Karan Taurani, Senior Vice President, Elara Capital feels Nykaa's valuations are almost a 100-150 percent premium as against the global valuation.
“I think they do deserve that because the growth rates here are very premium as compared to global rates. The market opportunity is huge because penetration here is low compared to international markets, and a lot of expansion will happen in the Tier II and III markets,” he says in an interview to Sunil Shankar Matkar of Moneycontrol. Excerpts from the interview:
Why do you think investors should go for the Nykaa IPO? Why is there so much craze over Nykaa when there are four more issues lined up at the same time?
If you look at Nykaa, it is a market leader in the segment it operates. The business model is irreplaceable because they have exclusive tie-ups with premium brands. They have got a very good customer base because they have got some differentiated marketing efforts like a lot of content-based marketing through social media influencers. This is a very differentiated approach, so they will continue to get the first-mover advantage. Some of the matrix are also very premium, if you look at the order value of Nykaa in the beauty and personal care (BPC) category, it is 40-50 percent higher than its peers, plus the company is profitable, pre-pandemic.
There are no supply chain issues as well, because if you see a lot of the smaller brands have come up and become big because of Nykaa and I don't see that changing in the medium to long term because most of the brands are very happy with what Nykaa is doing in terms of helping their product sales grow on the Nykaa platform through innovative marketing efforts (social media and influencer marketing).
So, I think there are multiple triggers and that is why there is a craze for Nykaa. Every business should evaluate it basis lot of factors and triggers.
Do you think it is overpriced at a band of Rs 1,085-1,125 per share? What is the criteria that one should consider for valuing Nykaa like companies?
If you look at global valuations vis-à-vis India’s, Nykaa's valuations are almost at a 100-150 percent premium here and I think they do deserve that because the growth rates here are very premium compared to global rates. The market opportunity is huge because penetration here is low compared to international markets, and a lot of expansion will happen in the Tier II and III markets. So, I think they deserve that premium multiple and that is something that will remain for some time.
Whenever you must evaluate, you have look at the growth rates, the market structure, and check if the market penetrated sufficiently or not. In case of market structure, you must assess the competitive intensity, what is the duopoly, triopoly, is the market fragmented or is it consolidated, and so on. Next, youmust check if the company is making profit and whether there potential for sustaining profits 5-10 years down the line.
Next is is the management capabilities, in terms of what have they done wrong and what have they done right historically, currently, and what their strategy is going forward. An important factor is also keeping a watch on global peers on what they are doing.
What are the key risks that investors have to consider while subscribing to the public issues like Nykaa’s and Fino Payments Bank’s?
Speaking of Nykaa, there are two risk factors that should be considered. One is that in the BPC segment, they are a lot of exclusive contracts with premium brands. So, they have a customer base that calls for premium products, so the exclusivity going away in the BPC space in the medium to long term can work slightly negatively for the BPC business that Nykaa has.
Second risk factor is Fashion. I think Nykaa Fashion has a long way to go. Fashion is in a very fragmented market, lot of incumbents. Also, fashion as a business segment is highly discount-sensitive because BPC is not discount sensitive. Nykaa does not have a first-mover advantage here. So, in terms of fashion, they would have really burn a lot of money if they must scale up that business.
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