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Nykaa is a unique player with PAT level profitability while logging a robust 48.2% FY19-21 CAGR. Going forward, we expect Nykaa to continue strengthening its market leadership in Beauty and Personal Care (BPC) while enhancing market share in the larger Fashion segment. With its focus on 3Cs – Content, Curation and Convenience, Nykaa has become the trusted platform for both customers as well as brands. As of Aug 31, FY21, Nykaa offered 3.1mn SKUs from 4,078 brands with cumulative transacting consumer base of 13.1mn, making Nykaa the largest specialty retail platform in India. Our proprietary analysis of Nykaa’s customer engagement metrics and advertising trends of BPC/Fashion brands suggests that Nykaa is likely to become the preferred RoI driven advertising platform for partner brands that will enable robust margin expansion. Furthermore, we foresee the aggressive omnichannel expansion to drive significant brand recall and organic customer acquisition for the company.

We initiate on Nykaa with a ‘BUY’ rating and Dec’22 TP of INR 2,480, projecting CAGR of 38%/86% for Nykaa in BPC/Fashion GMV over FY21-26, while expecting EBITDA margin to reach 15.4% (7.6% as % of GMV) in FY26. We value Nykaa using DCF valuation approach on a consolidated company basis with 10.5% cost of capital and 6.0% perpetuity growth rate. Key downside risks to our TP include 1) failure of Fashion business to ramp-up, 2) margin dilution due to expansion coming at the cost of premiumisation and lower spends per customer, and 3) a sharp rise in competitive intensity.

Nykaa to strengthen market leadership in BPC with sturdy ramp-up in Fashion:

As of FY21, Nykaa holds 37%/1.5% market share of online BPC/Fashion. Strong traffic metrics (220mn visits and 21mn MAUs in BPC) with broadest brand partners (2,644 brands offering 255k+ SKUs) in BPC provide durable moats to the company to sustain its market share. Simultaneously, Fashion would grow as a cross-sell on the BPC consumer base to reach 9% market share by FY41. We expect the company to deliver GMV/Revenue CAGR of 51%/44% over FY21-26 and CAGR of 14%/15% in FY26-41, respectively with EBITDA margin reaching 15.4%/22.6% by FY26/FY41 (7/6%/11.4% as % of GMV).

Brands to see Nykaa as the ideal digital advertising platform:

BPC/Fashion brands spend a generous portion of revenue in advertising and are also increasingly preferring digital channels (~20-30% of overall advertising budget). We believe Nykaa’s superior consumer engagement metrics with 21mn/16mn MAUs in BPC/Fashion and 13mn+ social media followers position Nykaa as the partner of choice for these brands’ advertising needs. Our analysis suggests the company can generate 4.2-4.6% of GMV as advertising revenue, which will be a robust margin expansion driver.

Omnichannel expansion is crucial:

We advocate that Nykaa should continue to aggressively expand its retail store network as it helps the company in 1) organic customer acquisition, 2) providing touch and feel experience to online buyers, and 3) also tap on consumers’ wallet share that was being spent in-person during travel/outings.

Initiate with a ‘BUY’ and TP of INR 2,480 per share:

We value Nykaa using DCF valuation methodology with explicit forecasts until FY41 to align to the long-term penetration story. Using 10.5% cost of capital and 6.0% perpetuity growth rate, we derive Dec’22 target price of INR 2,480 per share (~27% upside from CMP) and initiate coverage with a ‘BUY’ rating.

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