FSN E-Commerce Ventures, which runs the beauty and personal care (BPC) brand Nykaa, has received a thumbs up from analysts, who advise investors to subscribe to the issue. The company opened its Rs 5,351.92 crore initial public offering (IPO) on October 28.
Why are analysts so optimistic about the IPO? The company's strong brand image, and the management team led by banker-turned-businesswoman Falguni Nayar are the two chief reasons.
Then, there are factors like the loyal customer base, healthy financials, leadership position in the specialty BPC segment, capital-efficient business model and huge growth potential. However, they agree that the issue comes at a premium valuation.
Nykaa is the BPC brand and Nykaa Fashion sells apparels and accessories.
The IPO comprises a fresh issue of Rs 630 crore. This will be utilised for expansion and debt reduction. Then, there is an offer for sale (OFS) for Rs 4,721.9 crore by several shareholders, including promoter Sanjay Nayar Family Trust, and private equity firm TPG Growth.
Garners Rs 2,396 crore from anchor investors
FSN has already garnered Rs 2,396 crore from several global and domestic investors, through the anchor book route, at the upper price band on October 27. The price band for the IPO is Rs 1,085-1,125 per equity share.
“We like Nykaa, given its leadership position in the online BPC market, customer-centric approach, profitable tech platform and capital-efficient business model. The issue is valued at 16.1x FY22 EV/sales on a post issue and annualised basis, which seems to be similar to other Indian unicorns," said Sneha Poddar of Motilal Oswal.
"We believe Nykaa is rightly placed to tap the high growth digital/online penetration in the BPC/fashion market. Investors with high-risk appetite can subscribe for listing gains, given the fancy for the unique and first-of-its-kind listings in the e-commerce space," she said.
‘Nykaa's entry into the fashion segment holds promise’
Analysts at Prabhudas Lilladher also recommended a subscribe rating to the IPO. “Nykaa has revolutionised the art of online retailing of BPC products in India. Nykaa has been able to create a strong consumer following and 70 percent repeat purchase," they reasoned.
They believe Nykaa's entry into the fashion segment holds promise. Its focus on premium customers, curated and managed marketplace, offering over 1.8 million SKUs (stock-keeping units), private labels like NYKD, Pippa Bella, 20Dresses and industry-leading AOV (average order value) of Rs 3,977 and around 25 percent contribution to GMV (gross merchandise value) in 5MFY22 are the factors that find favour with them.
Nykaa operates through online as well as offline channels, and sells its own products as well. Its offline channel comprises 80 physical stores across 40 cities in India over three different store formats, as of August 2021.
“Although we expect lower margins in FY22 (lower ad spend in FY21), there will be steady margin expansion, led by scale economies, as margins have expanded from 1.8 percent to 6.6 percent over FY19-21, making it one of the few e-commerce players to turn profitable," said Prabhudas Lilladher analysts who believe Nykaa can sustain a CAGR of around 35 percent in sales, and 50 percent in EBITDA in the next few years, with double- digit margins.
The company has delivered strong earnings growth, and turned profitable in FY21, clocking Rs 61.94 crore against a loss of Rs 16.34 crore in FY20 and a loss of Rs 24.54 crore in FY19. Revenue from operations grew significantly to Rs 2,440.9 crore in the year ended March 2021, from Rs 1,767.5 crore in FY20.
Profit for Q1FY22 stood at Rs 3.52 crore on a revenue of Rs 816.99 crore. Operating performance, too, was quite strong with EBITDA (earnings before interest, tax, depreciation and amortisation) growing to Rs 161.43 crore in FY21, from Rs 81.06 crore in FY20. It was at Rs 26.94 crore in H1FY22.
EBITDA margin expanded to 6.6 percent in FY21, up from 4.6 percent in FY20 and 1.8 percent in FY19, while it was at 3.3 percent in H1FY22. Analysts expect the margin to improve further with growth in topline and debt reduction.
