Nykaa stock now a more attractive 'buy', analysts positive but divided

Through financial modelling, experts arrive at a fair value that ranges between Rs 145 and Rs 360

FSN E-commerce or Nykaa, as its popularly known, was profitable before it went public and that remains the case for the online fashion and personal care retailer. This is unusual for a digitally-driven startup, since the sector focuses on growth rather than profits.

However, like all startups, Nykaa was very highly valued when it went public and it listed at Rs 2,018, a big premium over its issue price of Rs 1,125 in November 2021. According to some calculations, it was believed that the company would need to maintain a revenue compounded annual growth rate (CAGR) of 25 per cent for 20 years with earnings before interest, tax, depreciation and amortization (Ebitda) margin of 20 per cent to justify the share price.

There have since been complex movements in the stock. The initial public offering (IPO) had a lock-in period for pre-IPO investors, which ended in November 2022.

However, the company announced an issue of bonus shares in a 5:1 ratio in October (with November 22 as record date). Apart from dividing prevailing share prices by 6, there was a serious capital gains tax (CGT) implication to the bonus issue.

The new shares (over 80 per cent of holdings) would attract short term CGT. The adjusted record high for the stock was about Rs 430 per share The timing of the bonus issue may have dissuaded pre-IPO investors from booking profits. But the stock has been sold down a lot, and it’s trading at Rs 134 now.

 

Since it has experienced some degree of profitability while also maintaining reasonable growth, is it now a more attractive ‘buy’ in terms of valuations?

After a reasonable third quarter for the 2022-23 financial year (Q3FY23), it’s expected higher travel spends will push BPC (Beauty & Personal Care) and fashion demand, leading to 31 per cent year-on-year (YoY) growth in FY24 with flat Ebitda margins at about 5.25 per cent. If it can maintain those growth rates for a couple of financial years, that would double the revenues.

The strategy includes opening up a network of physical stores to complement its online presence. The company is also building its own brands. It’s also experimenting with an EB2B initiative called Superstore by Nykaa. Good profitability metrics, and smart capital allocation, along with its strategic initiatives, should enable it to keep its lead position.

There are risks of course. One is increasing competition which will erode margins at minimum. Another significant risk is policy with the government still to decide upon e-commerce regulations after proposing to limit ‘flash sales’ and to limit private-labels’ contribution of e-commerce companies, and to scrutinise relationships between online marketplace operators and vendors. Changes here could be a key risk to Nykaa’s plans and growth trajectory.

Various analysts have done a lot of financial modelling to try and arrive at a fair value for the stock. There’s no consensus – and there can’t be since the online BPC and fashion markets are both fluid.

It may be mentioned that fashion has much higher margins but it is also the more difficult segment to make headway in terms of brand building and competition. Analyst targets range between Rs 145 (a small upside of 8 per cent) to Rs 360 (over 165 per cent upside).