Rural development could help curb e-commerce heat over next two quarters, says Mamaearth CEO Varun Alagh

Despite all the bullshit Mamaearth received on its pre-initial public offering (IPO) valuation last year, Skincare Unicorn’s share price has held up quite well.

In contrast to the uncertainty that most new-age companies have faced for at least the first 12 months after going public, Mamaearth shares are up more than 30 percent since its November 2023 IPO.

Perhaps the market rewards a focus on increasing margins and generating free cash flow.

As operating profitability improved by 5.6 percentage points in FY24, the company posted a profit of Rs 111 crore during the period as compared to a net loss of Rs 151 crore in FY23.

Meanwhile, the company reported free cash flow of Rs 224 crore in FY24.
After the company announced its results for March this year. Money control sat down with Mamaearth founder and CEO Varun Alagh to talk about profitability, the costs of competing online, the speed of commerce as a sales channel, and more.

Edited excerpts:

You recorded the highest quarterly profit after tax for FY24. What levers were pulled to achieve this?

As an organization, we have been working on increasing efficiency in three areas. First, we improved our gross margins through category mixes as well as cost reduction negotiations. The second area is advertising and promotion expenses (ANP), which continue to grow slower than the company’s development.

For example, if the company grew by 31 percent, the cost of ANP increased by 24 percent. So the difference between the two is leverage. The third element is financial leverage in terms of operating costs such as salaries.

Have the costs of competing in e-commerce markets decreased due to the financing winter?

In the case of start-ups, some caution can be exercised as there is a focus on profitability, but over time the intensity of competition from incumbents has increased as rural development has been slow. Let us hope that now, as rural development intensifies, the intensity of this phenomenon will also decrease over the next two quarters.

We have observed a trend where large shareholders of new age companies start delisting after 6 months of post-IPO lock-up. Do you expect something like this?

I can only tell the promoters that we don’t want to sell anything. From an investor’s point of view, it is an open market where we should not have any information about anyone else’s sales plans. I can say that we have not seen any major transactions since the end of the lockdown period.

You acquired the assets and intellectual property of Cosmogenesis for Rs 4 crore. How does this fit into your business?

It is basically a research and development company. It is led by Rohini, who has over two decades of experience in helping companies develop and commercialize formulations. They have their own laboratory and production where, with the help of a team of scientists, they have so far developed 4,000 recipes.

Do you get any brand IP from them as well? Do you have any acquisitions planned for FY25?

This is like no other brand takeover. These are purely research and development opportunities. We currently have no plans to make any further acquisitions in the near term.

How does fast trading work for you as a channel?

As a channel, it didn’t really exist two years ago. Last year it started to grow and feel its effects. It is currently growing almost four to five times faster compared to other e-commerce channels. If last year e-commerce channels weren’t even in the top ten customers, now they are in the top five.

You said that quick trading is more profitable. Why?

The difference in profitability is not very large. The difference, however, is the mix of categories, the limited number of SKUs, and the fact that it is B2B in nature.

You recently launched a makeup brand aimed at Generation Z. How is it done?

We launched it just two months ago. Of course, the response to the innovative products we introduced to the market, such as the three-in-one lipstick, was quite positive from the beginning. But he’s too young a child to ask such questions. We like to evaluate brand performance only after 12 and 24 months.

Your ESOP costs in FY24 have halved to around Rs 13 crore. Meanwhile, this affects the profitability of other new-age companies. How did you manage to control it?

I think there is also some accounting fun here. For us, three years ago when we were building our leadership team and board, we were issued strong stock options. The settlement of this is actually very expedited as per IndAs norms. As the years go by, the impact of stock options decreases.