Nykaa: Long runway for growth

19 Jun 2023 , 10:16 AM

Recommendation: Buy

Target Price: Rs. 190

While the BPC division is on a strong wicket, Fashion is working towards capturing higher share in premium online Fashion market. Further, the headroom for growth is huge, given the under-penetration of BPC/fashion e-commerce in India. At 45x FY25 BPC EBITDA, valuations are reasonable given the growth opportunity.

Favorable industry dynamics

India’s nascent online BPC and Fashion industry is expected to grow by 29%/27% CAGR till 2030. This will be driven by multiple factors: 1) Increase in per-capita spend on BPC/Fashion (lowest among countries) from USD15/54 to USD50/160 by 2030; 2) Increase in purchasing power, resulting in 50% of total households (HH) lying in upper, mid and high-income class category (target HH of 197m) by 2030. 3) BPC and Fashion remain under-indexed in the overall e-commerce penetration. 

BPC on a strong footing; prudent investments to support growth businesses

In BPC, Nykaa has established strong moats acquiring 18mn customers from a universe of 60-70mn online BPC shoppers. Moreover, with average BPC spend per customer of USD80, Nykaa has successfully captured higher share in premium BPC consumers. In Fashion, Nykaa’s aim is to capture higher share in the niche and more profitable premium online Fashion market, in which it currently has a share of 16%. Despite investments in warehouses, marketing, private labels and tech infra, Fashion division maintained its guard rail of positive contribution profit. Going ahead, the target will be to improve conversion rate (1% currently versus 3.7% in BPC), increase GMV share from existing customers, profitably expand private labels and sustain investments in new customers.

Upgrade to Buy

Analysts at IIFL Capital Services have upgraded Nykaa as they think that major investments in physical assets are behind us and losses in non BPC businesses seem to have peaked out. Their DCP-based TP of Rs190 builds in 20% EBITDA CAGR for the BPC business FY23-42 — quite reasonable given the nascent BPC market. Currently, the stock is trading at 45x FY25 BPC EBITDA, which is reasonable considering the growth opportunity. Risks from competition seem to be overstated due to Nykaa’s strength in customer engagement, omni-channel presence and large customer base. Discounting is unlikely to be a strategy, which will work beyond a point in this category.