What is Nykaa all about?
Nykaa was founded in 2012 by star investment banker, Falguni Nayar, who led Kotak’s Investment banking division for a long time and was seen as a key driver of its investment banking success. Nykaa is a totally digital platform selling beauty and personal care products as well as apparel and accessories. It plans to leverage on the fast-growing discerning Indian customer looking for brand ownership plus value for money.
While the beauty and personal care products are sold under the “Nykaa” banner, the apparels and accessories are marketed under the “Nykaa Fashion” banner. As of March 2021, Nykaa had over 197,195 stock keeping units (SKU) under the beauty and personal care offering spread across 2,476 brands. In addition, Nykaa Fashion has about 18 lakh SKUs spread across 1,350 well-known apparel and accessory brands across the world.
Nykaa offers an omnichannel experience, combining online and offline stores for fulfilment. Apart from its robust online presence, Nykaa operates through 73 offline brick-and-mortar stores across 38 locations in India.
More about the Nykaa IPO
Nykaa had filed its DRHP with SEBI couple of months back and is one of the recent approvals granted by SEBI. While price band and other details are to be worked out, the IPO will be a combination of fresh issue of shares and an offer for sale to give exit to early investors in the company.
The IPO will comprise of a fresh issue of Rs5,349cr and an offer for sale of 4,31,11,670 (4.31 crore) shares. Considering that overall IPO size is expected at Rs4,000cr, the OFS portion will be worth around Rs3,475cr. That would imply an approximate price band of Rs800-Rs850 per share. We have to await final price band decision by Nykaa, which is expected shortly.
Utilization of IPO proceeds
Let us first spend a moment on the OFS portion, which will not result in fresh fund infusion. The promoter Nayar family holds 53.5% in Nykaa. There are some family offices that have invested in the company including the families of HS Banga, Sunil Kant Munjal and Narotam Seksaria. In addition, global PE investors including Steadview Capital, TPG Growth Fund and Lighthouse India hold 10% between them. The details of participants in the OFS is yet to be confirmed by Nykaa.
The fresh issue of Rs5,349cr will be used by Nykaa Retail and Nykaa Fashions to expand their store network as well as in expanding their warehousing capabilities to provide adequate logistical support to the digital business. In addition, Nykaa also proposes to use some of the funds to repay or prepay its debts as well as invest in long term brand building.
A peek at the financials of Nykaa
The table below captures a gist of the financials of Nykaa for last 3 years.
|Particulars||FY 2020-21||FY 2019-20||FY 2018-19|
|Profit After Tax||Rs61.95cr||Rs(16.34cr)||Rs(24.54cr)|
|Net Profit Margins||2.53%||-0.92%||-2.20%|
Net margins are still small to begin with but the company has just turned around to profits. Also, one of the key selling points the company has been constantly hinting at is that Nykaa is one of the rare breed of profitable digital plays in India. A lot of the future financial traction will predicate on how the current investments in stores, warehouses and brand pans out in the coming quarters.
What is the investment story?
Evaluating digital plays on traditional parameters like P/E or P/BV or even EV/EBITDA does not help. A better way is to look at the strengths and risks and take a qualitative view. On the positive side, Nykaa brings a unique digital shopping experience for beauty and lifestyle products. The omnichannel approach of combining offline, online, third party brands and own brands is a big advantage. The profit factor in the digital story cannot be ignored.
One cannot ignore the risks, though. There appears to an absolute gold rush for digital IPOs and these can create risks of excesses in valuation. Also, it remains to be seen if the Indian market can absorb the kind of capital hunger that IPOs are showing. For now, it is all about celebrating the digital story.