JM Financial reiterates 'Buy' on Nykaa; ups target price with 15% upside

Based on expectations of the BPC company delivering robust numbers during the festive period this year, JM Financial has raised the target price on Nykaa with an upside of 15 per cent

JM Financial has raised its target price on FSN E-Commerce Ventures, the parent company of Nykaa, expecting the company to deliver robust numbers during the festive period this year. The brokerage has raised the target price of the company to Rs 250 from Rs 230, while estimating an upside potential of 15 per cent. The brokerage firm has also reiterated its 'Buy' rating for Nykaa.

Discounting any improvement in the company's margins in the beauty and personal care (BPC) segment, JM Financial expects the company to deliver 250 basis points (bps) earnings before interest tax Depreciation and Amortisation (EBITDA) margin expansion over the next three years.

Further, the Indian fashion industry is expected to grow 3.5x over the next six years, and reach $200 billion by 2030. Tracking this growth, Nykaa's average spend per customer is likely to increase to $200 by 2030, according to the brokerage's research note.

In FY24, Nykaa Fashion's gross merchandise value (GMV) grew 27 per cent year-on-year (YoY), driven by categories such as women's Indian wear (28 per cent YoY) and Western wear (72 per cent YoY), with 48 per cent of the business coming from existing customers.

Moreover, in the current demand environment, the brokerage sees Nykaa as a dominant player in the e-commerce segment, with strong secular tailwinds and expects the company to deliver sustained compounding returns.

The company's Superstore, too, presents Nykaa with ample headroom to grow and penetrate the unorganised BPC market.

"In FY24, Superstore's GMV grew 84 per cent YoY with a 919 bps YoY improvement in contribution margin, reaching 18.2 per cent. The platform now has 0.2 million transacting retailers across 1,006 cities, with 182 brands listed, registering 1.2 million orders in FY24," the report stated.

Nykaa's footprint in the Gulf Cooperation Council (GCC) markets also provides it with a significant opportunity to tap into the $30 billion GCC beauty market, stated JM Financial. The brokerage firm added that in this segment, the region has the highest spending capacity in the world, with per capita expenditure pegged at $500.

The brokerage further sees Nykaa to be attractively positioned in terms of valuations as well as near-term triggers. Not just that, it even looks cheaper compared to other new-age companies such as Zomato and PB Fintech.

Conversely, JM Financial sees a ramp-up in BPC competition and sustained higher marketing expense requirements across segments as key risks for the company.