Nykaa hits new low; stock slips 23% in seven days

Shares of FSN E-Commerce Ventures, the parent company of beauty e-tailer Nykaa, hit a new low of Rs 1,458.10, down 2 per cent on the BSE in Wednesday’s intra-day trade. The stock has declined 6 per cent from its opening level of Rs 1,548. It was quoting lower for the seventh straight trading day, having fallen 23 per cent during the period.

With an over 20 per cent decline, the stock has now corrected 43 per cent from its record high level of Rs 2,574 touched on November 26, 2021. The company had issued shares at a price of Rs 1,125 per share in its initial public offer (IPO). The stock had made a market debut on November 10, 2021.

At 11:22 am; Nykaa erased its intra-day loss and was up 2 per cent at Rs 1,524, as compared to a 0.21 per cent decline in the S&P BSE Sensex.

On February 9, 2022, Nykaa had reported a weak set numbers, with a 58 per cent year-on-year (YoY) decline in its December quarter (Q3FY22) net profit at Rs 29 crore, hit by a jump in expenses and subdued demand for personal care and fashion products.  Earnings before interest tax and depreciation and amortization (EBITDA) margin contracted 697 bps at 6.3 per cent from 13.2 per cent in Q3FY21. On a sequential basis, EBITDA margin improved 302 bps from 3.3 per cent in Q2FY22.

Revenue from operations of the company grew 36 per cent YoY at Rs 1,098 crore. It said growth in beauty business accelerated in a relatively normalized Covid environment, with a strong revival in the cosmetics category. Nykaa's gross merchandise value (GMV) grew 49 per cent YoY driven by 32 per cent and 137 per cent YoY growth in beauty and personal care (BPC) and Fashion segments, respectively.

However, analysts at IIFL Securities expect margins to recover in FY23 on the back of normalcy in sales as Covid abates; normalisation of ad spend after a high FY22; and stabilisation of fulfillment cost as supply chain normalises and new warehouse operations get optimised.

Likely increase in competitive intensity, with Tata, Reliance, Purplle, MyGlamm and Myntra vying for an aggressive ramp-up, is the key risk to Nykaa’s growth. A possible international foray (no guidance on this from management) could open up new growth avenues, the brokerage firm said with ‘reduce’ rating. The stock however, traded below target price (TP) of Rs 1,650 per share.

Analysts at JM Financial Institutional Securities believe a strong driver of margin improvement is the swift improvement in advertisement revenue (33 per cent/53 per cent QoQ/YoY growth) with brands picking Nykaa’s platform for high-intent buyers.

"We retain ‘BUY’ rating with a March 2023 TP of Rs 2,120 as we expect growth investments (in team as well as brand) to continue delivering robust returns for a sustained time period," the brokerage said in a result update. Slower-than-expected tech penetration in India, sharp rise in competitive intensity, regulatory risks and being a relatively new entrant in fashion are key downside risks, it said.