Nykaa stock rating: ‘Buy’. HSBC initiates coverage with 21% upside; check target price

HSBC said that Nykaa is a rare combination of strong, sustainable growth and marginal return on capital in the range of 70-100%.

Nykaa
Valuations are a key debate when discussing Nykaa stock price. (Image: REUTERS)

Nykaa’s share price has more than doubled from the IPO price of Rs 1125 per share to now trade at Rs 2390 apiece. However, India’s beauty and personal care e-commerce market is seen as the next big growth story by analysts at HSBC who see more than 20% upside for the stock from current levels. “We believe Nykaa, a leading and already profitable online business, can dominate the market over the next decade,” HSBC said in a note. The brokerage firm has initiated coverage of the stock with a ‘buy’ rating with a target price of Rs 2,900 per share.

Compelling play on beauty and personal care

Nykaa is a platform business with 23 million registered users and 8.5 million unique users who make transactions on its platforms. HSBC said that Nykaa is a rare combination of strong, sustainable growth and marginal return on capital in the range of 70-100%. “While the BPC category will likely grow at a CAGR of between 11% and 13% for the next decade, we see the online-BPC market expanding at a CAGR of 30%+,” HSBC said. They added that Nykaa’s revenue could double every 2-3 years in the coming decade. 

Adding to Nykaa’s potential, HSBC said that the company has shown over the last decade that it can compete in the hyper-competitive e-commerce market with giants like Amazon and Flipkart.

Are valuations expensive?

Valuations are a key debate when discussing Nykaa stock price. Currently, Nykaa is trading around FY24e PE of 317x on HSBC’s estimates or FY24x EV/sales of 14x. The brokerage firm believes Nykaa can still offer material upside from here. “Despite the sky-high valuation, we think e-commerce in beauty and personal care is at an early stage in India. In our view, a 10-year revenue CAGR of 25-30% is realistic and perhaps a conservative expectation for Nykaa,” analysts said.

Bull, Bear and base case

Slower adoption of e-commerce, inability to significantly expand its user base, high competition, failure in scaling up fashion business are some of the key risks involved with Nykka’s stock price. In such a bear case scenario the stock is expected to plummet to Rs 1,820 per share. Meanwhile, in the base case scenario, the stock is seen to scale to Rs 2,900 price target.

On the other hand, if E-commerce BPC 10 year CAGR comes at 34% with higher pace of online penetration, and Nykaa grows in line with the category, HSBC Predicts a target price of Rs 3,690 per share.

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