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Shares of FSN E-Commerce Ventures Ltd, the parent of cosmetics-to-fashion retailer Nykaa, continued to decline with the stock falling to a fresh record low at 120 apiece, down more than 3% on the BSE in Monday's early deals. Domestic brokerage and research firm ICICI Securities has upgraded the stock's rating to ‘Add’ from ‘Hold’

“We had always liked Nykaa's business model. That said, post its listing on the Indian bourses, we've been staying on the sidelines due to valuations beyond our ability to comprehend (at peak stock price, revenue CAGR requirement over the next 20 years was 23%)," the note stated.

Post around 70% correction from peak, in SoTP, BPC (beauty & personal care) business now accounts for around 77% of current price, assuming it's a defensible and high-growth business in medium term, as per analysis by the brokerage. Reverse DCF shows 15% revenue CAGR requirement at 20% EBITDA margin. 

“We believe cyclical slowdown in BPC and fashion businesses is somewhat priced in. We believe Nykaa continues to present a combination of (1) the largest beauty and personal care (BPC) business in a growth market (India), (2) good profitability metrics and prudent capital allocation, and (3) omni-channel in the ‘true sense’ (going online to offline)."

That said, competition may intensify from both vertical and horizontal peers and while ICICI Securities expects BPC revenue to grow, it believes Nykaa’s journey could be different – it will have to go more mainstream to drive this growth. Growth trajectory in fashion will be keenly watched out. It has upgraded Nykaa shares' rating to ADD (from HOLD) and has a target price of 145 apiece. 

“Our fair value estimates at different revenue CAGR and operating profit margin assumptions range between Rs14 and Rs75. Since fashion business is more margin-accretive (50% higher than BPC), higher revenue growth should be more value-accretive," it added.

Though, key risks, as per the brokerage could be chasing growth at elevated levels can dilute gross margin, success in fashion business can be difficult given higher competition in the category. 

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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