Nykaa is focussed on building sustainable business with an eye on profitability: CEO Falguni Nayar

Also read: Nykaa sinks on weak Q3 but Goldman Sachs, Morgan Stanley remain optimistic

“We have done it in a profitable way and our EBITDA margin has just shifted by 200 basis points. We are investing for the future, acquiring new customers, and bringing back our repeat customers,” said Nayar.

On Profitability Decline

Increased marketing expense was primarily a major reason why the company saw a drop in profit, said the CEO. The net revenue is on the basis of commission rather than sales booked, so the structure and the mix are changing slightly, she added.

“There was a slight improvement in our gross profit, partly due to a mix of beauty and fashion. Our fashion segment is growing and now contributes 25% to our GMV. But our marketing expenses went up by 155% YoY,” said Nayar.

Marketing and advertisement expense was 14 percent of revenue from operations in Q3FY22 versus 7.5 percent in Q3FY21. However, she points out that the marketing investments for new customer acquisition and repeated customers have paid off, as per the operating metrics. The customer and unique transacting customers have improved over the last year, she said.

“Our EBITDA margin for this quarter is 6.3% and EBITDA margin for nine months is 4.5%. And even the previous year, the EBITDA margin was 6.6%. So we do believe that we can bring our EBITDA margins to around those levels. It was about last year marketing costs have been an exception, I don't think that will come back. We are very comfortable. We can cut off 100 basis points of marketing cost but otherwise, we are very comfortable,” Nayar added.

“Beauty categories like cosmetics were impacted as people were not going out. But in Q3, we saw this massive uptick through revenge buying, though the marketing had remained subdued,” said Anchit Nayar, CEO of Nykaa’s beauty business.

He added, “This year Q3, marketing progressed and costs have come back to normal levels, if not slightly more elevated. There is a lot of money floating in the private markets and into the space and everything else that is happening with the other competition. So there is an elevated cost because everyone is acquiring customers.”

Content to commerce play

Commenting on how other rivals are beefing up their content-to-commerce play, Falguni Nayar, said, “We have a lot of content not just created by Nykaa army, but also influencers. And from there, you can directly purchase. Our own Instagram and YouTube investments have been massive over the years. So I think many of these platforms that they bought is more influencer networks, which are more like consumer networks. And they are trying to sell private labels through those networks. So those are not really comparable examples.”

She also added, “In the long run, when many of them were to report both the GMV and the net revenue, the jury will be out in terms of how effective those things were.”

Adding to this, Anchit Nayar said, “We've got 2000 brands ranging from home, domestic Indian Ayurvedic brands to Dior and Mac and Jo Malone. These are the creme de la creme of beauty brands globally. So these other companies are not really comparable, because they probably had a very elevated cost of customer acquisition because they were retailing, no-name brands. So they had to do something to bring that cost of customer acquisition down. We've always had very, very strong organic traffic because we're a multi-brand retailer.

“Our investment in content, whether it's the live streaming capabilities that we've built on the app, Watch and Buy personalized content hub or social media, or the content we create for YouTube or TV, am not seeing this kind of technology from others,” says Anchit Nayar.

Employee costs

The company's employee costs jumped 56 percent on year, while finance costs increased by 71.5 percent.

Commenting on it, Nayar said, “The Employee Benefit expense is in line with our gross profit of 51 percent. In eCommerce businesses, we don't have plants and machinery, our tech team and our people are our only machinery. So we don't have any fixed investments except stores. Everything else is passed to the teams who are building our platform of the future. And then investments are being made in new businesses (Superstore, NykaaMan).”

“We are a multi-brand retailer for beauty, but others are not really multi-brand retailers. And they have certain private label brands that they are trying to sell more through content to commerce, and also to scale the business. A very large part of our traffic is organic, it's content-led. And we continue to have all of the elements,” said Falguni Nayar.

Live Streaming

Moneycontrol had earlier reported that Nykaa tested influencer-led live shopping events as part of its 'Pink Friday Sale' last year. The Beauty and fashion e-commerce firm has now added it as a feature.

"It's no longer a test. It's part of the business now. We did a live stream with Dolly Singh today evening. Live streaming is up and kicking on our app multiple times in a week,” said Anchit Nayar. “We did almost 100 live streams in a month. So you know, it's no longer an experiment.”

Social commerce app Meesho is also looking to start live commerce and is hiring for roles. Myntra, on the other hand, was one of the first major players to start live commerce last year.

Views on Technology Stocks

“Tech-led businesses were able to cater to much larger market sizes because there were no physical geographical barriers. And also they were able to leverage technology to execute and implement scale. Very often, many of those businesses were also incurring large losses and large expenses to do that. I think investors are fairly differentiating that. Tech-enabled businesses that are growing fast and trying to maintain a balance between growth and profitability will appeal to the investors at large,” said Falguni Nayar.