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Nykaa reported sequential improvement in EBITDA margin for the first time in Q4, post the seasonally best Q3. This was driven by 36%YoY GMV growth with BPC/Fashion/Others growing at 29%/38%/170%, respectively. Consolidated GMV for Q4FY23 was at INR 24.4bn with INR 12.9bn in NSV and INR 13.0bn in revenue. As we highlighted in preview note, Gross Margin improved by 54 bps QoQ to 44.2% with Fashion reverting back to 76.5% GM after the unexpected dip in Q3FY23. On costs, company exercised tight control with fulfilment costs in BPC at all time low of INR 86 per order, as the regional warehousing strategy plays out. However, the consequential rise in D&A results in PAT margin declining by 30bps. Net addition of just 0.4mn/0.1mn customers in BPC/Fashion makes us lower our GMV estimates but we still find the downside protected and retain ‘BUY’ rating with a Jun’24 TP of INR 210 (~68% upside), 9% lower than our prior TP

* Pink Love sale could not overpower the subdued demand environment: While Nykaa management has continuously reiterated the minimal impact of macro environment on its premium customer base and hence delivering 29% YoY GMV growth, we believe the pressure on discretionary spends in Q4FY23 did finally impact Nykaa’s BPC segment. This was reflected in just 0.4mn net customer addition (0.5mn in Q4FY22) and 7.4% decline in orders (vs 4.5% in Q4FY22) despite the company coming up with a new sale during Valentine’s Day. The company did already communicate in revenue update release in April that Fashion segment did suffer due to the deteriorating discretionary spends.

* Management profusely reiterated focus on stabilising costs below contribution profit: With employee/other expenses rising 51%/76% YoY in FY23, management spent considerable time in highlighting the reasons for this rise – store/warehouse build-out and tech team addition (73% YoY growth in costs). Going forward, the company expects a maximum of 50 store addition in FY24 with minimal warehouse expansion in comparison to store/warehouse area increasing by 43%/79% in FY23. This should result in stabilising capex and D&A in the future. Management also suggested prudence about people costs in the core business, though incremental stores would require hiring.

* Fulfilment costs in control, marketing expenses in focus now: In Q4FY23, Nykaa’s fulfilment cost per order for BPC segment was down to INR 86 and the company expects it to sustain around these lower levels. Fashion fulfilment costs have still not dropped sharply due to the 3rd party nature of the business. Going forward, the company expects to see stronger leverage in marketing costs with existing/new user mix in GMV at 78% in BPC and ~50% in Fashion, though they suggested that it is tougher to lower marketing costs in Fashion. Management also mentioned that FY23 was the peak loss year for Fashion (INR 1.1bn EBITDA loss) and the losses should drop going forward.

* Owned brands ramping up well: As of Q4FY23, owned brands accounted for 12.4%/13.9% of BPC/Fashion GMV with four of these owned brands having crossed INR 1bn in GMV. Nykaa Fashion grew GMV on NykaaFashion.com at 36% while GMV on other platforms grew 46% YoY. With 13 owned brands and 3 collaborations, Nykaa is now able to distribute these and 15 3rd party brands across EBOs, MBOs, general trade and Nykaa Fashion MBOs with 50%+ GMV of owned brands being sold on 3P platforms

* Maintain ‘BUY’, Jun’24 TP reduced to INR 210: We have tweaked estimates with revenue FY25E GMV declining by 5.0% while EBITDA margin improves to 8.9% (+55bps). This is due to a sharper GMV decline in investment phase Others segment, as we believe the company will be scaling less aggressively. We continue to estimate Nykaa’s BPC segment to generate INR 10bn+ EBITDA in FY25E. Our segmental DCF suggests 95% value coming from BPC with Fashion and Others accounting for the remaining ~5%. Hence, our Jun’24 TP stands at INR 210, revised 9% lower from INR 230 earlier. Key Risks: Heightened competitive intensity in BPC from Reliance/Tata and sustained operating losses in Fashion/Others.

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