FSN E-Commerce Ventures Limited aims to balance growth and profitability. But the company’s December quarter (Q3FY23) results show that this is easier said than done. FSN is the parent of Nykaa. While it saw decent growth across all segments in the third quarter, margins came under pressure, particularly in the fashion business. Nykaa’s overall gross margin fell 290 basis points (bps) year-over-year to 43.4% in Q3. One basis point is 0.01%.
Nykaa noted that there has been some downtrading in some brands. In addition, there were also higher brand-funded discounts during the festive season. Strong growth in Nykaa’s low-margin eB2B business is another factor that upsets the game.
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“The gross margin miss, an aberration according to the management, should reverse; Otherwise, any structural impact could negate gains in marketing and fulfillment, analysts at Nuwama Research said in a report on February 13.
The lower-than-expected margin performance has prompted analysts to broadly reduce their EBITDA estimates for FY23-FY25. Ebitda is earnings before interest, taxes, depreciation and amortization. Investors were discouraged, with shares down nearly 5% on Tuesday.
The main reason for the cut in estimates is the fashion vertical. The gross merchandise value (GMV) growth of the segment was strong at 50% year-on-year (yoy) and 21% sequentially. But the segment’s contribution profit as a percentage of net sales value fell to 0.9% from 2.7% in Q3FY22. Gross margin also fell.
“The lack of margin expansion during the quarter could make it difficult to achieve both growth and rising margins,” analysts at Goldman Sachs (India) Securities said in a report on February 14.
Nykaa’s average order value in fashion was 3,959 in Q3. “At this rate,” Goldman Sachs analysts said, “user growth in our view will be limited, while boosting user growth at lower levels could expose Nykaa to competition from platforms such as Myntra and Ajio as well as adversely impact unit economics.” May have.”
One point of comfort in Nykaa’s fashion segment was that monthly average unique visitors increased to 19.4 million in Q3. This is a meaningful improvement compared to the previous five quarters when each monthly average unique visitors were approximately 16 million. However, given the slowdown in discretionary spending, the trajectory of monthly visitors needs to be monitored.
In fact, this was also a major factor that influenced the growth of Nykaa’s core Beauty and Personal Care (BPC) business. Although GMV growth here was strong at 26% yoy, it was lower than some analysts’ estimates. In addition, the last quarter was impacted by the change in festive period, Nykaa’s management said in the earnings call. BPC’s gross margin also fell, driven by unfavorable mix, though the decline was not as sharp. However, BPC’s profit contribution as a percentage of net sales value increased to 25.9% from 23.9% in Q3FY22.
Meanwhile, other segments, which include businesses such as NykaaMan and eB2B platform, SuperStore by Nykaa, are witnessing improvement in profit metrics. But the vertical remains in the red and is in a nascent stage, thus too young to move the needle.
“While the BPC business remains on a strong footing, it may feed into other businesses until these businesses become self-sustaining,” analysts at Kotak Institutional Equities said in a report on February 14.
Furthermore, rising competitive intensity is a risk. To be sure, Nykaa must balance both growth and profitability across all segments to boost sentiment for the stock. That’s a tall ask, given the muted near-term demand.
Nykaa shares have fallen more than half from their 52-week high 315.44 each in April.
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