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Expiry of the one-year lock-in period for pre-initial public offering (IPO) investors has been an overhang for stocks of new-age companies. Investors in shares of FSN E-commerce Ventures Ltd, the parent of Nykaa, are understandably wary. Nykaa’s pre-IPO shareholders’ lock-in is set to expire on 10 November. Recall that shares of Zomato Ltd had dropped significantly in July after the expiry of the one-year lock-in period.

Nykaa’s shares have fallen by about 9% in the last month. However, even in general, rising interest rates have wreaked havoc on technology-led stocks and this has rubbed off on Nykaa, too. So far in 2022, the stock has declined as much as 45%. Founder and chief executive officer Falguni Nayar believes that the company’s share price should reflect the underlying performance in the long term, according to media reports. Nykaa’s management is focused on the future and is channelizing its efforts to strengthen the company, added the reports.

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The company put up a decent show in the September quarter (Q2FY23), but that could not move the needle in a big way. The fashion business continued to slacken and failed to tick many boxes last quarter. The monthly average unique visitors, at 16 million, have remained stagnant over the past five quarters. Moreover, the gross merchandise value (GMV), which is the value of orders, rose by just 3% sequentially in Q2 and net sales value grew by a mere 1.1%.

“Despite the fashion business being at an early stage, low single-digit quarter-on-quarter (GMV) growth is a disappointment even while it reflects management focus on measured growth rather than adopting an aggressive stance of chasing growth at any cost," said analysts at Jefferies India in a report dated 2 November.

The weak show in Nykaa’s fashion vertical weighed on overall GMV to revenue conversion. Consolidated operating revenue in Q2 stood at 1,231 crore, which is 52% of the total GMV, down from 66% seen in Q1FY21.

However, Nykaa’s mainstay beauty and personal care (BPC) business continues to add to its glamour. BPC GMV grew by 9% sequentially to 1,630 crore. “We find BPC growth to be highly impressive, especially in light of the increased competitive intensity from Amazon and Myntra, who are both allocating the increased real estate to BPC on their platforms and in marketing communications," said analysts at JM Financial Institutional Securities in a report on 2 November.

The BPC vertical is expected to drive growth, but the monthly average unique visitors appear to be plateauing. This metric stood at 22 million in Q2, flat sequentially. Nonetheless, Q3 is a seasonally strong quarter because of the wedding and holiday season. It remains to be seen if this adds to visitors’ growth across segments.

Meanwhile, Nykaa’s other segments, which include NykaaMan, Superstore by Nykaa, international brands, Little Black Book and Nudge, remain red at the contribution profit level. Losses have risen sequentially in Q2.

“We have tweaked estimates with revenue declining by about 11% while Ebitda margins marginally improved by 10-100 basis points over FY23-27E. We significantly lower our forecasts in fashion to factor in the flat performance in unique visitors and just 0.1 million incremental transacting users," said JM Financial analysts. One basis point is 0.01%.

“We continue to see Nykaa dominating its focus on BPC vertical and expect significant value coming from BPC in an implied sum-of-the-parts valuation," the analysts said. The broking firm’s one-year forward target price is 1,680. On Wednesday, Nykaa’s shares closed at 1,153.

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ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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