After listing at a 78 percent premium from its issue price of ₹1,125, shares of FSN E-commerce Ventures, the parent company of Nykaa have witnessed a massive decline. However, currently, the stock is trading around 30 percent higher than its issue price at around ₹1,470.
The stock has lost around 30 percent year-to-date and are down 75 percent from its record high of ₹2,574, hit on November 26, 2021, its listing date.
Post the huge correction, domestic brokerage house ICICI Securities has initiated coverage for the e-commerce stock with a 'hold' rating and a target price of ₹1,250, indicating a downside of around 15 percent from its current market price.
Even as FSN E-commerce Ventures, the parent company of Nykaa has established itself as a go-to beauty and personal care (BPC) brand online, the company will have to ‘go more mainstream’ and compete with established players to drive its growth, ICICI Securities said in a report.
“We expect Nykaa to go more mainstream to chase higher growth rates, which will expose it to competition from horizontal and other e-commerce (mass) players. To put this point across, Nykaa does not offer the best price on a product (in the online world) and going mass may require a tweak in its strategy of less discounting,” the brokerage house noted.
However, it added that the problem that the company solved i.e providing access to beauty products which are authentic, was not a problem in the mass market.
The brokerage further stated that even though it sees the company’s revenue and EBITDA CAGRs of 40.5 percent and 63 percent respectively over the FY21-FY26 period, it sees some risks with the stock. The key risks are that the company is chasing growth at elevated levels, which can be dilutive of gross margin, and success in the fashion business can be difficult, given the higher competition in the category, it added.
As per ICICI, Nykaa is expected to be a big beneficiary of D2C disruption in the beauty and personal care (BPC) business where several smaller brands will fight for space on specialty platforms. It also noted that it sees Nykaa driving growth through the following four areas:
i) Brand acquisitions
ii) By further strengthening its position by expanding in the e-B2B space (as a distributor),
iii) By investing in the nascent male grooming category, and
iv) By strengthening offline presence and warehousing capabilities.
That said, the brokerage also stated that Nykaa is already a dominant player in the Indian online BPC market with a 28.6 percent market share, as per its estimate. Its growth estimates for the (Indian BPC) industry and Nykaa implies that Nykaa will have an around 33 percent market share of the online BPC market in FY26E, and its market share of the overall BPC market will increase to 7.3 percent in FY26E from 2.7 percent in FY21, it noted.
It further expects the BPC market in India to grow at a 12 percent CAGR over FY21-FY26E to reach ₹1.9 lakh crore. It was sized at ₹1.1 lakh crore in FY21, down from ₹1.3 lakh crore in FY20, due to the impact of COVID-19 (reduced spending on discretionary items), informed the brokerage.
ICICI believes the consumer sector, as a whole, will see a lot more bolt-ons this decade and Nykaa can also look to ride this trend. Also, some of the large acquisitions (of brands) could be funded by a stock swap, it added.
While in this case, the acquisitions may be RoE-dilutive, Nykaa will be able to extract synergistic values from these acquisitions. It noted that Nykaa enjoys premium valuations on the back of several key strengths and a favourable growth outlook.