might need to seek a lower valuation if it wants to leave room for investors to make money. The company was valued at $1.2 billion in its latest funding round last January, according to Traxcn. And a lot has changed since then in global markets—investors might not be in the mood to splurge on a company that is still focused on growth and barely turns a profit. Honasa made a profit of 37.62 million Indian rupees on revenue of 7.32 billion Indian rupees for the six months ending in September 2022.

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The company is spending heavily on advertising to create brands apart from Mamaearth, and expand its online and offline presence. Advertisement expenses were equal to 37.63% of its total revenue from operations for the six months ending in September 2022. Of the $49 million of fresh proceeds, it plans to spend a little less than half on its advertising expenses.

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Despite the current challenges, there is still potential for growth for those who are willing to stick around. According to an estimate by Redseer, commissioned by Honasa and included in the draft prospectus, the company's addressable market could reach $45-$50 billion by 2026.

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Honasa's recent IPO has put the company firmly in the spotlight. If it fails to impress investors, other startups may have to further delay their own listing plans. But if Honasa is successful, it could thaw the IPO market a little and give hope to many late-stage startups that are running out of cash to fuel their high-speed growth.