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Nykaa hosted its 2023 Investor Day where the company enabled an opportunity for investors and analysts to interact with the senior management. The company used this event to elaborate on the ‘realistic’ TAM and consumer base potential for Nykaa, rationale for investments in technology, deep-dive on owned brands and strategic decision making in BPC, Fashion and Others segments. Though the management resisted from providing any forward guidance, we understand that Nykaa’s segments can grow at multiples of base industry growth rates with substantial margin expansion opportunity driven by higher BPC/Fashion consumption per capita and premiumisation. We continue to believe in Nykaa’s right to win in BPC (both B2C and eB2B) while expecting Fashion segment to focus on sustainable growth in premium fashion and hence reiterate our ‘BUY’ rating with Jun’24 TP of INR 210. 

* Robust industry tailwinds: The company shared multiple industry forecasts with all suggesting that Nykaa’s realistic TAM still has penetration opportunity while also growing at 2-3x of the base industry (29%/27% 2022-2030 CAGR for online BPC/Fashion). With India’s GDP per capita expected to reach USD 5,500 by 2030 (according to Google India 2023 report), average BPC/Fashion spends per capita are expected to reach USD 50/160 from USD 15/54 in 2022. In comparison, countries such as USA and Germany are already at USD 200+/1,000+ spends per capita in BPC/Fashion.

* Plan to focus only on a niche market in Fashion: While the primary reason for Nykaa’s diversification into Fashion was a larger TAM, management highlighted that the foray will aim to capture a more niche segment of the market with higher AOV while becoming a preferred partner for brands to launch new season styles. This focused approach can potentially enable faster profitability (compared to the peers) due to the non-discounting led approach and higher AOVs generating enough commissions to compensate for the cost of higher returns in Fashion. As of FY23, Nykaa Fashion accounted for 16% share of premium online fashion market with 25% contribution from new season merchandise and 20% sales at full price (discount less than 10%).

* Reiterate ‘BUY’, Jun’24 TP of INR 210: With Nykaa retaining market share despite the rise in competitive intensity, we expect BPC segment to continue being strong along with losses shrinking in Fashion segment. While Others segment could see a rise in investment, consolidated margins should demonstrate an improving trajectory as the management has persistently highlighted pursuing a measured approach. Our DCF-based valuation suggests a Jun’24 TP of INR 210 (36x FY27E EBITDA) with ~90% of the value being derived from BPC segment.

* Owned Brands creating their own identity: The company also used this event to highlight a couple of its owned brands (25 overall) – Nykd and Kay Beauty. The thought and care that the company has put into building these brands was evident with the brands also gaining substantial scale and customer love already. Nykd generated INR 850mn in GMV in FY23 while turning EBITDA positive in Mar’23. The brand has gained ~1mn unique customers with distribution across Nykaa platforms, D2C website, other marketplaces, 4 EBOs and 1,000 MBOs and has also become Top 3 Bra brand on Amazon in <1.5 years. Simultaneously, India’s first celebrity beauty brand, Kay Beauty has 235+ SKUs with FY23 GMV reaching INR 1,279mn. 

* Technology team creating robust and fast platforms: Nykaa’s tech platform has‚4 9s? availability, implying only a maximum of 52 minutes of outage in a year. Further, the company has been investing in building its ad-tech platform that would drive more real estate as well as use cases for brands’ advertising on Nykaa. Once fully operational, the platform would enable near-real-time ad setup and management as well as D+1 ad performance reporting, resulting in higher discovery opportunities for brands and increased ad revenue for Nykaa. The team is also experimenting with Github and Slang Labs to enhance productivity of engineers and better consumer experience, respectively.

* Realistic consumer base potential of over 150mn: ~18mn unique consumers have transacted on Nykaa BPC since inception, 30% of overall online BPC shoppers (60-70mn) in India. As per WEF/Bain Analysis, in 2022, India had 18mn high income (>INR3.2mn) and 115mn upper income (INR 0.8-3.2mn) households. Management expects potentially 2 members per household in these income brackets could be Nykaa customers, implying potential consumer base of over 150mn. By 2030, upper and high income households would account for 50%+ households in the country. Further, 92% of e-commerce transactions are done by Gen Z & Millennials, who account for only 42% of the population. As Gen Z population becomes a larger force in earning population, a higher wallet share would shift to e-commerce.

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