Nykaa’s Q3 muted fails to lift sentiment for stock

hero’s Total Gross Merchandise Value (GMV) in Q3 increased by 49% year-on-year (Yoy) and 26% sequentially 2043 crores. GMV is the value of the order including taxes and total discount before product return or order cancellation, including sales to and through third party channels.

Company revenue up 36% year-on-year and 24% sequentially 1098 crore, though sharp fall in Ebitda margin impacted net profit. Ebitda is earnings before interest, taxes, depreciation and amortization.

In Q3, the company focused on higher acquisition of brand awareness and new customers. This means that Nykaa spent more money on marketing and advertising expenses. These costs as a percentage of revenue grew sharply from 7.5% in Q3FY21 to 14% in Q3FY22, irrespective of the quarter including festivals. Essentially, Ebitda margin contracted by 697 basis points to 6.3%. A basis point is one hundredth of a point. Result: Net profit declined 58 per cent year-on-year to Rs 29 crore.

Analysts at JM Financial Institutional Securities Ltd said, “The company saw relatively low GMV in revenue conversion as the fashion segment is fast growing and accounts for a high share of GMV.”

Sure enough, Nykaa’s gross margin grew by 451bps to 46.3% in Q3. JM’s analysts attribute the gross margin expansion to a higher mix of fashion, a higher mix of high-end products in beauty and personal care (BPC), and a growing share of proprietary brands.

Nykaa operates in two main segments: BPC and Fashion. While the fashion segment is a relatively new vertical, the company has really carved a niche in the BPC segment. This reflects a 32% year-on-year growth in the GMV of the segment 1533 crores. Notably, average order value (AOV) has been flat year-over-year 1966. With the reduction in COVID cases, Nykaa has accelerated store expansion with a total operational physical store count of 96 across 45 cities as of December 31.

Meanwhile, the fashion segment is facing increasing competition from the likes of Myntra, Ajio, Tata Cliq among others. Still, Q3 to . Division’s AOV increased by 24% y-on-y in 3590 and GMV increased by 137% yoy 510 crores, indicating its growing presence.

Here, investors will keep an eye on Nykaa’s growth momentum amid stiff competition. Maintaining a high AOV is another factor that should be taken into account.

As things stand, shares of Nykaa have now fallen over 30% from their high of Rs 2573.7 on November 26. A fair share of the stock’s weakness can also be attributed to the recent drop in share prices of technology-led companies across the board.

“While we have marginally increased estimates as we continue to see strong fundamentals in Nykaa business, an increase of 11.5% (from 10.5% earlier) in WACC resulted in a revised target of Rs 2,120 (earlier Rs 2,480) The value has been received,” said analysts at JM in a report on February 9. WACC is the weighted average cost of capital.