As of August 2021, Nykaa offered approximately 3.1 million SKUs, from 4,078 national and international brands to consumers across business verticals. In FY21, its total GMV was Rs 4,045.98 crore, growing 50.7 percent from FY20.
Also read Moneycontrol's Exclusive Research Note on Nykaa IPO
"Q1FY22 financials also looked better than previous years, but you need to see how it grows further. The BPC market has a large market opportunity, especially in India, where millennials are more into buying brands and look for easy buying options such as e-commerce," said analyst at Swastika.
At the upper price band of Rs 1,125, the PE works out to be 839x and the price to sales comes at 21.6x to its FY21 earnings. "The valuation of the IPO is pretty high. However, eyeing the higher valuations of other unicorns, we may expect some listing gain. Thus, we assign a 'subscribe' rating to the IPO only for listing gains," analysts said.
BPC and fashion industry
Vikrant Kashyap of KRChoksey Research expects Nykaa to benefit from the prevailing tailwinds in the industry, its strong technology-led platform, strong relationship with global brands, diverse portfolio of own brands, content-first approach, omni channel presence, loyal customer base, planned expansion in the Middle East and Europe, growth in Tier II & III cities and strong management team. "Considering the prevailing opportunities, investors should invest in the IPO for listing gains as well as the long-term opportunity it presents."
A report by management consultancy firm RedSeer indicates that India's retail market is expected to grow from Rs 54.8 lakh crore in calendar year 2020 to approximately Rs 91.2 lakh crore by calendar year 2025. The Indian BPC market is estimated to touch approximately Rs 2 lakh crore by calendar year 2025 from Rs 1.1 lakh crore in calendar year 2020, and the fashion market is estimated to grow to approximately Rs 8.7 lakh crore from Rs 3.8 lakh crore in the same period.
Nykaa has gained significant prominence, not only as a lifestyle retail platform but also as a leading lifestyle brand and influencer. Nykaa has successfully redefined the art of retailing BPC products in India.
"The business model is rooted in its value proposition, separating it from the otherwise predominantly transaction-based e-commerce industry. There is an underlying risk for high valuations but considering factors such as increasing PAT, positive cash flows, huge growth capabilities and confidence in the company's management, we recommend a 'subscribe' rating to the issue," said analyst at BP Equities.
Incorporated in 2012, Nykaa is led by Founder, Executive Chairperson, Managing Director and Chief Executive Officer Falguni Nayar, who was a former managing director at Kotak Mahindra Capital Company.
Fashion key for valuation upgrade
Experts feel the fashion segment is the key to a valuation upgrade ahead, after securing a leadership position in the BPC segment.
Currently, the fashion market is already crowded by several competitors such as Ajio, Myntra, Amazon, Flipkart etc. Strategies like discounts to beat competition could hit profitability, experts feel.
"The issue price is already at 10.2x FY24 enterprise value/sales, factoring in a premium multiple, backed by the growth in the fashion business. Nevertheless, the successful execution in the fashion segment holds the key to valuation re-rating, in the mid- to long term. Expansion in fashion may mar profitability, given the heavy investments in discounts and marketing," said analysts at Elara Capital who advise subscribing to the issue.
"Exclusivity of premium brands in the fashion segment is amiss, which may force a steep discounting to compete with larger players. Further, there exists other concerns like higher return order percentage, poor customer loyalty, smaller fashion brands on almost all platforms and) low-margin business exist," they explained.
“But the BPC segment is not overwrought with many risks in the medium term. This may sustain till horizontal (super) apps partner with Nykaa's premium global brand partners to pose a credible challenge. Yet, the replication of Nykaa’s brand perception may be difficult on its innovative content (marketing-led)," analysts at Elara said.
Analysts at Hem Securities, Anand Rathi, Arihant Capital Markets, Canara Bank Securities, Choice Broking, Angel One, and Marwadi Shares also advised subscribing to the issue.Disclaimer: The views and investment tips by experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.