The worst seems to be over for FSN E-commerce Ventures, the parent company of Nykaa. According to global brokerage house HSBC, Nykaa is likely to cross ₹2,100 in the next 1 year as it sees Nykaa as the structural winner of large-scale beauty and personal care (BPC) and lifestyle opportunities.
The brokerage has maintained a 'buy' call on the beauty products firm with a target price of ₹2,170, indicating a massive upside of 83 percent from the current market price of ₹1,185. However, this is lower than HSBC's previous target price for the scrip, which stood at ₹2,180.
While Nykaa listed at a 78 percent premium from its issue price of ₹1,125, it has witnessed a massive decline since then.
The stock has lost around 44 percent in 2022 year-to-date (YTD) and has tanked 54 percent from its record high of ₹2,574, hit on November 26, 2021, its listing date.
The stock is currently up just 5 percent from its IPO price. Since its listing, it has given positive returns in just 2 months - March and April 2022. It jumped 31 percent in March and around 0.3 percent in April.
The stock has consistently declined each month since May 2022. It has shed 30 percent between May and October.
In January and February 2022 as well, the stock crashed by over 21 percent each month.
Despite such weak market performance, why should you buy Nykaa? HSBC tells us.
1) 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.
2) Large growth opportunity: HSBC believes BPC and e-commerce are the perfect match and expects a 30 percent CAGR for the BPC e-commerce market in the coming decade, followed by a subsequent decade of double-digit growth.
3) Nykaa leads the pack: According to the brokerage. Nykaa with its leading scale, reach and broad product range is a rare combination of profitability and sustainable exponential growth. It sees the firm's revenue doubling every 2-3 years in the coming decade.
4) Astute strategy of long-term value capture in BPC:
The brokerage said that by augmenting the core e-commerce operation with a growing pan-India store network, Nykaa is raising structural barriers for others and edging up its game in the consumer experience.
The brokerage also added that Nykaa is building a portfolio of its own skin and beauty brands, and extending its overall proposition for other retailers through eB2B SuperStore by Nykaa. This should make Nykaa’s long-term evolution as not just a platform owner but also a formidable brand owner, said HSBC.
Further, the firm continues to be a magnet for brands and consumers as its large scale and loyal consumer base attracts new brands looking to be in India and becomes a virtuous cycle for consumers and brands alike, noted HDBC.
"Specialism is key to success in BPC and Nykaa leads by a wide margin in assortments, and education-led, content-driven digital marketing engine. The fashion business could also potentially surprise in the next five years," it pointed out.
Another important factor to consider is its exceptional September quarter (Q2) results.
It 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.
The company also noted that the consumer demand for premium beauty, personal care and wellness is showing signs of buoyancy as we gear up for a promising H2 FY23.
"Our focus on curation and discovery in Fashion is evident, as new season merchandise accounted for 24 percent of Nykaa Fashion GMV (gross merchandise value); international brands are at 13 percent of western wear category GMV in Q2 FY23. Repeat buyers in Fashion now contribute 66 percent of Q2 FY23 GMV, giving us confidence in our product proposition," MD and CEO Falguni Nayar informed.
In the beauty and personal care segment, Nykaa's GMV grew 39 percent YoY to ₹1,630 crore in Q2 while margins also improved by 630 bps. The fashion business recorded a GMV growth of 43 percent YoY to ₹599.1 crore. In the remaining segments, the GMV grew 240 percent YoY to ₹116.5 crore.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
