High valuation caps Nykaa's upside despite strong Q1 and margin gains

Nykaa posts 23% revenue growth and margin expansion, but lofty valuations may limit further stock gains

FSN E-Commerce Ventures, popularly known for its Nykaa range of beauty, fashion and lifestyle products, posted revenue growth of 23 per cent year-on-year (Y-o-Y) for the April-June quarter (Q1), aided by 26 per cent growth in overall gross merchandise value (GMV).

 

The beauty and personal care (BPC) segment reported a 26 per cent growth in GMV and revenue rose 25 per cent.

 

Fashion segment reported a 25 per cent Y-o-Y growth in GMV and a lower 15 per cent revenue growth.

 

BPC’s contribution and earnings before interest, taxes, depreciation and amortisation (Ebitda) margins expanded 73 basis points (bps) and 47 bps, respectively. Fashion’s Ebitda margin increased 467 bps, as fixed costs were controlled.

 

The Q1FY26 revenue was at ₹2,150 crore. Ebitda was at ₹140 crore, up 46 per cent. Aggressive strategy led to high marketing costs at 15.2 per cent.

 

PAT was at ₹24.5 crore, up 72 per cent, and return on capital employed (RoCE) ratio was 12.7 per cent against 11.3 per cent.

 

Q1FY26 revenue growth of 23 per cent was in line with estimates. BPC segment’s GMV increased 26 per cent, driven by a 17 per cent rise in orders and a 4.4 per cent increase in average order value (AOV).

 

The fashion segment’s GMV growth was led by AOV growth of 6.3 per cent. BPC’s revenue grew 24 per cent, slower than its GMV. Nykaa BPC firmly focused on adding more users (annual transacting user growth of 26 per cent at 16.5 million).

 

Nykaa reported an overall contribution margin of 20.4 per cent, as a percentage of revenues (versus 20 per cent in Q4FY25 and 19.9 per cent in Q1FY25). Ebitda margin came in at 6.5 per cent, and increased 100 bps.

 

Overall, the contribution margin expanded to 20.4 per cent versus 19.9 per cent in Q1FY25 due to BPC at 21 per cent (versus 20.3 per cent in Q1FY25).

 

Fashion’s Ebitda margin expanded 467 bps, despite a 271 bps contraction in contribution margin on account of control of costs.

 

The Ebitda margin in BPC was at 9 per cent, down 50 bps quarter-on-quarter (Q-o-Q), while fashion was at minus 6 per cent, an improvement of 300 bps Q-o-Q.

 

Annual unique transacting users (ATU) for the fashion segment grew 10 per cent to 3.4 million and offline expanded to 250 stores across 82 cities. The company is adding brands, using innovative methods such as OTT content to drive BPC demand. It is looking to drive customer acquisition in fashion as well and is confident of achieving Ebitda breakeven in FY26.

 

The management says BPC's AOV growth of 4 per cent was led by premiumisation and there is not much inflation.

 

Demand remains a mixed bag and competition is high, but with new segments such as quick commerce, Nykaa continues growing ahead of the industry.

 

The BPC margins are highest in ecommerce, followed by offline and then by own brands. Marketing spends are high, due to the customer acquisition strategy.

 

In Fashion, there is short-term uncertainty around demand but Nykaa will continue to outpace competition. Gross margins reached 44.6 per cent in Q1FY26, representing a 132 bps improvement and the highest since Q3FY23. It was driven by strong ‘House of Nykaa’ beauty brands' performance and improved marketing and service income. The management feels competitive pressure may remain high but could start to level off.

 

The company highlighted that fulfilment expenses are relatively steady at 9.4 per cent despite increased order volume and rollout of faster delivery.

 

Going global remains an ambition despite geopolitics and the India-UK trade deal may create new opportunities.

 

Nykaa’s performance has been resilient despite competition and weak discretionary spending. The stock is expensive (P/E of over 100 times on FY27 estimated earnings) but growth rate has been good and fashion is getting closer to breakeven.

 

Margins are improving but still behind expectations and analysts may start to downgrade projections on this front. Therefore, earnings per share (EPS) expectations may also be lowered.

 

According to Bloomberg, of the 19 analysts polled post Q1 results (announced on Tuesday evening), 11 are bullish, six are bearish and two neutral on the stock with an average one-year target price of ₹215.34.

 

On Wednesday, the stock closed with almost 5 per cent gains at ₹215.05 on the BSE, indicating little room for upside.