Elara Global Research recommends to subscribe Nykaa IPO; check reasons behind the rating

The initial share sale of FSN E-Commerce Ventures, which runs an online marketplace for beauty and wellness products Nykaa, is all set to open for public subscription on October 28.

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The company plans to raise Rs 5,351.92 crore through its public issue at the upper price band. The price band has been fixed at Rs 1,085-1,125 a share. The e-commerce venture is promoted by Falguni Nayar and backed by private equity firm TPG. The three-day initial public offering will conclude on November 1, according to the red herring prospectus (RHP).

Elara Global Research has recommended subscribing to Nykaa IPO.

Rating: Subscribe
Price Band: Rs 1085 – 1125
Opening date: 28 Oct 2021
Closing date: 01 Nov 2021

Here are the reasons behind the rating:

Favorable metrics in H1 led by Wave II; conversion rates low

Nykaa’s Q2 monthly active users (MAUs) grew a sturdy 50% to 20 million from 13.5 million, partially led by digitization shift during Wave II. Customer conversion stood low, range-bound at 3-3.5%. AOV waned 4% in 5MFY22 from FY21 levels, largely as expected. AOVs had surged 36% YoY in FY21, on the COVID-bred digital shift. "We expect order values to trend lower in the next few quarters as normalcy is restored, post which growth will be inflation-led. The fashion segment’s MAUs doubled YoY to 14.7 million on a low base and AOVs up 17% to Rs 3,197 in 5MFY22," Elara Global Research said.                  

Multiple growth drivers intact across segments    

Nykaa enjoys strong customer recall in the Beauty and Personal Care (BPC) segment, led by: 1) trust (original products); 2) differentiated marketing/content strategy; 3) first-mover advantage/competitive edge; and 4) sticky existing customer base. Increased penetration and higher frequency are key growth drivers for BPC. Also, AOV should be an additional growth trigger, medium-to-long term. The fashion segment (forming ~25% of GMV) is estimated to grow at a faster pace (50% CAGR in FY22E-27E) on a small base, propelled by AOVs and frequency, which are higher versus that for the BPC segment, Elara Global Research added.    

BPC – Strength’s eclipse concerns; Fashion – Snares aplenty

Nykaa does not enjoy the first-mover advantage in the fashion segment currently, dominated by incumbents such as Ajio, Myntra, Amazon, Flipkart, etc. Also, the exclusivity of premium brands in the fashion segment is amiss, which may force steep discounting so as to compete with larger players. Further, other concerns such as: 1) higher return order percentage; 2) poor customer loyalty; 3) smaller fashion brands present on almost all platforms; and 4) low-margin business exist. But BPC is not overwrought with many risks, medium-term. This may sustain till horizontal (super) apps partner with Nykaa’s premium global brand partners to pose a credible challenge. Yet, replication of Nykaa’s brand perception may be difficult on its innovative content (marketing-led).        

The turnaround in fashion – Key to valuation upgrade      

Nykaa is likely to trade at a huge scarcity premium versus global peers in the online BPC space (trading at 3x FY24E EV/sales average). We believe, Nykaa could trade at one-year forward EV/sales of ~6-8x, purely based on its core BPC offering. However, the issue price is already at 10.2x FY24 EV/sales, factoring in a premium multiple, backed by growth in the fashion business. Nevertheless, successful execution in the fashion segment is key to valuation re-rating, in the mid-to-long term. Expansion in fashion may mar profitability given heavy investments in discounts, marketing. Multiple re-rating to 12-14x one-year forward EV/sales should percolate overtime on Nykaa’s multi-platform approach (successful execution in Nykaa Man and Nykaa Fashion), which is a niche platform currently (largely BPC led) – Subscribe, Elara Global Research added. 

(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)