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Seasonality dents growth and bottom-line

FSN E-Commerce Ventures (Nykaa) reported sequential revenue de-growth as well as decline in margins driven by 17% QoQ decline in BPC GMV. The company saw overall GMV growing by 49% YoY driven by 32%/88% YoY growth in BPC/Fashion with Others GMV (includes Nykaa Man, eB2B etc) growing 371% YoY to reach INR 1.8bn in FY22. The sharp uplift in gross margin to 46.3% in Q3FY22 proved temporary with Q4FY22 gross margin deteriorating to 43.7% due to lower mix of higher-end BPC products. The company continues to invest in ramping up omni-channel presence with 105 stores in 49 cities along with 23 warehouses in 11 cities that are now enabling serviceability to 98% of pincodes in India. Despite decline in marketing and advertisement expense and fulfilment expense to 12.0% and 9.8% of revenue, respectively, in Q4FY22, the decline in gross margin and ensuing operating deleverage resulted in the company posting EBITDA margin of 4.0%, compared to 6.3% in Q3FY22. We believe the investments in fulfilment capabilities, owned brands and brand building will drive strong operating leverage as the company gains further scale driven by 3,000/1,500 brand partnerships in BPC/Fashion. We retain ‘BUY’ rating with a Jun’23 TP of INR 1,730 (~28% upside), 18.4% lower than our previous TP, largely driven by an increase in WACC to account for rise in risk-free rate and market volatility.

GMV saw seasonal decline from Q3FY22 to reach INR 18bn: Nykaa’s GMV dropped by 12.1% sequentially, higher than the drop seen in the same quarter in FY21 (9.7%). With Q3 being the best quarter seasonally due to festive and wedding season, GMV decline was driven by -17.3% and -0.3% QoQ change in BPC and Fashion, respectively. We postulate that this decline would also have been steered by the Omicron wave in January 2022 as well as inflationary impact.

Reversal of gross/EBITDA margin to 43.7%/4.0% from 46.3%/6.3% in Q3FY22: As the GMV mix of higher margin, cosmetics and skincare products declined, the company saw gross margin declining by 260bps sequentially. While the company did curtail spends on advertising expense (12.0% of revenue) and fulfilment expense (9.8% of revenue) benefitted from newer warehouses becoming operational, decline in revenue (-11.4% sequentially) instigated operating deleverage, resulting in EBITDA margin also falling by 230bps to 4.0%

Sequential drop in visits, unique visitors and average order value for BPC: The company saw BPC visits, unique visitors and AOV decline to 215mn, 21.2mn and INR 1,732, respectively with annual unique transacting shoppers rising to 8.4mn. While the sequential drop in traffic data was expected due to seasonality of BPC business, decline in AOV was a result of the company lowering minimum order thresholds for free delivery. The company continued to attract new shoppers on the platform as seen in the incremental increase in shoppers of 0.5mn over Q3FY22.

Maintain ‘BUY’, Jun’23 TP of INR 1,730: While we have tweaked estimates with near term growth getting pushed further out as we continue to see inflation and rate hike risks rise globally, but a rise in WACC to 12.5% (from 11.5% earlier) has resulted in a revised TP of INR 1,730 (INR 2,120 earlier). We believe Nykaa has made strategic investments in fulfilment capabilities, owned brands and brand recognition that will continue to bear fruit in the medium-term. Key Risks: Stronger than expected competitive environment and non-sustenance of higher AOVs in Fashion.

Nykaa’s Curation capabilities and distribution make it the partner of choice for brands: As of 31 March 2022, Nykaa has partnered with 3,000/1,500 BPC/Fashion brands with 300k/5mn+ SKUs. IN BPC, Nykaa has introduced 22 foreign brands in the country and is the only platform that has enabled this access across 27,800+ pincodes of India. The curations such as Hidden Gems, Nykaa Beauty Bazaar, The Responsible Collection and The Plus Size Store have found the perfect way to engage with the customer base and helping the customers with the right filers and sorting methods.

Physical stores accounted for 7.5% GMV share of BPC: As of 31 March 2022, Nykaa has 105 physical stores in 49 cities across the three formats with average store size of 940 sq ft. In FY22, these physical stores generated INR 3,442 in GMV per sq ft per month, implying GMV of INR 3.2mn+ per store per month on average and the physical stores accounting for 6.6%/7.5% BPC GMV for the year/quarter.

SuperStore business will help retailers access BPC and Wellness brands directly: Nykaa launched eB2B business in Q2FY22, SuperStore by Nykaa to solve for accessibility and distribution pain-points for retailers and brands, respectively. The company plans to distribute BPC and wellness brands to beauty stores, pharmacies, salons and sophisticated kirana stores. As of Q4FY22, Nykaa has onboarded 18,806 retailers in 302 cities with 134 brands listed on the platform.

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