FSN E-commerce Ventures IPO (Nykaa IPO)

About the company:

The festive season is here and so is another money-making opportunity. The IPO that we will be discussing today is India’s favorite beauty destination, FSN E-commerce Ventures, or as we all know it, Nykaa.

Issue Details:

Objects of the Issue:

Proceeds from fresh issue are expected to be utilized towards:

Ø Setting up of retail stores – Rs. 42 crores

Ø  Setting up of warehouses – Rs. 42 crores

Ø  Repayment of borrowings – Rs. 156 crores

Ø  Expenses to acquire and retain customers by enhancing the visibility and awareness of the brands – Rs. 234 crores.

Ø  Remainder for general corporate purposes.

Industry Overview:

Nykaa operates two business verticals – Beauty and Personal Care Products & Fashion. Before we deep dive into the company, it is essential to understand these two industries.

BPC Industry

The unorganized channel dominates the Indian Beauty and Personal Care (BPC) market. With Indian consumers evolving their BPC shopping habits, the unorganized BPC market's share fell to 72% in 2020 from 77% in 2016. In India, the BPC market was worth Rs. 126,700 crores in 2019, having grown at a CAGR of 13% over the last three years. It is projected to grow at a CAGR of 12% to reach Rs. 198,100 crores in 2025.

Within the BPC market, the online BPC market has grown at a promising 60% CAGR over the last four years, penetrating 8% of the country's BPC market by 2020. Growing online shopping penetration in Tier 2+ cities, increasing demand for a convenient shopping experience, increasing adoption of e-commerce by Gen Z and Millennials, the category's key growth enablers, and increased consumer trust in products purchased online are the primary drivers of the market's growth.

Fashion Industry

Like the BPC market, the organized component has risen at a significantly quicker rate, with its share increasing from 29% in 2016 to 37% in 2020.

The Indian online fashion business has developed at a promising 25% CAGR over the last four years, capturing 12% of the country's fashion market in 2020.

Nykaa has a total addressable market of Rs. 1,068,300 crores across BPC and fashion.

Company Overview:

Nykaa, incorporated in 2012, is a digitally native consumer technology platform that provides consumers with a content-led, lifestyle retail experience. With a diverse portfolio of BPC and fashion products, including its own brand products, it has established itself not only as a lifestyle retail platform but also as a consumer brand. The company has an omnichannel presence with both online mobile applications, websites, mobile sites and physical stores present in three formats namely – Nykaa Luxe (luxury beauty), Nykaa On Trend (best-selling products across brands) and Nykaa Kiosks (free standing units in malls which primarily sell Nykaa’s own products).

Last quarter, the company's online platforms accounted for 90% of its business. Nykaa had 55.8 million cumulative downloads across mobile applications as of August 31, 2021. As for the offline stores, it debuted its first store in 2014 and has now expanded to 80 stores across 40 cities.

Portfolio of Owned Brands:

The company owns 15 brands, many of which have a high recall and operate independently. Third-party contractors are in charge of manufacturing for such brands. The owned brand portfolio is implemented by identifying market gaps, both in terms of varied consumer wants and multiple price points, and then building brands to address these needs. Some of these brands are Nykaa Cosmetics, Nykaa Naturals, Kay Beauty, Dot & Key (recently acquired), Twenty Dresses, Nykd by Nykaa, Pipa Bella, RSVP, Gajra Gang, etc.

Robust Operational Metrics:

Nykaa seems to have improved its operational performance over the last few years right from a number of visits to gross merchandise value (GMV). The growth in the operational metrics is being led by the Fashion vertical which also happens to be the fastest growing fashion platform in India.

Strong Financial Performance

Nykaa has posted a good set of numbers as seen above. Revenue and EBITDA saw an uptick of 48.22% CAGR and 176.88% CAGR, respectively. The company turned profitable in FY21. Nykaa has also posted a consistent improvement in its margins as well as returns to its shareholders. Improvement in margins is supported by lower advertising and marketing costs as a % of revenues and higher average order value.

The debt-to-equity ratio has continuously declined to 0.38, indicating deleveraging and strengthening of its balance sheet. The company will be utilizing a part of its fresh issue to repay debt, which will further lead to a decline in this ratio.

Peer Comparison – FY20:

A huge chunk of Nykaa’s revenue is derived from its BPC vertical. Thus, it would be prudent to compare it to online BPC platforms like Purple and MyGlamm. The brief summary given below, clearly shows how far behind the competition is. While both the competitors were EBITDA negative, Nykaa has been EBITDA positive since the past three years. Additionally, while Purple and Nykaa started their journey around the same time, Nykaa has managed to grow at a much larger scale due to its differentiated content-led strategy. Guarantee of authenticity is unique to Nykaa which has enabled it to be trusted by customers. Even in terms of SKUs, which are unique product codes for different categories and subcategories of products, Nykaa has a huge lead.

Source: Company, MOSL

What sets Nykaa apart?

Ø  The company has expanded from being a beauty e-tailer to one of the largest lifestyle-focused consumer tech platforms.

Ø  It reports one of the highest Average Order Value among leading online BPC players and has developed the largest luxury BPC platform in India.

Ø  Nykaa also enjoys high customer stickiness evidenced by 70% of its GMV coming from existing customers.

Ø  The company’s focus on educating consumers via digital content through Nykaa TV, Nykaa Beauty Book, Blogs, etc. has differentiated it from other BPC players. It has leveraged content across social media platforms to inspire consumers and build brand awareness.

Ø  Due to its strong emphasis on curation and variety in offerings, Nykaa Fashion is one of the fastest growing fashion platforms.

However, the company does have a few risks:

Ø  Nykaa operates in highly competitive and seasonal industries. Additionally, the company could be confronted with increased competitive intensity due to the possibility of new entrants with deeper pockets when it reaches a certain scale.

Ø  It also has concentration risks in terms of product categories and vendors. The Top 3 categories contributed 71% of GMV in FY21. However, the company is gradually de-risking its business from such a concentration.

Ø  Due to low margin cushions, failure to retain customers and maintain average order value could adversely affect profitability.

Samco’s Stance:

Considering the lower and upper price bands of Rs. 1,085 & Rs. 1,125 and an EPS of Rs. 1.39 per share, the P/E ranges between 780x to 809x, which is extremely expensive.

However, Nykaa is one of the few profitable players in this space and has a huge and underpenetrated addressable market. The brand also has a strong resonance among millennials and Gen Z. We believe that multiple levers are in place for future growth given the company’s business model and differentiated strategies.

Thus, we recommend investors to ‘Subscribe’ to Nykaa’s IPO.

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