Nykaa climbs 6% as PAT more than doubles in Q3; should you buy, sell or hold the stock?

Shares of FSN E-Commerce Ventures, which operates fashion and beauty retailer Nykaa, traded higher by 2.43 per cent, or Rs 3.9, at Rs 164.4 apiece in the morning deals on Wednesday (February 7) after the company reported a good set of earnings for the December-ended quarter.

At the day’s high, the stock climbed 5.95 per cent to Rs 170.05 as against the previous day’s close of Rs 160.5 on the BSE.

For the December quarter, the company’s profit after tax (PAT) grew 106 per cent on year to Rs 17.5 crore, while the PAT margin increased 1 per cent on year versus 0.6 per cent in the same period last year.

Further, revenue from operations at the online services firm grew 22 per cent on year to Rs 1,788.8 crore in the quarter.

“We continue to drive improvement in profitability. EBITDA margin expanded to 5.5% for the quarter, a growth of 26 per cent  YoY driven by direct and indirect cost efficiencies," the company said in its earnings release.

Fulfilment cost as a per cent to revenue stood at 9.6 per cent for the quarter, compared to 10.7 per cent in Q3 FY2023. Similarly, employee expense as a per cent to revenue stood at 8.3 per cent for the quarter, compared to 8.7 per cent in Q3 FY2023, witnessing improvements through the last few quarters, the release added.

Brokerages' views

Global brokerage HSBC maintained its ‘buy’ call on the counter with a reduced target of Rs 240 from Rs 250. The brokerage noted that revenue growth of 22 per cent at the company during Q3 was strong amid a weak demand environment. Nevertheless, the EBITDA margin came in a tad lower than expected. The brokerage believes Nykaa, with its scale, is formidable in the beauty and personal care (BPC) segment, and fashion is on a superior track now.

Jefferies also retained its ‘buy’ view on the counter and slashed the target price to Rs 210 from Rs 230. The brokerage held that the company’s 3Q EBITDA missed forecasts as weak demand weighed across line items. The ad income was lower as BPC brands prioritised discounts over marketing spends while discounts rose on their label, impacting gross margins. Further, the BPC contribution margin compressed to a seven-quarter low.

Domestic brokerage JM Financial also reiterated its buy rating on the stock with a target of Rs 210, as it expects Nykaa to be a strong beneficiary of improving discretionary spends. Key risks, however, cited by the brokerage are the ramp-up in BPC competition and higher marketing expense needs.