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Investments in customer acquisition drive margin miss

In a quarter where consumption names disappointed, Nykaa delivered decent growth numbers with BPC/Fashion delivering 29%/10% YoY growth. Though BPC growth did get a boost from 80% YoY growth in eB2B business, core BPC GMV growth came in at a robust 26%. With customer acquisition remaining prominent, core BPC saw a dip in GMV-NSV conversion while ad expenses also inched up. Overall, the company reported 24.4% YoY growth in revenue to reach INR 18.7bn with EBITDA margin flat sequentially at 5.5%, miss on JMFe by 50bps. Despite the miss, we believe core BPC EBITDA margin continued to improve with 20bps jump YoY while Fashion losses sustained around INR 250mn. We forecast core BPC to sustain EBITDA margin improvement driven by operating leverage while other segments will see peak losses in FY25. We find downside limited with favourable riskreward making Nykaa the top pick in internet space. Retain ‘BUY’ with Dec’25 TP of INR 250.

* Core BPC growth steady at mid-twenties: Nykaa BPC segment has seen 29% YoY GMV growth in 2QFY25, on the back of continued investment in more direct traffic to its platform and stores with new user acquisition rising by 31% YoY. The segment delivered 24% NSV growth. However, our triangulation suggests that core BPC (excluding segment additions announced in June) has delivered 26% / 22% GMV/NSV growth, suggesting sharp dip in GMV-NSV conversion. This was due to 1) sustained discounting, and 2) increase in new user discount coupons. Gross margin improved 40bps YoY due to rising owned brands salience; while contribution Margin declined 120bps YoY mainly due to increased advertising spends for accelerated customer acquisition. Company continues to broaden its network of brands and assortment with focus on categories such as premium fragrance (growing faster than overall beauty) and skincare.

* Macro pain continues in Nykaa Fashion with festive season the only hope: Nykaa Fashion reported GMV/NSV growth of 10%/14% YoY in 2QFY25 as muted demand environment continued in 2Q as well. Besides this, 2Q has seen fewer wedding dates and festivities further hampering the segment growth. However, strong performance by LBB (marketing income) and higher services related income resulted in better GMV-Revenue conversion with revenue growing 22% YoY. Gross margin demonstrated sharp improvement of 567bps YoY to reach 49.7% whereas decline in fulfilment expenses (leakages optimisation and increased share of land shipments) offset the increase in marketing expenses, led to contribution margin (as % of NSV) improvement of 440bps YoY to reach 9.4%. Management expects fashion outlook in 2H to improve as October has seen some pickup and also festivities and wedding season in 2H are expected to be strong.

* Reiterate ‘BUY’, Dec’25 TP stable at INR 250: Despite unfavourable demand environment recently, Nykaa has delivered against the odds to retain margins while delivering growth in mid-twenties. We lower growth in Fashion while factoring in a steeper profitability curve in eB2B driven by sustained improvements. Rolling forward to Dec’25, we retain TP at INR 250 and reiterate ‘BUY’, expecting Nykaa’s investments in H1 to supply robust growth along with sharp margin jump during the festive and wedding season ahead.

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