Nykaa rating: Brokerage initiates with ‘Hold’, sees 12% downside; online BPC co needs to go more mainstream

Even as FSN E-commerce Ventures, the parent company of Nykaa has established itself as a go-to beauty and personal care (BPC) brand online, the company will have to ‘go more mainstream’ and compete with established players to drive it’s growth, ICICI Securities said in a report. The brokerage has initiated coverage of the company with a ‘Hold’ rating. ICICI Securities has set a target price of Rs 1250 apiece, slightly above its IPO price range. The brokerage sees about 12 per cent downside to Nykaa’s stock from its last close on Monday.

Nykaa stock has corrected since listing last year; maintaining growth a challenge

The company had set an IPO price in the range of Rs 1085 and Rs 1125 per share when it was listed in November last year. The shares were listed at a 78 per cent premium in a bumper listing but since then the stock has corrected. Nykaa’s shares are down nearly 30 per cent year-to-date and down 44 per cent from its record high.

“We expect Nykaa to go more mainstream to chase higher growth rates, which will expose it to competition from horizontal and other ecommerce (mass) players. To put this point across, Nykaa does not offer the best price on a product (in the online world) and going mass may require a tweak in its strategy of less discounting,” ICICI Securities said in a note Monday. However, the problem that the company solved i.e providing access to beauty products which are authentic, was not a problem in the mass market, it added.

The brokerage also said even though it sees the company’s revenue and EBITDA CAGRs of 40.5 per cent and 63 per cent respectively over FY21-FY26 period, it sees some risks with the stock. The key risks are that the company is chasing growth at elevated levels, which can be dilutive of gross margin, and success in fashion business can be difficult, given higher competition in the category, the brokerage added.

What can Nykaa do? Tap male grooming, acquire more brands

The brokerage said “Nykaa is expected to be a big beneficiary of D2C disruption in BPC business where several smaller brands will fight for space on specialty platforms,” adding, that it sees Nykaa to drive growth through the following four areas:

i) Brand acquisitions

ii) By further strengthening its position by expanding in the e-B2B space (as distributor),

iii) By investing in the nascent male grooming category, and 

iv) By strengthening offline presence and warehousing capabilities.

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