Nykaa Q2: Slow growth in fashion vertical blots otherwise exceptional performance; analysts upbeat

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The shares of FSN e-Commerce Ventures, the parent company of Nykaa, remain under pressure despite some recovery from record lows in the last one week but analysts believe the structural story of the company’s business has strengthened after the Q2 earnings.

The stock has been under heavy selling pressure ahead of the lock-in expiry of pre-IPO investor shares on November 10. The counter slipped to a record low of Rs 975 before recovering to Rs 1,150 levels. It is still down 45 percent year to date (YTD).

“The stock has corrected partly due to the global tech sell-off on rising yields and more recently due to the imminent lock-in expiry,” said Amit Sachdeva, India Equity Strategist, Consumer & Retail Analyst at HSBC Securities and Capital Markets. “We believe valuation is now even more appealing and under-appreciates the structural growth opportunity in beauty and personal care.”

He is among the most bullish analysts on Nykaa, with a price target of Rs 2,180 in the next one year, meaning a potential upside of nearly 85 percent from current levels.

Better-than-expected quarter 

Nykaa’s Q2 numbers were better than analyst estimates on gross merchandise value, revenues and Ebitda, led mainly by beauty and personal care (BPC), which enjoyed strong growth across parameters. However, the growth in other verticals, including fashion, which it entered recently, was modest.

“Nykaa has been able to carve out a niche for itself through its focus on BPC which differentiates it from horizontals like Flipkart and Amazon,” said Vivek Maheshwari, Equity Analyst at Jefferies. “The recent years have seen a surge in transacting customers for the company. Nykaa should benefit from the increasing order frequencies and basket values, as the newer customer cohorts mature.”

Maheshwari expects Nykaa to remain in a hyper-growth phase in the medium term as the online BPC and fashion penetration ramps up.

He has a base-case price target of Rs 1,650, translating into a potential upside of 45 percent. In the bull case, he sees an upside of 90 percent while in the bear case, a potential downside of 31 percent hereon.

Also read: HNIs tend to be long-term investors, says Nykaa CEO Falguni Nayar as end of lock-in looms

Beyond BPC, the company has increased its thrust on its own labels and other ventures as the management talked at length about them.

To generate the next phase of growth from them, Nykaa has made senior-level appointments. Rajesh Uppalapati (ex-Amazon, Intuit) has joined as Chief Technology Officer, Vishal Gupta (ex-Unilever) as Executive VP, Own brands and Vikas Gupta (ex Flipkart, Unilever) as CEO, eB2B & International.

Nykaa is one of the few new-age tech companies that are able to churn out profits. However, capex investments in warehousing and store expansion are resulting in higher depreciation expense, causing net profits to remain the same as last quarter despite revenue and Ebitda margin improvement.

The company’s omnichannel expansion continued with 123 (two for the fashion segment) stores in 53 cities along with 31 fulfilment centres in 14 cities. Moreover, the company’s international foray with product listing on four portals in Gulf countries and two portals in the US can be a start of an exciting journey.

Mixed bag

While overall they are bullish, analysts have been mixed in adjusting their earnings estimates.

Jefferies upgraded FY23-26 Ebitda estimates by 24-33 percent on better margins but JM Financial tweaked estimates as it sees revenues declining by 11 percent and EBITDA margins marginally improving by 10-100 basis points over FY23-27. It said its downgrade factors in the flat performance in unique visitors and just 1 lakh incremental transacting users in the fashion segment.

Kotak Institutional Equities, which has a "buy" rating with a target of Rs 1,615, also trimmed FY23-25 revenue estimates by 2.5 percent on account of slow growth in the fashion vertical. “However, we increase FY23-25 Ebitda by 4-15 percent on account of cost optimisation, related to lower ad spends in line with the reduction in growth in the fashion segment. Higher offline expenses drive higher interest and depreciation charges, resulting in modest FY2023-25 EPS changes,” it added.

Disclaimer: The views and investment tips expressed by 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.