Nykaa’s share price: Will Nykaa recover after Macquarie dealt a blow to its stocks?

Nykaa shares recovered initial losses to end flat on Monday, after Macquarie initiated coverage on the cosmetics-to-fashion retailer with a target price that implied a 23 per cent downside in its stock. The brokerage assigned an 'underperform' rating on Nykaa with a target price of Rs 115. 

The Nykaa stock finished 0.1 per cent lower at Rs  149.6 apiece on BSE, having fallen as much as 2.8 per cent to Rs 145.6 apiece during the session.
     
Nykaa shares have underperformed the benchmark indices so far this year, having lost 3.8 per cent of their value while the Sensex gauge has declined 2.7 per cent. 

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Analysts are divided on the company, giving the bulls and the bears enough to engage in a tug of war. Zee Business research takes you through some of its findings about Nykaa:  

Positives 
NYKAA shares have gone through a huge correction in less than a year. The stock has dropped from its peak of Rs 315.86 on April 11, 2022 to nearly half its current price. The decline in price has led to an unsustainable valuation. However, the group is likely to get support from the beauty and personal care (BPC) business, which supports 77 per cent of the current price. 

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The BPC section is Nykaa's defensible and high-growth business in the medium term. A cyclical slowdown in BPC and fashion businesses is priced in.

The group can also draw some positivity from growth in its private-label business, which is a high-margin business. However, its current contribution to overall revenue is a mere seven per cent. It is estimated to get a shot in the arm in the near future and rise to 16 per cent by FY25. It will be more than the BPC's current contribution of 10 pe rcent.   

Some other factors that work in favour of NYKAA include: 

• a strong customer base

• prudent capital allocation

• good profitability metrics

Morgan Stanley recently maintained its 'overweight' on the Nykaa stock with a target price of 206. It can be seen as a positive sign and can reinforce shareholders' faith in the company. 
Negatives

The market for beauty products is shifting to small cities and offline stores, which can dent Nykaa's margin since the lion's share of the company's customer base comes from metros. With a limited history of operations, it will be a daunting task for the company to bridge the gap and reach out to customers in small cities. 

With more players and intense competition in the market, Nykaa shares may go through an overhang and slide further. 

If the company's fashion segment continues its lean patch, Nykaa's profit is most likely to take a hit. The company is known for its premium products, but such products form a much smaller market than its beauty and personal care (BPC) business. Even if the premium product section gains momentum, it can do little to rescue Nykaa's dwindling fortunes. 

Like many other companies in the beauty and fashion product segment, it is an uphill task for Nykaa to keep customers loyal to its products. In a volatile market, customers are discount-driven and value-sensitive, have different personal requirements, fashion styles, or a strong preference for high-end luxury products. They can easily ditch an established brand and pose a threat to a renowned company like Nykaa. 

Another significant challenge before Nykaa is to deliver relevant, engaging products. If it falls behind in this important variable, its business may take a hit.