Beauty segment to help Nykaa outrun market growth rate: What do analysts say?

The stock is still down 65 percent from its all time high of Rs 415.52 which hit on 1 December 2021. It is down nearly 42 percent from its 52 week high which hit on 26 July 2022.

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Nykaa-owner FSN E-Commerce Ventures Ltd traded marginally higher in the opening hours on June 19. The stock shed nearly 7 percent so far this year, while it gained nearly 13 percent since March 28.

The stock is still down 65 percent from its all-time high of Rs 415.52 hit on December 1, 2021 and nearly 42 percent from its 52-week high scaled on July 26, 2022.

In its recent investor meet, Nykaa talked about a future of robust growth in its BPC (beauty and personal care) business, with the beauty products driving the growth. This rally will largely be fuelled by high-income and upper middle-class consumers who play a vital role in the BPC industry growth. By strategically targeting this customer segment, Nykaa aims to position itself for accelerated growth and outrun the market.

Nykaa intends to firm up its fashion business by prioritising private labels to enhance customer loyalty and reduce marketing expenses. The company is focused on continuous investments in new verticals, particularly the SuperStore (eB2B) concept, to expand its operations and achieve scalability in an evolving marketplace.

Nykaa indicated that the EBITDA margins for both the BPC and fashion segments are expected to range from low to mid-teens. Additionally, the Superstore vertical is projected to achieve margins within the 3-5 percent range. The company has lowered its marketing and fulfillment expenses from the previous year to enhance operational efficiency.

Nomura has retained its ‘buy’ rating and kept the target price unchanged at Rs 183 a share. Nuvama has kept ‘buy’ tag and unchanged target price at Rs 186 a share, Kotak has maintained buy ratings and unchanged target price at Rs 210 a share. Meanwhile, Jefferies India has a bullish call on the stock with a buy ratings and expects 39 percent increase in the stock to Rs 200 a share from current market price.

Let’s take a look at what analysts say:

Nomura Research

We continue to estimate a strong 25 percent CAGR for BPC over FY23-30. However, we factor in the fashion CAGR at 13 percent with a terminal year mix of 5 percent to NSV. We factor in the overall revenue CAGR of 25 percent over FY23-30 and EBITDA margin to expand to 12.7 percent by FY30 (from 5.4 percent). With major expenses on employee costs and warehousing behind, we believe the steady margin expansion should continue over the next few years.

Nuvama Research

Stable growth in BPC, along with profitability improvement, is admirable. Going forward, comfort on competition, given two large independent beauty platforms have been launched in the last one year, and cash flow generation (debt moderation), as per us can drive re-rating.

Kotak Institutional Research

Nykaa incurred Rs 2.5 billion of losses in FY2023 from fashion and the new verticals (eB2B, Nykaa Man). We believe this can go down to Rs 2.1 billion in FY2025 as channel economics improve. B2B is a competitive space and, for now, we do not bake in any major value creation from it. We retain our estimates with an unchanged FV of Rs 210. Maintain buy.

Jefferies India

Nykaa has been able to carve out a niche for itself through its focus on BPC, which differentiates it from horizontals (Flipkart and Amazon). 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. We expect Nykaa  to remain in a hyper growth phase in the medium term as online BPC and fashion penetration ramps up. We built a strong order of 25 percent+ for Nykaa BPC over FY22-26, led by new customer additions. Order frequency is expected to see gradual growth as customer cohorts mature. BPC GMV is expected to grow strongly, at 25 percent CAGR over FY22-26. Fashion is expected to continue ramping up on the low base. We see 30 percent GMV CAGR for Fashion. We value Nykaa’s BPC at 8x FY25 sales and Fashion at 2.5xFY25 sales to arrive at a PT of Rs 200.