Why Nykaa’s December quarter results lacked glamour
1 min read 14 Feb 2023, 12:14 PM ISTHigher brand discounts and consumer downgrading weighed on the gross margin last quarter but the impact on the overall Ebitda level was not as pronounced
PremiumFSN E-Commerce Ventures Ltd, parent company of Nykaa could not charm investors with its December quarter (Q3FY23) results. Gross margin at 43.4% missed analysts estimates and was lower by roughly 300 basis points (bps) year-on-year (y-o-y) and 200bps sequentially. One basis point is one-hundredth of a percentage point. Unsurprisingly, the company’s shares were trading about 5% lower in Tuesday’s morning trade on the National Stock Exchange.
Why did margin contract? Higher brand discounts and consumer downgrading weighed on the gross margin last quarter. True, both the beauty and personal care (BPC) segment and fashion segment’s gross merchandise value growth was strong at nearly 26% and 50% y-o-y, respectively. But this came at the cost of profitability. Both the verticals gross margins fell but the drop in fashion segment was much steeper at 1010bps y-o-y to 71.7%. In comparison, gross margin of the BPC segment fell by 180bps.
“The gross margin miss, an aberration as per management, must reverse else as any structural impact could negate benefits in marketing and fulfilment," said analysts at Nuvama Research in a report on 13 February.
Nonetheless, the impact of weak gross margin at the overall Ebitda level for Nykaa was not as pronounced owing to operating leverage and savings in marketing and fulfilment expense. Ebitda (earnings before interest, tax, depreciation and amortization) margin at 5.3% was lower by only 94bps y-o-y and grew by 38bps sequentially.
“While the BPC business remains on a strong footing, it may feed other businesses until such time as these businesses become self-sustaining," said analysts at Kotak Institutional Equities in a report on 14 February. The broking firm has increased its estimate of loss from fashion business, leading to a 3-4% Ebitda cut for Nykaa for FY24-25.
To be sure, growth in BPC’s GMV was below some analysts’ expectations and lower than the increase seen in Q2 when the measure was 39% y-o-y. Against this backdrop, better-than-expected growth in BPC business and improvement in margins is crucial to aid investor sentiments.
“Given the recent volatility in the stock, we again bake in a higher cost of capital assumption, which yields a target price of Rs195 (Rs251 earlier)," said the Nuvama report. Nykaa’s shares are now trading at around Rs143 apiece.
