Nykaa stock drops for 4 days in row, hits new low. What should investors do?

Market


FSN E-Commerce Ventures aka Nykaa share price touched a fresh record low on Tuesday as investors carried heavy selloffs. The stock has nosedived by at least 5.5% on BSE in 1 day. However, Nykaa shares have been on the downside slope for the fourth consecutive day now. However, UK-based financial services company, HSBC has upgraded its target price on Nykaa while maintaining a ‘Buy’ recommendation.

At the time of writing, Nykaa stock dipped by 4.35% to trade at 134.15 apiece on BSE. The stock has touched a new 52-week low of 132.55 apiece in the early trade, resulting in an overall drop of 5.5% so far on Tuesday. Its market cap is over 38,252 crore.

Nykaa stock has tumbled by nearly 14% in from January 12th to date. The last time the stock was in green was on January 11th.

In its India equity strategy report dated January 16th, HSBC on Nykaa said, “stock has corrected partly due to the global tech sell-off on rising yields and more recently due to the recent lock-in expiry (10 November 2022).”

HSBC believes Nykaa’s valuations are now even more appealing and under-appreciate the structural growth opportunity in beauty and personal care.

In regards to growth opportunity in Nykaa, HSBC’s note said, “We believe Beauty and Personal Care (BPC) and e-commerce are the perfect match and expect a c30% CAGR for the BPC e-commerce market in the coming decade, followed by a subsequent decade of double-digit growth. Nykaa (the brand

name for FSN) with its leading scale, reach, and broad product range is a rare combination of profitability and sustainable exponential growth, in our view. We expect revenue to double every two to three years over the coming decade.”

Furthermore, the note added that an astute strategy of long-term value capture in BPC with (1) augmenting the core e-commerce operation with a growing pan-India store network, raising structural barriers for others, and edging up its game in the consumer experience; (2) building a portfolio of its own skin and beauty brands, and extending its overall proposition for other retailers through eB2B SuperStore by Nykaa.

“This should make Nykaa’s long-term evolution, not just a platform owner but also a formidable brand owner. Maintain Buy,” HSBC’s note said.

On valuation, HSBC’s note said, “We value Nykaa’s business segments using the sum-of-the-parts approach. We value Beauty & Personal care (BPC) and Fashion using DCF methodologies while we value Nykaa’s newly launched eB2B segment (SuperStore by Nykaa) at a price/sales multiple of 5.5x for FY27e, which is based on the current peer average valuation. For our DCF model, we assume a cost of equity of 10%, which is based on a risk-free rate of 2.0%, market risk premium of 5.5%, inflation differential of 2.5% (all in line with HSBC’s Global Equity Strategy team’s assumptions) and beta of 1.0. We also assume terminal growth of 6.0%. Our target price of 361.67 (corrected from 2,170 due to corporate action on 10 November 2022) implies c137% upside from current levels; accordingly, we maintain our Buy rating on the stock.”

However, among key downside risks for Nykaa, HSBC’s note highlighted — slower adoption of e-commerce; inability to significantly expand its user base; increased competition impacting profitability; premiumisation trend progress slower than anticipated; fashion business failing to scale up; and regulatory risks.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.


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