Broker’s Call: FSN E-commerce Ventures (Buy)

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Target: 210 rubles

CMP: INR 150.45

Nykaa’s beauty and personal care (BPC) business retained its silver footprint (it accounted for 68 percent of GMV in FY23), driven by the benefits of: fewer cuts than other categories (edged by global brands); Extensive penetration opportunity by educating more clients; Potential entry for more global/D2C brands; higher expenses / larger basket size; and proven unit economics with a healthy contribution margin of 26.5 percent in FY23 and potential for further expansion (tools such as private label, lower implementation costs, increased advertising revenue).

Nykaa’s customized approach to its discerning customer base and also factors such as: customer worthiness (genuine products); And content initiatives may help improve performance compared to competitors, resulting in higher consumer retention/retention. Nykaa has also launched a loyalty program – Prive, to increase frequency for existing customers. May continue to work closely with existing/new D2C/emerging brands to innovate/improve customer experience.

Nykaa aspires to achieve revenue growth ahead of the industry average. We estimate a revenue compound annual growth rate of 25.8 percent in the online BPC segment, led by stiff competition, over the near to medium term. Nykaa is nearing the end of its maximum investment cycle with: the number of offline BPC stores at 145 (adding one fewer store going forward); Warehouse space, 0.146 million square feet (0.082 million square feet in FY22); investing in technology / other initiatives to help improve customer experience; and huge marketing expenses (11 percent of FY23 revenue). Healthy growth with ample margin leverage: private label expansion, increased ad spend revenues in BPC/fashion may be key drivers of profitability.

Nykaa’s underlying BPC chip is trading at 63x FY25E P/E, which is just 25 percent higher than the valuations of traditional BPC peers (the average forward price-to-earnings target for large BPC players is 50x). Expect a steady revaluation at BPC, led by strong earnings compound annual growth of 38 percent in fiscal 23-25E. An improved view of EBITDA or EBITDA break-even in fashion could help the share price performance. We keep buying with TP-24 March-TP valued at INR 210. We value the BPC tranche at 60x EV/EBITDA one year forward and haven’t allocated any value to fashion and other businesses at this time.