Nykaa’s anchor lock-in period ends on December 8, will it see selling pressure?

After a bumper month for the primary market, recent listings, including Nykaa, may have to face some reckoning in December as the regulatory one-month lock-in period for anchor investors begins to open.

According to an Edelweiss Alternative Research report, 10 IPOs raised over Rs 36,000 crore in November, and starting December 8, anchor lock-ins will start to loosen.

Historically, newly listed companies see selling pressure once the anchor lock-in period ends. For instance, as many as 76 percent of issuances whose lock-in periods are behind this year, experienced selling pressure on the anchor lock-in opening dates.

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The average decline among these stocks, including IRFC, Indigo Paints, Home First Finance, MTAR Tech, Easy Trip Planners and Craftsman Automation, was 2.6 percent, according to the report. And after five days of the anchor opening date, 61 percent of the issues were trading 3.9 percent down on an average.

Of this, Easy Trip Planners and Zomato saw a sharp fall on the day of the lock-in opening of 10 percent and 9 percent, respectively. While the likes of Clean Science and Tech, Devyani International, Ami Organics and others saw about 4-5 percent fall.

This brings to the fore concerns about how the next batch of stocks will react, starting with Nykaa, whose anchor lock-in opens on December 8. Anchor shares make up for about 4.5 percent of total outstanding shares in Nykaa, as per the Edelweiss report.

Ricky Kirpalani, Lead Sponsor, First Water Capital Fund (AIF), believes the opening up of the lock-in will have a marginal impact on Nykaa’s stock.

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“The reason for this is that most investors look at this as a chance to enter the space without having to come in at IPO level. They tend to have a long-term perspective of the company and are less likely to cash in or flip their investment,” he said.

Another expert said that anchor investors do not always exit immediately after a lock-in, so as not to put pressure on the stock. Even if they do, it gives other investors an attractive opportunity to invest in the stock.

“We also believe that those who were looking for an exit partial or otherwise do so at the listing stage. Plus some with larger stakes are more likely to seek negotiated deals,” added Kirpalani.

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Analysts believe the company’s business model is strong and that future growth prospects are intact but rich valuations could play spoilsport for the stock.

“We believe that it is a fantastic platform and a landmark listing for India Inc. We have a young population and a growing penetration of smartphones and data accessibility. So, websites like Nykaa should hopefully continue to grow, become profitable and one day fulfil its potential,” said Kirpalani.

“However, for me, companies with fancy multiples which are also loss-making is not something that I would look to invest in. I believe that there are too many assumptions that need to play out to justify its valuation,” he said.

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Similarly, Dolat Capital, in its recent report said Nykaa boasts a rare combination of growth and profitability in the internet space and it will continue to trade at a premium.

However, it cautioned that current valuations at 19.4/13.7x FY23/24E EV/Sales seem too rich for comfort even after factoring in a long timeframe.

“In the current valuations, implied expectations leave limited room to err on execution and growth trajectory of the space. The risks of increased competition from some of the large players remain key in our view. Stock supply is another risk,” the note said.

The research firm has initiated a “sell” with a target price of Rs 1,600 at 10x FY24 EV/Sales.

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Kirpalani also shared similar concerns. “Will it be able to monetise and not be disrupted or outdated as happens in the tech world?” he questioned.

IIFL Securities also believes all positives have been factored into the stock.

The company listed at a premium of 78 percent over its issue price of Rs 1,125 on November 10. It then hit a high of Rs 2,573 last week but has since fallen to Rs 2,141. However, it is still above its listing price of Rs 2,001.

“Nykaa has occupied the most profitable customer-product niches, with an average price of Rs 450 per item. In our view, it will not want to step too far away from this safehold and hence growth, while remaining robust, would slow down after a few years,” IIFL Securities said in its note.

“Moreover, a large part of the BPC e-tail space is served by Amazon/Big Basket, which would place Nykaa in competition with these players if it steps out of its niche, not to mention increasing competition in the beauty vertical itself,” the brokerage said.

The other stocks where anchor lock in periods will end this month are Fino Payments Bank, SIS Enterprises, PB Fintech, Sigachi Industries, Paytm, Sapphire Foods, Latent View Analytics, Tarsons Products and Go Fashion.