Why is ICICI Prudential MF doubling down on battered Nykaa?

All the attention has been on the extent of selling in the stock, with the profile of the buyers going under the radar.

One buyer that has stood out is ICICI Prudential Mutual Fund, India’s second largest. ICICI Prudential MF has snapped up 11.1 million shares in FSN since November 10. That’s roughly 16 percent of the shares sold since the end of the lock-in period.

At the end of October, ICICI Prudential held roughly 2.1 million shares of Nykaa, which would became 12.8 million shares after adjusting for the 5-for-1 bonus share issue. By the end of this month, the mutual fund would have increased the number of shares it holds of the company by nearly 100 percent.

Buying the dip

ICICI Prudential MF has been consistently buying corrections in the stock since January. ICICI Prudential’s holding dipped to 280,232 shares in January from 571,416 shares the asset manager had purchased during Nykaa’s anchor allocation in October 2021 as it used the initial rally in the stock to book substantial profits.

In January-April, ICICI Prudential more than trebled its holding to 902,422 shares in the e-commerce firm and then more than doubled its holding to 2.1 million shares by October.

In January-October, Nykaa’s shares fell 45 percent amid concern over rich valuations of technology companies, the company’s large investments in fashion retail and some deterioration in earnings during the June quarter of 2022-23.  The Nifty 500 index had risen over 2 percent in the same period.

With time, e-tailers should gain market share from offline retailers and Nykaa is the most dominant player in the BPC (beauty and personal care) space alongside Amazon, analysts said when asked on reasons for ICICI Prudential MF's attraction towards Nykaa.

Some industry experts said per-capita spending on beauty and personal care products in India is among the lowest in the world. With rising disposable incomes, affluence and increasing participation of women in the workforce, discretionary spending on personal care products and fashion is likely to increase.

ICICI Prudential MF has had a glittering history of buying stocks against the cycle, which ended up paying rich dividends in the long-term. The mutual fund bet on the metal and power sector in 2019-20 when the consensus view was negative on those sectors, helping the asset manager reap handsome returns.

An official spokesperson for ICICI Prudential AMC declined to comment for this story.

Bullish in the long term

The sell-side on Dalal Street have been largely bullish on the prospects of the e-commerce beauty products company despite the near-term pressure on the stock, deterioration in earnings and stake sales by marque investors.

Of the 19 securities firms that cover Nykaa, 13 have a ‘buy’ rating on the stock in the belief that its long-term prospects remain intact despite the negative press it has received in recent weeks.

HSBC Securities and Capital Markets India, which has the highest price target of Rs 362 on Nykaa, in a recent note argued that investors were under-appreciating the structural growth opportunity in beauty and personal care products space.

HDFC Securities, one of only two firms with a ‘sell’ call on the company, has raised questions on whether Nykaa can even be considered a platform company, a tag that had enabled it to derive rich valuations.

“In our view, Nykaa has the potential to be a hybrid, but as of now, it shares more characteristics with a busy, efficient, linear online pipeline than a platform,” Jay Gandhi of HDFC Securities wrote in a note earlier this month.

Overall, brokerages see an upside of as much as 50 percent in the stock over the next 12 months from the current market price, according to Bloomberg data.

At 0:45 am, shares of Nykaa were down 0.2 percent at Rs 171.40 on the National Stock Exchange.

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