Q1FY24 Review: Nykaa: Soft quarter due to weak demand

14 Aug 2023 , 12:34 PM

In Q1, Nykaa’s sales growth decelerated to 24% from 34% in Q4 due to a decline in BPC and Fashion GMV because of weak demand (vs. Q4 growth). However, Nykaa gained market share in both the divisions, as per the company. Ebitda margin of 5.2% expanded by 120bps YoY and was slightly above estimates, due to lower-thanexpected losses in the B2B business. Owing to industry slowdown, Fashion growth was weak. Still, the company is optimistic about growth in Q2, in line with the trends in July. Analysts of IIFL Capital Services keep their estimates unchanged and maintain BUY on Nykaa, considering its high growth prospects in the medium-to-long term in India’s under-penetrated e-commerce landscape. TP of Rs190. 

Slight margin beat due to lower losses in B2B: 

Revenue grew by 24% YoY, driven by 19% growth in BPC while Fashion growth of 13% continued to be subdued. BPC GMV grew by 24%, but sales growth was lower on fall in ad revenues because of pull-back of spends by D2C brands and nearterm disruptions due to change in ad platform. Fashion orders were flat YoY vs BPC growth of 17%. AOV for BPC/Fashion grew by 4%/9% YoY. Ebitda margin of 5.2% (+120bps YoY) was slightly above IIFLe of 4.9%, due to lower-than-estimated losses in the B2B business. BPC/Fashion contribution margins were slightly below IIFLe. 

Soft quarter for Fashion: 

Growth in Fashion was impacted due to slowdown in the category; but as per the company, Nykaa performed better than industry and gained market share. Moreover, growth recovered to historical levels in July and the company is optimistic about Q2. Mgmt reiterated its target of profitable growth in Fashion and is working on increasing salience of high-margin categories like women’s Indian wear, bags, etc., and scaling up own brands. In BPC as well, Nykaa gained market share and expects growth to pick up in subsequent quarters. 

Maintain Buy: 

Analysts of IIFL Capital Services keep their estimates intact and forecast 20% Ebitda Cagr for the BPC business in FY23-42- quite reasonable, given the nascent BPC market. Analysts of IIFL Capital Services have a BUY rating on Nykaa due to high growth prospects of the online BPC/Fashion market likely to grow by 29%/27% Cagr till 2030. BPC continues to be robust and Fashion is working towards capturing higher share in the Premium Online Fashion market. Moreover, losses in non BPC divisions seem to have peaked out and risks from competition seem to be overstated given Nykaa’s strength across value chain.