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Nykaa stock may face pressure from rising operational challenges and looming inflation

ICICI Securities warned that higher inflation could present a challenge for consumer demand in the near term

Mumbai / May 30, 2022 / 08:27 AM IST
 
 
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Shares of FSN E-Commerce Ventures, which runs online beauty and fashion platform Nykaa, saw increasing operational challenges in the quarter ended March, said analysts.

The retailer reported a 14 percent year on year decline in operating profits to Rs 38.5 crore while operating margins shrank to four from six percent a year ago. The sharp decline in profitability was due to continued investments in new businesses and higher spends on advertisement.

The average order value for the company declined two percent year on year in the mainstay beauty and personal care business while the same for the full financial year fell five percent likely reflective of consumers tightening discretionary spending in a high inflation environment.

Brokerage firm ICICI Securities slashed its operating profit estimates by 24 percent for 2022-23 and 16 percent for 2023-24 adjusting for higher investments in new businesses.

It warned that higher inflation could present a challenge for consumer demand in the near term due to lower spends on key discretionary segments.

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These concerns have cropped up at a time when debate around the company’s valuations continues to rage. Priced at more than eight times its expected one-year forward sales, Nykaa is expensive compared to global peers despite a 47 percent drawdown from its record highs.

Moneycontrol Pro has retained a cautious view on the stock given rich valuations and rising pressure on margins.

Overall, analysts covering the stock retained their optimism on long-term strategy and growth prospects. “We remain constructive on Nykaa. It is, globally, a one-of-its kind profitable and management-owned new-age business and offers a multi-decade growth opportunity,” brokerage firm Edelweiss Securities said in a note.

Edelweiss Securities retained its ‘buy’ call on the company and kept its price target of Rs 1,859 unchanged.

Goldman Sachs and Morgan Stanley also retained their positive calls on the stock. Morgan Stanley said that the company has shown good traction in gross merchant value, which grew more than 40 percent year on year, as well as in topline.

While concerns remain over margins going ahead amid higher spending on new investments and rising competition, ICICI Securities believes the company’s content-driven model in beauty and personal care “is a long-drawn journey and cannot be built by a new entrant just on the strength of capital”.

“While we expect BPC revenues to grow, we believe Nykaa’s journey could be different – it will have to go more mainstream to drive this growth,” it said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Chiranjivi Chakraborty
first published: May 30, 2022 08:27 am
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