Macquarie's 27% Downside Prediction For Nykaa Raises Concerns Over Profitability
Nykaa must make substantial investments to maintain growth in beauty products sector
6 March 2023
According to Macquarie, Nykaa must make substantial investments to maintain growth in the beauty products sector due to customers' demand for physical stores to experience products.
According to the brokerage, the problems for Nykaa can worsen due to the entry of big players such as Tata Cliq and Reliance Retail in the beauty vertical.
Macquarie expressed concerns about Nykaa's success in the fashion vertical as it is yet to be proven.
Macquarie initiated coverage on beauty ecommerce giant Nykaa on Monday, March 6, with a target price of INR 115, implying a 27.2% downside to the stock’s close on Friday, March 3. The brokerage flagged profitability concerns due to the need for investments to sustain growth, as Nykaa faces the risk of margin decline in its beauty segment as growth moves to smaller towns/offline and competition threats loom. The entry of big players like Tata Cliq and Reliance Retail in the beauty vertical can exacerbate the problems for the startup. Reliance Retail recently forayed into the beauty ecommerce category with a platform named Tira.
Nykaa’s shares witnessed a dip of up to 2.8% to INR 145.55 on the BSE during intraday trading on Monday, but they eventually closed the day at INR 149.55. Apart from Nykaa's beauty and personal care (BPC) segment, Macquarie expressed concerns over the fashion vertical and questioned the company’s ability to grow profitably in that segment. According to the brokerage, Nykaa's success in the fashion vertical is yet to be established as the company offers a curated marketplace of third-party/newly developed own apparel brands. Moreover, the analysis of offline retailers indicates that players who follow a curation-led approach with third-party brands have seen limited success.
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The e-commerce platform, reported a year-on-year (YoY) decline of 70.7% in its consolidated net profit to INR 8.5 Cr in Q3 FY23. However, Nykaa's operating revenue rose 33.2% to INR 1,462.8 Cr during the quarter. In particular, Nykaa's gross merchandise value (GMV) in the beauty, personal care, and wellness (BPC) segment and fashion segment rose by 37% YoY to INR 2,796.5 Cr and 50% YoY to INR 724.4 Cr, respectively.
During the earnings call of Nykaa, its MD and CEO Falguni Nayar revealed that the company’s revenue and margin in the December quarter were adversely affected by weak consumer spending caused by the global economic slowdown. However, despite the company's plan to go public soon, Macquarie, in its initiation report, expressed caution regarding Nykaa's profitability, stating that the company's limited operating history and need for growth investments make it hesitant on EPS.
Moreover, in February, HDFC Securities downgraded its rating on Nykaa from 'reduce' to 'sell', citing higher gestation in fashion and B2B business as the reason for cutting its FY24/FY25 EBITDA estimates by 8%.