Nykaa’s journey from online to offline

Five bonus shares were issued for every share held in November 2022, exactly one year after the stock was listed. This increased the number of outstanding shares by 500%. In view of the bonus issue, the share prices are automatically adjusted to one-sixth of the former value – as six shares were now being placed for the price of one. i.e. an investor who has received an allotment 1,125 now has six shares, each considered nearly bought 188.

There was a lock-in period for investors who were shareholders before the IPO. That, incidentally, expired in November 2022, when the bonus was issued. This had tax implications which prevented pre-IPO investors from cashing out. Given the newly issued bonus shares, a sale would attract short-term capital gains tax even though the pre-IPO investor had been there for a period of more than 12 months (the threshold period after which an asset can be classified as “long-term”). has been defined).

However, the stock continued to decline even after the December quarter results. This isn’t too surprising as the company’s profitability has declined sharply. While revenue grew by 33% 1,463 crore to At an EBITDA (earnings before interest, tax, depreciation and amortization) of Rs 1,098 crore a year ago 78.2 crore (13% more 69 crore), and profit fell by 71% to 8.5 crores 29 crores.

Looking a little deeper, we see that Nykaa can no longer be strictly classified as an online store. It has invested in opening a lot of offline outlets, and this network of 135 physical stores brings it closer to other traditional chains in the way it operates. It has invested a fair amount in building its brand, and is looking to capture market share in fashion while maintaining a strong presence in beauty and personal care (BPC) products. Fashion has potentially much higher margins than BPC, but it is also a crowded, expensive and fickle space.

BPC contributed 68%, while fashion contributed 25.9% to the December quarter revenue and “others” including EB2B initiative Superstore by Nykaa contributed 6.1%. This is in contrast to a year ago when BPC contributed 73.9% while fashion contributed 23.7%. and others contributed 2.4%.

Growth drivers for the BPC segment include “evolving consumer preferences”, strong discretionary spending by Millennials and GenZ, the potential for personalization of premium solutions, and digitization, which includes the use of VR/AR to provide virtual try-on experiences .

Management estimates BPC to grow from $19 billion in 2022 to $31 billion in 2027 and the organized segment (offline and online) to grow from $8 billion to $19 billion. The company has several brand partnerships including several international and global brands.

The growth projections in the field of fashion are even more impressive. The market, estimated to be around $77 billion in 2022, is expected to reach $147 billion by 2027. The organized market (offline and online) is expected to grow from $43 billion to $100 billion. The factors could be new categories of fashion, higher digital penetration, more personalized shopping experience etc. In addition to proprietary brands, there are also brand partnerships.

Profit margins will continue to be thin as this combination of physical network expansion and digital infrastructure to build warehousing capacity and run online and offline operations is driving up interest and working capital costs. Fashion and BPC are both highly competitive spaces, especially fashion.

There are also some significant levels of policy uncertainty. The government is still unclear about e-commerce rules and proposals to limit ‘flash sales’ and private labels etc., which may force Nykaa to rework its strategy.

All these potential uncertainties and poor earnings have led analysts to cut their stock estimates. But Bloomberg’s consensus is that could take a hit to the stock’s valuation. 213-214 within 12 months, and this is a serious upside from the current price 143.