IGI Logo

Growth posturing unlikely to impact medium-term margins

Nykaa’s 2024 Investor Day showcased aggressive growth aspirations of the company across BPC and Fashion segment with eB2B already growing rapidly driven by a large penetration story. The company also guided towards FY26 EBITDA breakeven for Fashion, ahead of consensus and in-line with our estimates. Though management took a restrained approach in suggesting stable BPC EBITDA margins in the near-term, we believe contribution margins can potentially be flat but BPC should sustain EBITDA margin expansion driven by operating leverage. Company also highlighted the attractiveness of GCC market with plans to open 70 stores with robust early traction since launch. The company has also realigned segments to bring Superstore within BPC while Nykaa Man will now be split across the respective BPC and Fashion segment. We appreciate the company’s aggression considering the new BPC entrants are still figuring out while suggestions of 2.5-3.0x Fashion NSV in 3 years suggests the company is highly confident of its positioning in premium Fashion. Reiterate ‘Buy’ with a revised Jun’25 TP of INR 230.

* Continued innovation along with secular tailwinds to drive BPC growth: With India’s GDP per capita expected to reach USD 5,500 by 2030 (according to Google India 2023 report), average BPC spends per capita are expected to reach USD 50 from USD 15 in 2023. In comparison, countries such as USA and Japan are already at USD 250+ spend per capita.

Nykaa aims to be at the forefront of this market expansion with its four-fold strategy: 1) expanding category width by educating consumers about relatively newer categories such as fragrances, premium bath and body, haircare etc.; 2) increasing category depth with consumers shopping more sub-categories such as serum in skincare; 3) increasing share of premium in basket mix; 4) organising events and providing experiences to enhance customer engagement. The company will continue to reinvest in this category, capitalising on the significant growth potential.

* Fashion playbook ready to scale with profitability in sight: The management aims to drive rapid growth in Nykaa Fashion with suggestions of NSV reaching 2.5-3.0x of FY24 in FY27. This robust growth trajectory is also expected to see rising profitability with EBITDA margin expansion of 1,300-1,600bps. It strives to leverage technology to provide consumers with a hyper-personalised experience, offering them with wider, most stylish assortments and fresh browsing experiences. The company continues to drive the rise of premium fashion online. Nykaa Fashion has secured partnership with Revolve, a global fashion retailer with 1,200+ brands and Foot Locker, more recently, a footwear specialty retailer from the USA.

* Superstore makes Nykaa’s BPC foray truly omni-channel: With offline channels enjoying a rather large pie of the total beauty market and a notable underpenetration of eB2B in overall B2B retail (<1%), SuperStore presents Nykaa with an opportunity of a large TAM as well as addressing inefficienes across the market spectrum i.e. the brands as well as the retailers. In comparison to India, China has 10-15% eB2B penetration suggesting large headroom for penetration with unorganised BPC market pegged at USD 11-12bn. As an internet-first company, Nykaa is well positioned to lead the transition from traditional distribution to e-distribution.

* Reiterate ‘BUY’, Jun’25 TP of INR 230: Despite the muted demand environment in FY24, Nykaa did gain market share across online BPC and Fashion, suggesting strong brand affinity as well as the benefits of Nykaa’s attempts at category expansion. While Superstore as well as international expansion is likely to require investments and hence would impact near-term margin, the company would accrue benefits from a larger BPC and Fashion business. We revise our TP upwards to INR 230 (~35% upside) and reiterate ‘BUY’ rating.

* Owned brands are getting a life of their own: Through a lot of thought and attention to detail, Nykaa has successfully developed its own brands, delivering top-quality and trendy products to its customers. The company has launched brands across all major categories, including makeup, skincare, haircare and fragrances in BPC, and indian/western wear, athleisure, lingerie, footwear and accessories in Fashion. The scale that these brands have achieved is reflected in its contribution of ~13% to both BPC and Fashion GMV. Moreover, out of the total 27 owned brands, 3 in BPC and 2 in Fashion have crossed INR 1bn GMV on annualised basis with Dot&Key/Nykaa Cosmetics having crossed INR 6bn/INR 3bn mark as well. Additionally, we observe these brands performing across multiple platforms, not just on Nykaa’s online store (~45% contribution is from offline and other online marketplaces).

* Nykaa venturing into an attractive GCC market: Company made a strategic move of expanding its global footprint under the brand ‘Nysaa’ to tap into the USD 30bn GCC beauty market with website going live in Jan’24 and the first store opening up in Mar’24. Nykaa is well positioned to succeed in this market as 1) GCC enjoys the highest BPC spend per capita in the world (USD 500+); 2) favourable demographics with ~40% population under 25 yrs; 3) AOVs in this market are notably high due to high income levels; 4) there are only two other beauty chain multi retailers in the region i.e. Sephora and Faces; 5) brands exclusively available on Nysaa such as Minimalist, Dot & Key etc. are gaining traction among the younger demographic. Nykaa strategises to replicate its omni-channel approach in the region, with an aim to launch 70 stores in the next 5 years and capture ~7% of the beauty market share. As of June’24, it has already captured 18% of the online market with the only store operating at an ARR of USD 2mn.

* Superstore’s importance in Nykaa’s playbook: Currently, the retail distribution model is complex involving multiple exchange of hands that lead to cost and logistical inefficiencies, limited reach, and limited access to premium assortments. Nykaa’s Superstore addresses these challenges faced by the various stakeholders, while enhancing its own value proposition as it enables go-to market for its owned brands while also bringing more customers into the BPC funnel. 1) D2C brands: Superstore democratises access to distribution for small D2C brands, enabling them to reach a larger audience and boost their brand visibility. 2) Global brands: It stengthens Nykaa’s value proposition by providing the global brands a one-stop solution for distribution in India. 3) Traditional brands: Provides a channel for large brands to test new products in micromarkets. 4) Retailers: Retailers benefit from a much wider assortment of brands, along with elimination of intermediaries in the supply chain. Superstore is already generating margin-accretive service income. The company plans to ramp up profitability further by 1) improving order quality through loyalty programmes, personalisation, assistance etc. 2) reducing fulfilment costs through operational efficiency and 3) enhancing warehouse efficiency.

* Management Guidance: BPC 1) GMV is expected to grow at mid-late 20s% on a CAGR basis over FY24-28E. 2) Contribution margin should be in line with FY24 margin of 25.5%, as the company will continue investing in customer acquisition and improving customer retention. Fashion 1) NSV is expected to grow ~2.5-3x in the next three years.2) Gross margin should improve by ~150-200bps over the same period. 3) Improvement in fulfilment costs, market expenses and overheads should lead to EBITDA margin expansion by ~1300-1600bps by FY27E. 4) Additionally, the segment should turn EBITDA margin positive by FY26E, with steady state margins at ~10%+. Superstore 1) ~2000bps EBITDA margin improvement by FY26E. 2) In the medium-term, the company is aiming for GMV to reach ~9x of what it was in FY24, with EBITDA margins reaching 3-5%.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361