Nykaa soars 10% in 2 days; global brokerages divided on cosmetics-to-fashion retailer after Q2 results

Nykaa shares rose sharply on Tuesday, continuing to rise for the fifth trading session in a row, after the parent of the cosmetics-to-fashion retailer, FSN E-Commerce Ventures, reported a strong set of quarterly numbers. The stock of Nykaa strengthened by as much as Rs 7.2, or 4.9 per cent, to Rs 154.7 apiece on BSE, taking its total gain to 10.2 per cent in two days and 10.9 per cent in five. 

Nykaa Q2 results: Key highlights

After market hours on Monday, FSN E-Commerce reported a more than 50 per cent year-on-year jump each in profit before tax and net profit to Rs 13.3 crore and Rs 7.8 crore for the quarter ended September 30, respectively. Its revenue from operations grew 22 per cent to Rs 1,507 crore for the quarter under review, while its earnings before interest, taxes, depreciation and amortistaion (EBITDA) increased 32 per cent to more than Rs 80 crore, according to a regulatory filing.

The Nykaa parent's margin, a key measure of profitability, improved by 30 basis points on a year-on-year basis to 5.3 per cent for the fiscal second quarter.

Its quarterly gross margin, however, declined by 40 bps to 43.1 per cent.   

BPC and fashion segment registers consistent traction

The company clocked 23 per cent growth in the gross merchandise value (GMV) of its beauty and personal care (BPC) segment on the back of order growth of 19 per cent, according to a statement. The GMV of the fashion segment expanded 27 per cent on order growth of 21 per cent. GMV, a key measure of income, is the total value of goods sold on a platform over a given period. 

Both the key segments of the company, offering over 3,600 domestic and international brands, logged consistent growth, benefitting from exclusive tie-ups with international brands.

The company registered a significant improvement in its average transacting users (ATU), with growth of 18 per cent in BPC and 30 per cent in fashion.

Gross margin misses analysts' estimates

According to Zee Business research, Nykaa's gross margin for the September quarter was below expectations due to a higher mix of e-B2B and lower advertising income.

The e-tailer is facing increased competition from new home-grown brands, which is pushing discounts higher and poised to hurt the company's margin going forward, according to the research.

Analysts at Zee Business also pointed out that negative comments regarding the company over different social media channels are harming its reputation, making it difficult to retain customers. “Consumers can be discount-driven, value sensitive, have different preferences and personal requirements, fashion styles or possess a strong preference for luxury high-end products. If the company fails to deliver relevant, engaging products it may fall behind in this important variable which could affect its business,” they added.

Here’s what brokerages suggest on Nykaa post-Q2 earnings

Global brokerages are largely divided on Nykaa after the company’s earnings announcement. Morgan Stanley maintained its ‘overweight’ rating on the Nykaa stock with a target price of Rs 173, while Jefferies retained its ‘buy’ call with a target of Rs 200, implying an upside of over 35 per cent from the previous close.

JPMorgan and Macquarie, on the other hand, are bearish on the fashion products retailer, maintaining their ‘underweight’ and ‘underperform’ ratings, respectively. JPMorgan's target stands at Rs 125, which translates into a potential downside of 15 per cent.

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