What is causing the sudden rebound in Nykaa? Is the worst over?

Hot Stocks
admin
April 6, 2023
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12 minutes read

Nykaa has surged 10 percent in the last two sessions, ahead of the positive business update shared by the company on April 5 after market hours. Earlier in the day, the stock surged zoomed 8 percent after 6.8 million shares worth Rs 92.5 crore changed hands

Nykaa

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The stock price of FSN E-Commerce Ventures, the parent company of cosmetics-to-fashion retailer Nykaa, surged around 8 percent on April 5 after block deals worth Rs 92.5 crore involving 6.8 million shares were done on the National Stock Exchange (NSE), extending the uptrend.

The stock gained around 10 percent in the two sessions ahead of the positive business update released by the company after market hours on April 5.

The surge in FSN E-Commerce Ventures is attributed to the outcome of the sharp correction of around 12 percent in the preceding sessions and seemingly market participants getting a whiff of the positive business update, analysts said.

That should come as some relief after some recent top-level exits at the company. On March 24, Nykaa announced the exit of five executives —Nykaa SuperStore CEO Vikas Gupta, fashion chief business officer Gopal Asthana, chief commercial operations officer Manoj Gandhi, business head Shuchi Pandya and finance head Lalit Pruthi.

Earlier, company secretary and compliance officer Rajendra Punde, CFO Arvind Agarwal and chief technology officer Sanjay Suri, too, had quit Nykaa.

“I presume some market participants might be thinking of the stock as an attractive entry point after the big correction, and also seemingly due to the positive business update yesterday evening,” an analyst, who spoke on condition of anonymity, told Moneycontrol on April 6.

Also Read: Nykaa Q4 update: Revenue growth to be in line with first nine months of FY23

Positive quarter

In its FY23 guidance release on April 5, Nykaa expects to sustain its percentage growth rate in line with the first nine months of FY23.

According to the company, its beauty and personal care (BPC) segment continued to display healthy revenue growth trends and expects FY23 revenue growth rates in the early 30 percent, aided by a robust operating performance in terms of average order values and conversion rates.

In fashion, the company said consumer pullback in discretionary spends did have some impact on the business and it expects revenue growth to be in the late teens.

The previous quarter was disappointing, with the company’s net profit declining 71 percent year on year (YoY) to Rs 9 crore. However, revenue was at Rs 1,463 crore, up 33.2 percent from Rs 1,098 crore in the third quarter of the previous fiscal.

EBITDA (earnings before interest, taxes and depreciation) increased 13.5 percent to Rs 78 crore from Rs 69 crore in Q3FY22. EBITDA margin, however, contracted to 5.4 percent from 6.3 percent in Q3FY22.

For the nine-month period of FY23, Nykaa’s gross merchandise value (GMV) grew 42 percent YoY to Rs 7,298 crore, while revenue was up 37 percent YoY to Rs 3,842 crore. Profit came in at Rs 19 crore, a decline of 45 percent YoY.

Losses have been growing in the fashion segment for the last few quarters and in that sense, new management may be a welcome move and could also lead to some kind of a path to profitability, said Elara Capital’s Senior Vice President-Research Analyst (Media, Consumer Discretionary & Internet) Karan Taurani.

Speaking on profitability, CEO Falguni Nayar had earlier said that the profitability of BPC was being used to build new businesses, including fashion and B2B.

“And we do believe that it will need another year or two of investment before we can talk about being profitable. But none of it will be massive losses. So, like contribution margin, even this year, it was only minus 12.6 percent negative and next year will be lower,” Nayar said. “So, like I said, the path to profitability is clearly in our mind, and at the moment, we are only investing in these three, four businesses.”

Also Read: Nykaa target price unchanged; 5 exits small compared to company size: Jefferies

Fashion, BPC worries

Despite Nykaa’s sustained growth, increasing competition on both fronts — BPC as well as fashion — could be a potential pain point for Nykaa.

In BPC, the latest hit comes in the form of Reliance Retail, which on April 5 announced the launch of Tira, an omnichannel platform for beauty products. The online platform also offers blogs, tutorials, trend-setting tips, personal recommendations and a virtual try-on feature.

“The market will be divided among three or four players because the players who are entering the market are the ones with deep pockets. However, effectively Nykaa will still kind of lead, at least for the foreseeable future,” said the source quoted. There could be some possibility of some traffic and advertisement revenue split, he added.

While Nykaa has established itself in the online BPC market, the same could not be said about fashion, where it also faces growing competition along with mounting losses.

“Fashion as a segment is something which has not clicked for them at all because they have got a poor recall, the market is highly competitive, their strategy may have may not work in terms of fashion,” Taurani said.

Nykaa has a formidable rival in Walmart-backed Myntra, which has a high recall and is deeply entrenched. Competition is also intense in the BPC segment, with Purplle, MyGlamm and traditional players like Sephora vying for customers.

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

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