Unlike most of its peers, Nykaa listed on the bourses as a profitable entity in 2021. However, rising competition, high inflation, and an increasing customer acquisition cost started taking a toll on the company’s fundamentals towards the end of 2022. Unfortunately, the same concerns continued until the fag end of 2023.
Speaking with Inc42 in June this year, an analyst flagged that Nykaa failed to improve its margins ever since its listing on the stock exchanges. This resulted in the stock not seeing much gains, despite the company being profitable. The analyst had added that the shares of Nykaa could rally if the company showed improvement in its margins.
While it took some time for the stock to regain investor confidence, it did manage to script a decent turnaround by the end of 2023. A rally in its share price starting mid-November resulted in the stock gaining 19% within a month — from INR 148.5 on November 12 to INR 176.85 on December 15.
While the stock lost some steam after that, it ended Tuesday’s (December 26) session at INR 170.85 on the BSE with a market capitalisation of nearly $6 Bn. The stock has gained over 10% year to date (YTD).
While increasing competition from deep-pocketed players like Reliance and Tata continues to weigh on Nykaa, the uptick in its beauty and personal care (BPC) and fashion verticals and improvement in margins have helped the company regain some of its lost sheen.
Now, let’s take a look at the key events, which shaped Nykaa’s journey in 2023.
Nykaa’s 2023: A Snapshot
Nykaa’s BPC and fashion verticals remained under investors’ scrutiny for most parts of 2023 due to their lower-than-expected growth. However, Nykaa managed to report improvement in the performance of these verticals in the second quarter (Q2) of the financial year 2023-24 (FY24).
While the BPC vertical witnessed moderate growth during the quarter, Nykaa Fashion posted better-than-expected results.
The net sales value of Nykaa’s BPC vertical grew 19% year-on-year (YoY) in the September quarter while the same jumped 32% for the fashion business. GMV for the BPC and fashion verticals grew 23% and 27%, respectively.
This growth in the fashion segment, which was a matter of concern for analysts and investors due to a high cash burn, increased conviction that the vertical would become profitable earlier than expected.
During the earnings call post the release of Q2 results, Nykaa Fashion CEO Adwaita Nayar said that the vertical had reached its peak loss and its books would see improvement from thereon.
Meanwhile, Nykaa’s consolidated net profit also surged 50% YoY and 44.4% quarter-on-quarter (QoQ) to INR 7.8 Cr in Q2.
While the Q2 numbers played a part in the stock’s rally, as per analysts, the stock was also due for a big upward movement given that other new-age tech stocks like Zomato and Paytm had surged in 2023.
“Most other internet stocks had moved up and Nykaa was positioning itself for that. If we look at the Q2 earnings, while the results were okay, the fashion vertical did quite well. Hence, a thesis was getting built that investors might finally start ascribing a value to the fashion vertical,” an analyst had then told Inc42.
Meanwhile, talks about rising competition for the company prevailed throughout the year. Not only this, Nykaa also saw many top-level exits and restructuring during the year.
Here’s a sneak peek into each one of the aforementioned topics:
On Competition Front
The thesis for Nykaa took a turn when deep-pocketed Reliance entered the beauty retail space, with an omnichannel playbook and launched Tira earlier this year.
Investors’ fears escalated as Tata CLiQ announced the launch of its first omnichannel beauty retail outlet, Tata CLiQ Palette, in mid-2023.
Nykaa’s fashion business was already facing competition from players like Flipkart-owned Myntra and Reliance’s AJIO by then.
Besides, beauty retailer giants such as Loreal India and Hindustan Unilever’s Lakme, which have ruled the offline space for years, also increased their focus on expanding their online presence.
On Restructuring Front
Five senior executives quit the company around March this year.
Following this, Nykaa restructured its leadership team with new appointments, including that of former Amazon employee Rajesh Uppalapati as the chief technology officer.
The company saw the exit of six other executives during the year, including its marketing head, resulting in founder and CEO Falguni Nayar taking over the reins of the marketing department.
Besides, heavy spending on advertising and marketing also caught investors’ attention during the year. However, Nykaa kept reiterating that it was laser focussed on long-term growth.
Ironically, at a time when most stakeholders were worried about its high cash burns, Kotak Institutional Equities said that Nykaa would have to keep spending on advertising to retain its market share amid rising competition.
No Major Block Deals Witnessed In 2023
Unlike 2022, the ecommerce startup didn’t see any major offloading of stakes by big investors. Nykaa’s pre-IPO shareholder Kravis Investment Partners was the last to sell a chunk of shares via block deals worth INR 629 Cr in December 2022.
However, the company’s shareholding pattern underwent some major changes in 2023, which are as follows:
Like most other new-age tech stocks, Nykaa has also been seeing a growing interest from mutual funds. At the end of the September quarter of 2023, 21 mutual funds held a 10.62% stake in the company as against a 2.04% stake held by 24 mutual funds a year ago.
Foreign institutional investors’ (FIIs) stakeholding in the company remained volatile. While they increased their stake in Nykaa to 9.84% at the end of the September quarter of 2023 from around 7% a year ago, it was a decline from the peak of 12.26% at the end of the March quarter of 2023.
How Does 2024 Look For Nykaa?
As of now, the Street seems to have a divided outlook on Nykaa. While most analysts see competition as the major risk for the ecommerce startup, others see the reversal in the Nykaa Fashion narrative to drive up the share price.
For instance, JM Financial notes that Nykaa Fashion appears to have turned the corner and is on track to generate incremental value for shareholders. The brokerage sees the vertical attaining profitability earlier than expected.
Surprisingly, the brokerage isn’t much concerned about the increasing competition. “We postulate that Nykaa retains its competitive edge as the preferred platform for brand launches, with marketing initiatives to provide brand visibility, along with its premium and sticky customer base,” it said.
Of the 22 brokerages covering the stock, 12 have a ‘buy’ or higher rating on the stock. While six have a ‘hold’ stance on Nykaa, the remaining four signal a ‘sell’. JP Morgan, HDFC Securities, and Macquarie are among the ones with a bearish stance on the company.
Meanwhile, the average price target set on the stock is INR 172.73 – a level that Nykaa is already trading at.
Moving on, Nykaa shares look positive on the technical charts. According to Rupak De, senior technical analyst at LKP Securities, Nykaa faces resistance at INR 187. However, a rally till INR 260-INR 300 level is possible in the next 6-7 months if the stock manages to cross this level, he added.
On the other hand, Kush Ghodasara, CMT and an independent market expert, said that Nykaa is trading at a premium when its fundamentals are taken into view. But, he expects the stock to rise up to INR 220.
For now, Nykaa’s Q3 FY24 results, which would also include the festive sales’ impact, are keeping the market hopeful. Still, it will be interesting to see if Nykaa can sustain growth in 2024.
[Edited by Vinaykumar Rai]
The post Losing Sheen? Decoding Nykaa’s Volatile 2023 & Calling Out The Risks Ahead appeared first on Inc42 Media.
