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Tough macro environment ensures that growth comes at a cost

While there have been murmurs of rising competition for Nykaa BPC, company seems to have retained its market share, if not increased it as well. The segment delivered 25%/20% GMV/NSV YoY growth. However, as reflected by 210bps YoY drop in contribution margin (CM), it did require the company to invest heavily. On the other hand, Fashion business delivered another strong quarter with 31% NSV growth along with 510bps improvement in CM on YoY basis. Overall, the company reported 29%/24%YoY GMV/NSV growth with EBITDA margin rising 18bps. Consolidated GMV for Q3FY24 was at INR 36.2bn with INR 17.9bn in revenue. This becomes particularly impressive in light of the tough discretionary environment as evidenced by FMCG results. Growth on transacting customers as well as ordering frequency was a bit subdued with AOVs sustaining at high levels. We reiterate ‘BUY’ rating with an unchanged TP of INR 210 (~31% upside) as we roll forward to March 2025.

BPC margins under pressure as brands spend on discounts: Despite festive season falling in 3Q this year, Nykaa reported a GMV growth of 25% YoY. GMV-NSV conversion dipped 229bps YoY and flat sequentially as brands spend on discounting to drive growth. Simultaneously, gross margin saw a decline of 59bps YoY/ 64bps QoQ, while contribution Margin (as a % of NSV) declined by 210bps YoY / 257bps QoQ, primarily due to lower advertising income and increased marketing expense including Nykaaland. Management has decided to drive strategic focus towards growth with CM expansion playing second fiddle. Our channel checks suggest that the company continues to perform better than the rising competitors and would benefit sharply as/when demand environment improves.

Fashion continues to be in focus: Nykaa Fashion has shown a GMV/NSV growth of 40%/31% YoY in 3QFY24. As seen in BPC, GMV-NSV conversion dipped 181bps YoY / 325bps QoQ as brands spend heavily on discounting while also pushing sales ahead. With all variable expenses demonstrating leverage, contribution margin (as % of NSV) reached 6%. Our estimates suggest the segment to reach operating profitability when CM crosses 10% of NSV. Company has also forayed into sneakers market by signing an exclusive deal with Foot Locker (a popular multi brand footwear specialty retailer in US). This segment is gaining share in overall business mix and has a potential to generate incremental value for shareholders with segmental DCF suggesting ~INR 20 share price from this segment.

Reiterate ‘BUY’, Mar’25 TP maintained at INR 210: Considering the tougher demand environment and lower than anticipated ad income, we reduce GMV and revenue by 0.6- 1.1% / 0.9-1.4% over FY25-28E, respectively. Though BPC marketing expense would normalise, we still expect it to sustain at relatively higher levels and hence lower EBITDA margin by 40-55bps over FY25-28E. Rolling forward to Mar’25, we retain our TP of INR 210 and reiterate ‘BUY’ rating and expect the company to be a strong beneficiary of improving discretionary spends. Key Risks: Ramp-up in BPC competition and higher marketing expense requirement.

BPC gross margin dip due to cyclicality of ad income: BPC ad income dipped by 63/42bps as a % of revenue on YoY/QoQ basis. In comparison, GM dipped 59/64 bps on YoY/QoQ basis, suggesting that the dip in BPC gross margin are not due to product level margin decline but rather due to brands lowering ad budgets in light of higher discounting. Hence, we surmise that this GM dip is not structural in nature and should see a sharp recovery when the current cyclicality reverses.

Others Segment could reach contribution positive by FY27 but operational profits still some way out: Others segment has been growing strongly with GMV/NSV growth of 39%/ 66% YoY. GMV-NSV conversion improved in this segment as the company plugged leakage. CM in Others segment reached -9.2% (as a % of NSV), improvement of 336bps over Q3FY23 and the trend suggests a breakeven over the next couple of years. Nykaa’s eB2B platform, ‘SuperStore’, has been outperforming the growth of the overall Others segment and now delivers to 146k retailers in 950+ cities. With investments in GCC expected to be parked under this segment, we anticipate it could be a long journey before the segment reaches operating profitability.

Owned brands continue to grow: As of Q3FY24, owned brands accounted for 13.3%/11.5% of BPC/Fashion GMV, cumulatively accounting for INR 4.3bn+ in GMV. Interestingly, owned brands account for 14.1%/16.8% of BPC/Fashion NSV, suggesting relatively lower discounting or returns. Out of the total 27 owned brands, 3 in BPC and 2 in Fashion have crossed INR 1bn GMV on annualised basis. The company is seeing these brands perform well not just on Nykaa platforms but also on 3P platforms and offline with 34%/46% sales of BPC/Fashion owned brands happening on 3P platforms

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SEBI Registration Number is INM000010361