Nykaa gets a thumbs up from investors after a strong Q2 performance

Further gains in margins and growth acceleration in the fashion section are potential triggers

Excellent results from FSN E-commerce (Nykaa) led to a big surge in the share price. This bucks the trend where most unicorns have seen bearish movements after listing. Nykaa reported revenue growth of 7.2 per cent quarter-on-quarter or QoQ (39 per cent year-on-year (YoY)) to Rs 1,231 crore in the July-September quarter (Q2) of 2022-23. Gross profit grew 9.4 per cent QoQ (47.5 per cent YoY) to Rs 558 crore. EBITDA grew 32.8 per cent QoQ (and 112 per cent YoY) to Rs 61 crore in Q2. Apart from revenue growth, decreased marketing & advertising expenses (down 5.8 per cent QoQ) helped to boost EBITDA. However, employee benefits expense (up 6.1 per cent QoQ), fulfilment expense (up 11.9 per cent QoQ) and other expenses (up 19.9 per cent QoQ) all saw rises.

The EBITDA margin rose 96 basis points (bps) and 171 bps QoQ and YoY respectively, to 5 per cent. The net profit grew 3.6 per cent QoQ and 342.9 per cent YoY to Rs 5.2 crore. The quality of revenues may have changed and improved with Other Income down 22.6 per cent QoQ and increased finance costs (up 35.1 per cent QoQ and up 79.4 per cent YoY). The Q2 net profit margin stood at 0.4 per cent.

The guidance suggests Nykaa’s beauty and personal care (BPC) segment (contribution of 69.5 per cent to gross merchandise value or GMV) may post 25 per cent YoY revenue growth in 2022-23, while AOV (Average Order Value) remains flat. The Fashion vertical has made less headway.

The possible profitability drivers for BPC segment could include higher ad revenue, lower fulfilment costs, increased share of private labels and a more favourable product mix. The BPC EBITDA margin could rise to 13-14 per cent which would be a jump of 800 bps. The growth momentum could accelerate due to the festive and wedding season.

The QoQ GMV growth of 9 per cent was driven by 8 per cent increase in BPC and 37 per cent growth in “Others” but only 3 per cent in Fashion. The consolidated GMV reached Rs 2,350 crore with Rs 1,200 crore in Net Sales Value and Rs 1,230 crore in revenue. The management claimed the low growth in Fashion was due to a decision to chase the right customer cohort and focus on profitability.

Capex investments in warehousing and store expansion resulted in higher depreciation expense. Channel expansion continued with 123 stores in 53 cities along with 31 fulfilment centres in 14 cities. The company has made an international foray with product listings on 4 portals in Gulf countries and 2 portals in the US. Competition is likely to increase with Amazon and Myntra, both pushing allocating BPC on their platforms.

After trading weak through October, the stock jumped over 10 per cent on the results to Rs 208. It went ex-bonus this week with a 5:1 ratio (five new shares issued per existing share). Analysts have optimistic valuations with target estimates of Rs 221, Rs 238, Rs 280 (all bonus-adjusted). A rising EBITDA margin, and a potential acceleration of growth in the fashion section could be drivers.