BackLed by an ex-banker, Nykaa’s IPO pricing is sure to be fascinating
In early 2021, reports suggested the firm will be valued about 67% higher, or around $3 bn for its planned IPO. But 6 months later, apparently, the firm’s value has risen to $4.5 bn. By the time the issue hits the Street, who knows, it may well be valued more than 3 times the price investors paid about 8 months ago
PremiumAn IPO is a pricing game. Rather than operating under the delusion that it is value that drives decisions, it is healthier to recognize that bankers price IPOs, not value them," said valuation guru Aswath Damodaran. In the case of Nykaa, consider that the person at the helm of the beauty and fashion retailer, Falguni Nayar, is also a former banker, having helped several companies price their IPOs (initial public offerings). Undoubtedly, the Nykaa IPO pricing game is bound to be fascinating.
The company, which is registered as FSN E-Commerce Ventures Pvt. Ltd, hasn’t yet filed its draft red herring prospectus. But news reports suggest there is considerable excitement about the proposed issue already.
A secondary transaction in November 2020 had valued the firm at slightly above $1.8 billion. In early 2021, news reports suggested the firm will be valued about 67% higher, or around $3 billion for its planned IPO. But six months later, apparently, the firm’s value has risen to $4.5 billion. By the time the issue hits the Street, who knows, it may well be valued more than three times the price investors paid about eight months ago.
As Damodaran said, the big factors that drive the IPO pricing game are mood and momentum. Things are certainly looking up on this front, especially for firms that have leveraged the internet to drive growth. Firms such as Zomato, Paytm and a handful of other e-commerce startups are simultaneously working on their IPOs, suggesting a sudden demand for shares of internet companies.
Nykaa was launched as an e-commerce portal, although it has added considerable offline presence as well. Based on its FY20 revenues of ₹1,850 crore, Nykaa commanded a market share of over 30% in India’s online beauty and personal care market, according to analysts at Jefferies India Pvt. Ltd.
Nykaa’s high market share has come on the back of brisk growth in recent years. Its revenue grew at an annual average rate of 120% between FY17 and FY20, according to data collated by VCCEdge. A strong growth, high market share business with a significant online presence can reasonably be expected to be lapped up by global investors.
The moot question, of course, is at what valuation? A $4.5 billion valuation implies a revenue multiple of around 14 times, going by media reports that said the firm expects 30% revenue growth in FY21. While the two firms aren’t exactly comparable, the pricey Titan Co. Ltd stock trades at around 7 times revenue.
But surely, the bankers to the Nykaa issue will manage to find more suitable comparables that justify a 14 times revenue multiple. Another selling point for the issue is the fact that the firm has already started generating cash from operations. Analysts at Jefferies said this makes it an exception in the Indian e-commerce industry, which requires hefty investments, resulting in high cash-burn and lack of visibility on the path to profitability for many firms. It does look like the Nykaa business offers all the necessary ingredients to play the IPO pricing game to its best potential.
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