Shares of FSN E-Commerce Ventures Ltd, the parent of online cosmetics and fashion retailer Nykaa, lost over 11 percent after it posted weaker June quarter earnings.
At 9.40am, the stock was trading at Rs 134 on the BSE, down 8 percent from its previous close. The stock hit an intraday low of Rs 130 a share and declined as much as 11.11 percent.
Brokerage firm Kotak Institutional Equities have downgraded the stock to 'add' from 'buy' and cut its target price to Rs 165 from Rs 210 a share earlier. Nomura Research too lowered the rating to 'neutral' from 'buy' and reduced the target price to Rs 163 from Rs 183 a share.
Nykaa posted a 24 percent year-on-year surge in revenue for the first quarter of fiscal year 2024. This growth was propelled by a corresponding 24 percent increase in beauty, personal care, and wellness (BPC) gross merchandise value (GMV), coupled with a 12 percent expansion in fashion GMV. Despite this positive trend, the reported revenues fell short of Kotak projections by 6 percent primarily because of a 2 percent deficit in BPC GMV and a more substantial 14 percent deficit in fashion GMV. Its consolidated net profit dropped 27 percent to Rs 3.3 crore.
The Gross Margin (GM) figure stood at 43.5 percent, marking a decline of 89 basis points on-quarter on the back of the growing prominence of the e-B2B segment within the overall product mix. The contribution margin (CM) for the BPC segment saw a noteworthy improvement, rising approximately 179 basis points year-on-year to 24.6 percent. In contrast, the fashion segment's CM witnessed a decline of around 80 basis points, settling at 4.6 percent.
Analysts said the decline in earnings can be attributed to several factors, encompassing heightened discounting, diminished advertising income, and a shortfall in GM, among other influences. The challenging macroeconomic conditions had a dampening effect on the fashion sector's growth, whereas the BPC segment maintained its position with industry-leading growth.
The management's outlook remains cautiously optimistic regarding growth prospects across various segments. Their concerted efforts are aimed at enhancing profitability through strategies such as optimizing the product portfolio mix and implementing cost-saving initiatives.
"We were concerned about: (1) elevated discounting pressures in the beauty segment, (2) negative impact on ad income as brand owners take time to adapt to new ad-tech platform, (3) slowing ad-spends from D2C brands on Nykaa platform, (4) slower growth in apparel net sales, (5) limited room for expansion in beauty margin, and (6) a 2-7-year timeline for break-even in the eB2B segment. These headwinds along with competitive concerns from Reliance make us cautious," Macquarie said.
The brokerage firm has maintained its 'underperform' rating but raised the target price slightly to Rs 120 a share from Rs 115 a share.
Kotak said that the eB2B business might necessitate ongoing investments spanning multiple years before achieving a break-even point. Additionally, the initiation of operations for a new venture in the GCC region could place further strain on the company's financial resources.
"As a result of these factors, we have revised our projected earnings per share (EPS) for the fiscal years 2024, 2025, and 2026. These revisions entail reductions of 29 percent, 19 percent, and 17 percent, respectively. This adjustment is reflective of the weaker performance in the first quarter, the continued investments in the eB2B business, and the meticulous efforts aimed at refining growth and profit margins in the fashion and BPC segments," the report added.
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