FSN E-Commerce Ventures (Nykaa) hosted its first-ever Investor & Analyst Day. Key highlights: i) BPC: Personal care and Beauty have similar margins—mix change will not be margin-dilutive. ii) Fulfilment: Regional fulfilment focus will help control this cost to less than 10% of revenue. iii) Fashion: Masstige and Premium are focus areas. Aiming for a 10% share by CY25 (our estimate: 5%). iv) Superstore: Nykaa highlighted that working capital investment would be minimal. This business has GMV potential of $3–4 bn with 4–6% Ebitda margin.
Overall, profitability scale-up in BPC has been impressive. Inventory increase (regional fulfilment driven) and losses from Superstore remain key variables. Maintain ‘Buy’ with a DCF-based TP of Rs 1,845.
BPC: Make-up and Skin account for a one–third of GMV each. Launched the ‘Watch & Buy’ feature six–eight months ago. Margins in personal care are similar to Beauty after considering advertising. Despite normalisation of shipping terms, AOV has not fallen below Rs 1,800. Also, physical store parameters are impressive.
Fulfilment cost: The company wants to transition from a national to regional-driven supply chain. Ideally, the company wants to bring the order-to-shipment ratio to 1.1–1.15. It is not too far from it.
Fashion: Brands/SKUs have grown ~4x/86x over last two years with the share of new segments also rising. It is aiming for a 10% online share by 2025/CY26. It aims to be present across categories with a focus on Masstige and Premium.
eB2B/Superstore: Presently, this segment has gross margins higher than 5–6% for industry. In a stable state, it would achieve 4–6% Ebitda margin.
Outlook: Asset-light scalability
We remain constructive on Nykaa given the growth potential and moats in place. We believe the profitability scale-up in core BPC is impressive with the segment touching 10% Ebitda margin in Q4FY22.
However, we would watch out for the following from the recent initiatives:
i) While Nykaa mentioned that inventory should normalise, any structural increase in inventory because of the regional warehouse strategy could negate the benefit from lower fulfilment costs. ii) The Superstore business, while not demanding on working capital, is a low-margin business that would achieve profitability only at a significant scale. Watch out for losses in the business.