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Nykaa’s stock rating upgraded by Morgan Stanley eyeing good entry opportunity but cuts target price

Nykaa stock’s recent correction has enticed foreign brokerage firm, Morgan Stanley, to go bullish on the scrip and upgrade it to ‘Overweight’.

Nykaa’s stock rating upgraded by Morgan Stanley eyeing good entry opportunity but cuts target price
Analysts at Morgan Stanley said the beauty segment can be an attractive play as incomes rise. (Image: REUTERS)

Nykaa stock’s recent correction has enticed foreign brokerage firm, Morgan Stanley, to go bullish on the scrip and upgrade it to ‘Overweight’. “We view FSN (Nykaa) as a consumer business with a technology edge. The recent stock correction gives a compelling entry point for long-term investors to play the theme of evolution in India’s beauty market,” Morgan Stanley said in a note. Nykaa’s share price is down 20% year-to-date. While analysts have upgraded the stock, they have cut their target price from Rs 2,183 per share earlier to Rs 2,040, which still hints at an upside of 22% from today’s levels. 

Beauty – an attractive play

Analysts at Morgan Stanley said the beauty segment can be an attractive play as incomes rise.  “We believe the share of beauty in India’s beauty and personal care spending has the potential to rise from 25% currently to 33% by FY27 as a result of rising income levels and India’s Age, Access, Aspirations cohort,” they said. The rising income factor is expected to force a shift towards a broadening (from basics) of category spending for skincare and cosmetics. The total addressable market for the beauty and personal care segment is expected to increase to $178 billion by 2027. 

Nykaa is believed to be currently sitting in a sweet spot with strong growth prospects and the potential to be the fastest-growing company in Morgan Stanley’s Indian consumer coverage. Although the competition is increasing in the space, analysts see higher competition positively. 

Recent fall in stock price makes valuations compelling

Nykaa’s share price has fallen 20% so far this year and is now down nearly 30% from its listing price. However, the stock is still trading above its issue price of Rs 1,085 – Rs 1,125 per share. “FSN (Nykaa) stock is down 21% since January 17 (vs. -6% for the BSE Sensex and the average of -10% for discretionary & retail peers in our coverage). The past track record of consumer stocks suggests that corrections in stocks with long-term growth stories and strong business fundamentals tend to be short-lived,” Morgan Stanley said.

Bull, base, and bear case scenarios

The base case scenario for Nykaa stock expects the stock to rally to Rs 2,040 per share price. Under such a case, analysts expect a gradual pickup in online penetration and stable competitive intensity. In a base bear case scenario, the stock is expected to touch Rs 1,017 per share. Such a scenario would be possible amid a slow pickup in e-commerce penetration and high competitive intensity leading to lower market share gains. 

The bull case scenario target price is set at Rs 3,390 per share, suggesting an upside of nearly 100%. Nykaa shares were up 1.4% on Monday at Rs 1,648 per share.

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