Nykaa’s parent company FSN E-Commerce Ventures Limited is rapidly spreading its wings. In its pursuit of growth, Nykaa is investing in both private labels as well as new brands. Last week, it said it would acquire Illuminar Media, also known as Little Black Book. This acquisition underscores the company’s strategy to increase consumer engagement through unique content.
Acquisitions may aid growth, but may also impact profits, at least initially. Against this backdrop, after Nykaa’s June quarter (Q1FY23) results were announced after market hours on Friday, several analysts lowered their earnings estimates. “We trim our FY23-25 EBITDA forecasts on lower margin assumptions and higher investments in new businesses. This results in a 10-25% reduction in earnings per share for FY 2013-25 and a revised discounted cash flow based fair value 1,770 ( 1,835 ago),” analysts at Kotak Institutional Equities said in a report on August 7.
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Nykaa stock closed on Monday 1,416.2 so far in 2022, down nearly 33% amid broad market corrections and rising interest rates. Still, the stock is above its issue price. 1,125 unlike companies like Zomato Ltd.
The stable macro environment will help improve sentiment for Nykaa shares. In addition, investors would do well to track an improvement in EBITDA margin, which was steady at 4% sequentially in Q1, with increased employee costs as well as investments in new verticals. This is despite gross margin increasing 71 basis points sequentially.
Nykaa’s fashion business continued to post EBITDA losses, but its gross merchandise value (GMV), the value of orders, grew 21% sequentially in Q1.
However, it is not striking enough. JM Financial Institutional Securities said, “We believe that growth in fashion on a smaller basis is slower than anticipated as Nykaa Fashion continues to be strongly challenged by Myntra in the budget segment, while Ajio Lux and Tata Cliq in the premium segment. The entry of luxury has been seen.” analysts in a note on Aug. 6.
However, the 10 per cent sequential growth in the number of customers doing unique transactions annually for the fashion segment is encouraging. Nayaka said that such numbers are volatile in nature. Therefore, it remains to be seen whether these healthy trends persist.
Nykaa’s core beauty and personal care (BPC) portfolio saw 18% sequential GMV growth, despite inflationary pressures, making its customer base comparatively less price-sensitive. Q2FY23 is expected to be strong as it will be the second largest sales of the year. Plus, the company believes the beauty category is a bit more essential than discretionary.
In addition, it launched the Nykaa Everyday Value proposition, a one-stop destination for everyday beauty and personal care needs. This will promote consumer interaction with the platform. “We believe that success will not be easy as Nykaa is not the cheapest place for BPC products nor does Nykaa solve authenticity issues. Second, Nykaa’s foray into eB2B business will help it achieve scale, but There may be less value creation as compared to the core business,” analysts at ICICI Securities said in a report on August 7.
Its B2B platform, Superstore by Nykaa, has over 45,000 retailers across 500 cities with over 45,000 transactions as of the end of June. This, along with other businesses such as NykaaMan and other international brands, had negative contribution margin in Q1. As such, profitability will be tracked here and break even will take time.
Competition is also high and is set to intensify. “While we expect BPC revenue to grow, we believe Nykaa’s journey may be different. It will have to go mainstream (tough decisions about brand vibe along the way) to drive this growth,” ICICI Securities said. Told.
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