Nykaa’s newer verticals may reduce its charm, weigh on profitability


FSN E-Commerce Ventures Ltd, the parent company of Nykaa, held its maiden investor and analyst meet on Thursday where it gave plenty of details on its business plans. Analysts have appreciated this move. 

“At a time when most consumer and internet firms find excuses for poor disclosures, sometimes under the garb of ‘competitive reasons’, Nykaa stands out,” said analysts at Jefferies India in a report on 23 June.

The beauty and fashion retailing company’s core beauty and personal care (BPC) business is expected to ride on the strong demand momentum seen in the March quarter (Q4FY22). There is scope for growth given that annual unique transacting customers stood at 8.4 million in FY22. In comparison, Nykaa has 21 million monthly average unique visitors. Besides makeup, personal care products are also seeing increased traction.

While this segment was Ebitda (earnings before interest, tax, depreciation and amortization) positive in FY22 of Rs277.2 crore, the fashion business reported a negative Ebitda of Rs68.2 crore. Higher customer acquisition costs are likely to keep profits of this segment at bay in the foreseeable future.

In its relatively newer e-B2B segment, which is Superstore by Nykaa, the company sees a potential of $3-4 billion gross merchandise value (GMV) and mid-single-digit Ebitda margin. GMV is the value of orders inclusive of taxes and gross of discounts, prior to product returns or order cancellations, including sales to and through third-party channels.

Through this app, Nykaa targets the unorganized market as it estimates trade in this sector to cater to a significant portion of the BPC segment even by 2025 i.e., about 41-50% of the market. Hence, it aims to serve the retailers who face issues such as poor fill rates, inadequate credit coverage and lack of proper access to new brands. The platform would aid kiranas, pharmacies, salons, beauty shops etc. to directly obtain BPC products from various brands like Dabur, Nyle, Marico, Mamaearth etc.

The working capital requirements would be minimal for this segment. However, analysts note that Nykaa’s strategy to establish itself here is still unclear. “The Superstore business, while not demanding on working capital, is a low-margin business that would achieve profitability only at a significant scale. Watch out for losses in the business,” said analysts at Edelweiss Securities in a report on 23 June.

The e-B2B business along with NykaaMan and other brands are expected to report losses in the near-term. In FY22, these segments together clocked Ebitda loss of Rs45.7 crore. “We believe this loss can double in FY23 before stabilizing in FY24 and reducing subsequently as channel economics improve. We cut FY23-25 profit after tax estimates by 17-27% as we bake in these losses; discounted cash flow impact is lower as we assume these businesses to turn profitable over the medium-term,” said analysts at Kotak Institutional Equities in a report on 24 June.

Meanwhile, Nykaa’s shares are down by 32% so far in CY22 versus 11% drop in Nifty 500 index. This is in keeping with the trends seen in shares of other technology-led companies in an era of rising interest rates.


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