Nykaa: Overhead costs dampen margin expansion

7 Sep 2023 , 10:30 AM

FY23 was a mixed bag. While BPC contribution margin expanded 445bps YoY, the overall Ebitda margin expanded only 65bps due to higher overhead costs in Fashion and other segments. The Fashion division reported 30% NSV growth — lower than 32% growth for BPC, despite a low base. At Rs 4bn, FCF was negative owing to higher capex and increase in working capital. ROE/ROIC deteriorated to 1.8%/4.3% from 4.5%/6% in FY22. Analysts of IIFL Capital Services cut their FY24/25/26 Ebitda estimate by 1%/8%/10%. 

Fashion – subpar performance: 

In FY23, fashion’s GMV ex. MBO grew by 40.2% YoY, driven by 20%/16.9% growth in number of orders/AOV. Contribution margin contracted by 69bps YoY to 2.1% of NSV. However, Ebitda losses widened sharply to Rs1.3bn from Rs704mn in FY22. At 33%, the take rate of marketplace model (75% of Fashion NSV) continued to be healthy. After fulfillment costs, inventory model margins at 41% were higher than 27% for the marketplace model. Working capital (WC) days increased significantly to 61 days (-3 days in FY22), due to the scale-up of own brands. 

BPC on strong footing: 

The Beauty segment GMV/revenue grew by 33%/32%. At 25%, annual transacting customer growth was healthy; rising to 10mn. Marketing support revenue grew by 34% — higher than 31% growth clocked by the net sales via inventory model. BPC’s contribution margin expanded by 482bps YoY to 26.5% of NSV (up 445bps YoY as % revenue), because of the expansion in gross margin (GM) and fulfillment/marketing cost per order reducing by 19%/11%. 

Cash outflow of Rs4bn; return ratios correct further: 

FCF outflow stood at Rs4.2bn vs Rs4.9bn in FY22, due to higher capex. In FY23, WC days increased to 70 from 66. ROE and ROIC deteriorated to 1.8%/4.3% vs 4.5%/6% in FY22. The company opened 41 physical stores in FY23, taking the total to 145 and opened 13 warehouses as well. For FY24/25/26, analysts of IIFL Capital Services cut their Ebitda estimates by 1%/8%/10%, due to slower sales growth in BPC and higher ramp-up of losses in the Fashion business.