Nykaa rating: Buy | Sustained growth is the standout feature

Business offers multi-decade expansion opportunity; ‘Buy’ retained with target price revised to Rs 1,743.

Nykaa rating: Buy | Sustained growth is the standout feature
Overall, we remain constructive on Nykaa.

FSN E-Commerce Ventures (Nykaa) reported a good performance with sustained growth (Q1FY23 GMV up 47% y-o-y/20% q-o-q) being the highlight in the backdrop of uncertain consumer sentiment and physical retail surge. While flat unique visitor trends have reversed in BPC, they persist in Fashion (last four quarters)—though conversions are driving order growth and AOV/private label share remains robust. Nykaa also announced the acquisition of Little Black Book.

Overall, we remain constructive on Nykaa. It is, globally, a one-of-its-kind profitable and management-owned new-age business and offers a multi-decade growth opportunity. Baking in a higher WACC and rollover to Sep-23E yields DCF-based TP of Rs 1,743 (Rs 1,859); ‘BUY’.

BPC: Growth improves across funnel – The BPC segment’s GMV, up 39% y-o-y/18% q-o-q to Rs 14.9 bn, beat expectations. On other parameters too, the business is showing decent traction with Annual Unique Transacting Customers (AUTC) rising 32% y-o-y to 8.6mn and monthly unique visitors improving after three quarters. AOV increased 4% q-o-q, reversing the earlier trend. Nykaa has expanded its store footprint by opening eight new stores, taking the total count to 112 spread across 52 cities. It plans to expand international presence to the UAE, Mauritius and the US.

Fashion: Conversion-driven growth – Unlike BPC, Fashion’s 59% y-o-y/21% q-o-q GMV growth to Rs 5.8 bn is a combination of the increase in conversions and AOV further inching up (18% y-o-y/3% q-o-q). Top of the funnel, i.e. monthly visitors has remained flat at 16mn since Q2FY22. Owned brand share increased to 12.1% (FY22: 7.8%). Emerging businesses contributed GMV of `0.9 bn, i.e. ~4% in Q1FY23. Nykaa also announced the acquisition of Little Black Book, an online shopping site to discover top local brands. While the acquisition amount has not been disclosed, it logged revenue of Rs 195 mn in FY22.

Outlook: Asset-light scalability – We are keeping estimates unchanged. Baking in a higher cost of capital and rolling over the valuation to Sep-23E yields a TP of Rs 1,743 (Rs 1,859 earlier). Retain ‘BUY/SN’. Key risks: much lower-than-estimated TAM, competition disrupting the unit economics in BPC and rise in cost of capital.

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