What drove Mamaearth’s 21% plunge post IPO?

Mamaearth parent Honasa Consumer’s newly listed shares plunged below initial public offering (IPO) price on Friday. Shares of Honasa Consumer dropped as much as 15 per cent to hit an intraday low of Rs 256.10, on the BSE.

Notably, the stock has dropped as much as 21 per cent from the IPO price of Rs 324.

What is driving down Mamaearth's share price?

Mamaearth made a tepid stock market debut on November 7 as the stock opened for trading at Rs 330, marking an upside of 1.85 per cent. Analysts were wary of Honasa Consumer shares ahead of the IPO and many came with an avoid rating for its shares in the IPO.

Brokerage firm Swastika Investmart had an avoid rating on the IPO. The brokerage in a note said that the financial performance of the company has been inconsistent, and it has reported losses in recent fiscals. Subsidiaries that it has acquired have also incurred losses. Additionally, the company does not manufacture its products and relies on third parties for that, and it also does not hold any patents over its product formulas.

Expensive valuation and low client retention were among other factors to avoid the Honasa Consumer shares.

"The business' return on advertising has also been consistent for a few years, that is, 2.5 per cent, thus the company's client retention is very low. As it is a loss-making company, we cannot derive its actual P/E, but even after considering its outflow in the latest investment, the company is coming at an extremely high valuation," the brokerage firm added.

Analysts have also warned about the stiff competition it faces from companies like Reliance Retail and Nykaa. Reliance Retail has been expanding its presence in the personal care business and it recently acquired Arvind Fashions' unit that ran Sephora's India Business.

Tepid response from retail investors

Mamaearth's IPO received a dull response from retail investors as the portion set aside for them was booked 1.35 times, and also indicated poor show for Mamaearth.

The company backed by entrepreneurs Ghazal Alagh and Varun Alagh raised Rs 1,701 crore from the IPO which was an offer for sale (OFS) worth Rs 1,336 crore wherein promoters along with actor Shilpa Shetty offloaded their stakes in the share sale. The remaining Rs 365 crore was fresh issue of shares.