Nykaa underperforms Zomato, Paytm in last 1 year! Is it still a good buy?

E-commerce stock FSN ECommerce Ventures (Nykaa) has underperformed its competitive stocks Zomato and Paytm i the last 1 year. While Nykaa has shed over 62 percent, Zomato and Paytm have lost 55 percent and 43 percent, respectively.

The stock had a stellar ₹5,350 crore initial public offering (IPO) in November 2021, with an over 82 times subscription. In comparison, the Zomato and Paytm IPOs were subscribed 38 times and 1.89 times, respectively.

Nykaa was cheered by the market and listed at an 80 percent premium to its IPO price as against Zomato, which listed at 53 percent. Paytm, on the other hand, listed at a 9 percent discount.

However, the stock was unable to hold on to its lead.

Once a top pick among internet stocks, brokerages now have varied views on the stocks. While some expect the stock to recover on the back of the massive decline from its listing price, while others remain cautious.

The stock is currently trading near its all-time low and has been that way since its lock-in period ended. Its fashion vertical has underperformed its beauty and personal care on order growth and monthly unique visitors, which has the investors worried. Adding to their concern was the company's controversial 5:1 bonus issue timed with the end of the lock-in period.

Nykaa is down 35 percent since October, faring worse than Zomato and Paytm.

However, despite the concerns, in a recent report, domestic brokerage house ICICI Securities upgraded the stock from hold to add. However, it reduced Nykaa's target price to ₹145 from ₹175 earlier. The new target prices imply a potential upside of 16 percent for the stock.

The brokerage said that it has always liked Nykaa's business model, however, post its listing on the Indian bourses, ICICI noted that it has been staying on the sidelines due to valuations beyond its ability to comprehend (at peak stock price, revenue CAGR requirement over the next 20 years was 23 percent).

The stock has fallen 62 percent from its 52-week high of ₹332, hit in January 2022. Post its correction from the peak, in SoTP, BPC (beauty & personal care) business now accounts for 77 percent of the current price, assuming it's a defensible and high-growth business in the medium term, noted the brokerage.

ICICI believes the cyclical slowdown in BPC and fashion businesses is somewhat priced in. It further pointed out that Nykaa continues to present a combination of (1) the largest beauty and personal care (BPC) business in a growth market (India), (2) good profitability metrics and prudent capital allocation, and (3) omnichannel in the ‘true sense’ (going online to offline). That said, competition may intensify from both vertical and horizontal peers, it added.

While the brokerage expects BPC revenue to grow, it believes Nykaa’s journey could be different – it will have to go more mainstream to drive this growth. Growth trajectory in fashion will be keenly watched out for, said the brokerage.

"As per our estimates, the value of BPC business is ₹100 assuming no operating revenue/profit from fashion and other business (B2B + BPC-Men). This is reflective of revenue growth (of BPC) settling down to 24 percent (from the current +40 percent) at the end of the first 5 years

(FY23-27E), followed by 16 percent at the end of the next 5 years (FY28-32E) and finally to 6 percent by FY42E (next 10 years)," it explained.'

It further predicted that its fair value estimates for Nykaa's fashion business at different revenue CAGR and operating profit margin assumptions range between ₹14 and ₹75. Since the fashion business is more margin-accretive (50 percent higher than BPC), higher revenue growth should be more value-accretive, it stated.

The brokerage has also maintained its estimates for FY23-24E. It has modeled revenue and EBITDA CAGRs of 37 percent and 83 percent, respectively, over FY22-FY24E.

Key risks, as per the brokerage, are (1) Chasing growth at elevated levels can dilute gross margin, and (2) success in the fashion business can be difficult given the higher competition in the category.

HSBC, on the other hand, sees a massive upside ahead for the stock as it sees Nykaa as the structural winner of large-scale beauty and personal care (BPC) and lifestyle opportunities.

According to HSBC, the stock has corrected partly due to the global tech sell-off on rising yields and more recently due to the imminent lock-in expiry (10 Nov). The brokerage believes the valuation is now even more appealing and under-appreciates the structural growth opportunity in beauty and personal care.

Also, Nykaa with its leading scale, reach and broad product range is a rare combination of profitability and sustainable exponential growth, said the brokerage. It sees the firm's revenue doubling every 2-3 years in the coming decade.

HDFC Securities, however, sees the stock continuing to fall. While Nykaa Fashion is a marketplace, it is still a budding segment targeting a premium customer base. Its right-to-win is not yet established, it said.

In the September quarter, Nykaa posted a 344 percent year-on-year (YoY) jump in its September quarter net profit at ₹5.2 crore vs ₹1 crore in the year-ago period. Meanwhile, its quarterly revenue from operations recorded a 39 percent YoY increase to ₹1,230.8 crore from ₹885 crore in Q2FY22.

"During the quarter, we continued to demonstrate strong GMV growth with improvement in gross margin, efficiency in fulfillment and marketing cost lead to improvement in EBITDA margin YoY," Nykaa said in an exchange filing.

Its EBITDA improved to ₹61 crore vs ₹28.8 crore in the year-ago period while the EBITDA margin improved to 5 percent vs 3.3 percent in Q2 FY22.