Brokerages remain mixed on FSN E-Commerce Ventures (Nykaa) ahead of its March quarter results announcements. The stock has declined over 17 percent since March this year.
Lately, the firm has been in focus after it announced quarterly business updates and the exit of five senior executives.
In its quarterly update, the beauty e-tailer said that it expects muted growth in Q4 of FY23 due to reduced customer spending.
“Consumer pullback in discretionary spending has had some impact on our fashion business, leading to subdued growth in NSV this quarter. For Q4 FY23, we expect our percentage revenue growth rates in the fashion business to come through in the late teens,” Nykaa said in an exchange filing.
The stock has shed 25 percent in 2023 YTD, down around 7 percent in April so far followed by an 11 percent decline in March. In the 17 months since listing, the stock has given positive returns in only 3. In the last 1 year, the stock has tanked nearly 60 percent.
On the back of this continued correction, brokerages have remained mixed on the stock. While JM Financial is bullish, HDFC Securities has a ‘reduce’ call.
JM Financial has a ‘buy’ call on Nykaa with a target price of ₹230, indicating an upside of almost 97 percent. As per the brokerage, Nykaa has a favourable risk-reward ratio and it believes that the current selling is technical with some investors liquidating their position and expecting a strong recovery post that.
"Nykaa’s stock has fallen significantly over the past 20 days since the company released its revenue update for Q4FY23. We find this move quite surprising considering that the Beauty business continues to grow robustly despite the poor discretionary spending environment and the company seems to be curtailing exorbitant investments to grow the Fashion business. We are appreciative of these trends and believe the company is making the right strategic calls," it said.
It believes Nykaa's BPC (beauty and personal care) segment can deliver an EBITDA margin in the high teens in a steady-state, empowering robust margin expansion. This improvement will be driven by contribution margin expansion by 400-450 bps as well as operating leverage on relatively fixed employee and other expenses, said the brokerage.
Though expecting a sequential decline due to the seasonally high Q3 festive quarter, JM expects Nykaa GMV (gross merchandise value) to grow 35 percent YoY with growth driven by Pink Love Sale in February. Nykaa BPC is again expected to stay strong with an inelastic customer base not impacted by the decline in discretionary spending but the same headwinds could challenge growth in the Fashion segment, it added.
"We expect BPC GMV to grow 33 percent YoY driven by robust AOVs (average order value) and better customer conversions while Fashion is expected to deliver 20 percent YoY growth on a smaller base. Overall, we anticipate Nykaa to deliver 36 percent/35 percent YoY growth in GMV/Revenue. With a company-wide lowering of fulfilment costs from regional centres and business mix shifting towards higher margin BPC, we expect overall EBITDA margin to improve 10bps sequentially, a sudden change from 200bps+ sequential declines seen in the same quarter in previous fiscal years," forecasted JM Financial.
On the contrary, HDFC Securities has a ‘reduce’ call on the stock with a target price of ₹110, indicating a downside of 6 percent.
The brokerage pointed out that while Nykaa remains an efficient online business; especially on the BPC side, its success in part is also due to the absence of potent competitors (this is gradually changing). Ex-ad income, the lack of non-linearity in monetization capabilities restricts it from being constructive on the name, it noted.
It also believes that Nykaa will find it tough to add new consumers.
"Our three-point thesis was a total addressable market (TAM) seemed oversold; ad revenue will be closely contended for; and Nykaa seems more like an efficient pipe business than a platform. All three still hold," it said. “Management highlighted that BPC offers an upside from product cross-selling, purchase frequency and market share gains, its performance doesn’t quite add up,” it added.
HDFC stated that rising competition, more cost of acquisition, and softening product margins are likely to dent Nykaa's prospects. This makes the operating levers more linear against a platform, it added.
