Markets
Nykaa’s diversification strategy is yet to pay off
Summary
In FY22, Nykaa’s fashion business formed 25% of the consolidated GMV, though contribution to revenue was 8.6%
Shares of FSN E-Commerce Ventures Ltd, the parent company of Nykaa, have fallen nearly 35% since its listing on 10 November, amid the broader market mayhem, which has weighed more on stocks of technology companies as interest rates are set to inch up across the world. Even so, investors in Nykaa’s shares are sitting on almost 28% gains from the issue price of ₹1,125 apiece during its initial public offering.
However, sentiments for the stock can be expected to remain muted in the near-term, as analysts are pencilling in higher losses from the newer verticals, which include the e-B2B business, NykaaMan and other international brands. Nykaa continues to diversify its portfolio.
Last week, at its maiden investor and analyst day, it elaborated on its e-B2B platform, ‘Superstore by Nykaa’, which has 45,000 transacting merchants as of May 2022. Here, the company sees a potential of $3-4 billion gross merchandise value (GMV) and mid-single-digit Ebitda margin. GMV is the value of orders.
Investors will keenly watch the Superstore’s profitability. As such, newer verticals, e-B2B business, NykaaMan and other international brands were in the red with an Ebitda loss in FY22. Analysts at Kotak Institutional Equities reckon loss from newer verticals can double in FY23 before stabilizing in FY24 and reducing subsequently as channel economics improve. “ ₹100 crore is a fairly large loss in Nykaa’s context and drives a 17-27% cut to FY2023-25 earnings per share forecasts," the analysts said in a report on 24 June.
Nykaa’s expansion in other verticals has meant the beauty and personal care segment’s contribution to consolidated GMV in FY22, which stood at ₹6,933 crore, dropped to 72% from as much as 98% in FY19.
Further, Nykaa’s fashion segment, where it is a relatively new entrant, is also yet to break even at the Ebitda level with FY22 loss at ₹68.2 crore. The company is expanding its presence in the fashion business, but given the higher competitive intensity in this segment, customer acquisition costs are likely to keep profits of this segment at bay in the foreseeable future. In FY22, the fashion business formed 25% and 8.6% of consolidated GMV and revenue, respectively.
Nykaa aims to plug gaps in the online fashion market. At its analyst day, it pointed out that customers acknowledged the company’s different approach, which focuses on assortment. It also said customers feel overwhelmed with the large number of stock keeping units on other platforms, which means searching extensively to find the right product.
Meanwhile, it remains to be seen how Q1FY23 shapes up as discretionary spends would have taken a hit amid high inflation levels. Analysts said growth in company specific metrics would trigger meaningful upsides in the stock.
