Analysts bullish on Nykaa's outlook for beauty and personal care business

FSN E-Commerce Ventures (Nykaa) hosted its annual investor day recently. The responses were positive from analysts. Although some analysts pared FY25 and FY26 estimates, the bulk continued to issue ‘buy’ calls after the stock rose 2.5 per cent. 

The management expects the Beauty & Personal Care (BPC) business to grow at a 25 per cent compound annual growth rate (CAGR) during FY24–28.

The ambition is to grow the fashion business’s net sales value by 2.5–3x in the next three years.

Nykaa is also targeting holding BPC margins close to the current levels while fashion is expected to hit breakeven by FY26.

Domestic capex has peaked in FY23. The GCC thrust will need $3–5 million in capex to support growth. The guidance is also that gross margins will expand 1.4x by FY26 over FY24.

A breakeven at earnings before interest, taxes, depreciation, and amortisation (Ebitda) level in the fashion business by FY26 would be a big improvement versus Rs 100 crore loss in FY24. 

But Ebitda margin expansion expectations for the BPC segment need to be reduced on management guidance of near current levels, although 25 per cent CAGR on GMV would create an upside. 

The B2B segment may continue to log losses in the foreseeable future.

The BPC segment saw 27 per cent GMV growth in FY24 year-on-year (Y-o-Y), so the expectations of high CAGR may be achievable.

The company plans to grow revenue from offline stores at 40 per cent CAGR during FY24-28 as it plans to double offline stores to 400-plus by FY28 from the current 187 stores.

The guidance is for an 2.5 to 3x increase in top line in Fashion by FY27 aided by new customer acquisitions, increasing All Commodity Volume across stores, and higher Life Time Value (LTV) of existing customers given strong trends in premium fashion.

The guidance is for Ebitda breakeven in the segment by FY26 due to lower fulfilment costs, lower marketing expenses and lower overheads as scale kicks in.

The company pointed out some favourable macro-trends.

India has an active internet base of 800 million, with only 230 million online shoppers and 350 million digital payment users.

This implies under-penetration in e-commerce compared to China and the United States where over 70 per cent of internet users shop online. Penetration is likely to increase.

The per capita BPC spend is also expected to rise in correlation with rising per-capita income from the current (CY23) of $2,700 to around $5,500 in FY30.

BPC spends is expected to increase to $50 per capita per annum by FY30 from $15 in FY23.

The management aims to maintain current contribution margins of 25.5 per cent of net sales value for BPC (ex-superstores) and plans to reinvest, given gross margin expansion of 1.4x during FY24-FY26.

The mix of BPC business is changing with colour cosmetics reducing while high growth is seen in haircare, fragrances, and bath and body products.

Nykaa’s brands are scaling up with 5 brands having reached annualised GMV run rate of Rs 150 crore or more. The management expects the NSV (net sales value) of fashion to grow 2.5-3x from Rs 990 crore currently over the next 3 years. Nykaa claims its superstores offer a better buying experience to retailers.

GCC countries like Saudi Arabia, UAE, Qatar, Kuwait, Bahrain, and Oman have a $30 billion BPC market with a very high BPC spend per capita of $500.

Nykaa plans to open 70 stores in GCC in 5 years to target a 7 per cent share of GCC BPC market in 5 years with the first 5 GCC stores opened in FY25.

Analyst consensus remains positive with valuation targets ranging from Rs 195-200, according to analysts.