What’s adding sparkle to Nykaa shares

Nykaa’s mainstay beauty and personal care portfolio saw 18% sequential GMV growth, despite inflationary pressures, implying its customer base is comparatively less price sensitive. Photo: Bloomberg
Nykaa’s mainstay beauty and personal care portfolio saw 18% sequential GMV growth, despite inflationary pressures, implying its customer base is comparatively less price sensitive. Photo: Bloomberg

Summary

Acquisitions can aid growth, but can also weigh on profits, at least initially

FSN E-Commerce Ventures Ltd, the parent company of Nykaa, is spreading its wings fast. In its pursuit of growth, Nykaa has been investing in both private labels as well as new brands. Last week, it said it will acquire Iluminar Media, also known as Little Black Book. This acquisition underpins the company’s strategy to drive consumer engagement through unique content.

Acquisitions can aid growth, but can also weigh on profits, at least initially. Against this backdrop, after Nykaa’s June quarter (Q1FY23) results were announced after market hours on Friday, many analysts lowered their earnings estimates. “We trim our FY23-25 Ebitda forecasts on lower margin assumptions and higher investments in new businesses. This results in 10-25% earnings per share cut for FY23-25 and a revised discounted cash flow based fair value of 1,770 ( 1,835 earlier)," said analysts at Kotak Institutional Equities in a report on 7 August.

Climbing up
View Full Image
Climbing up

On Monday, the Nykaa stock closed at 1,416.2, down nearly 33% in 2022 so far amid the broader market correction and rising interest rates. Even so, the stock is above its issue price of 1,125 unlike companies such as Zomato Ltd.

A stable macro environment will help improve sentiment for Nykaa’s shares. Also, investors would do well to track the improvement in Ebitda margin, which was steady sequentially in Q1 at 4% with employee costs rising along with investments in new verticals. This is despite gross margins rising 71 basis points sequentially.

Nykaa’s fashion business continued to make Ebitda losses, but its gross merchandise value (GMV), the value of orders, rose by 21% sequentially in Q1.

You might also like

The investment strategy of Sanctum Wealth’s Shiv Gupta  

Why investors in SBI stock still have hope

How to read the signals from our call money market

However, this isn’t striking enough. “We believe growth on a smaller base in fashion is slower than anticipated as Nykaa Fashion is being strongly challenged by Myntra in the budget segment, while the premium segment has seen the entry of Ajio Luxe and Tata CLiQ Luxury," said JM Financial Institutional Securities analysts in a note on 6 August.

However, the 10% sequential growth in the fashion segment’s annual unique transacting customers to 2 million is encouraging. Nykaa said such numbers are volatile in nature. Therefore, it remains to be seen if these healthy trends sustain.

Nykaa’s mainstay beauty and personal care (BPC) portfolio saw 18% sequential GMV growth, despite the inflationary pressures, implying its customer base is comparatively less price sensitive. Q2FY23 is expected to be strong as it would have the second biggest sale of the year. Also, the company believes the beauty category is a bit more essential than discretionary.

Further, it launched Nykaa Everyday’s value proposition, which is a one-stop destination for everyday beauty and personal care needs. This would drive consumer interaction with the platform. “We believe success will not be easy as Nykaa is not the cheapest place for BPC products and neither does Nykaa solve authenticity issues. Second, Nykaa’s entry in eB2B business will help it get scale, but may have lower value creation than the core business," said analysts at ICICI Securities in a report on 7 August.

Its B2B platform, Superstore by Nykaa, has more than 45,000 transacting retailers across 500 cities as of June end. This, along with other businesses such as NykaaMan and other international brands, had negative contribution margins in Q1. As such, profitability will be tracked here and breakeven will take time.

Competition is also high and is set to intensify. “While we expect BPC revenues to grow, we believe Nykaa’s journey could be different. It will have to go mainstream to drive this growth (tougher decisions about brand stretch along the way)," said ICICI Securities.

Elsewhere in Mint

In Opinion. Surjith Karthikeyan tells what game theory says about China-Taiwan conflict. Pankaj Mishra argues why Rishi Sunak should not pander to the base. Long Story previews a coming Sebi storm for fintechs.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App