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Fashion segment posts positive surprise

BPC revenue and earnings growth plateau in Q3FY24  

FSN E-Commerce Ventures (NYKAA IN) online BPC segment posted in-line GMV growth of 24.6% YoY, on: 1) festive season boost, 2) positive impact of November sale and 3) strong growth in gross merchandise value (GMV) of its premium product portfolio (250+ brands – three-year GMV CAGR of 50%); revenue growth was lower at 19% YoY, due to increased discounts. However, GMV growth, near term, may pare further on 1) increased competitive intensity in BPC (Tira and quick commerce players) and 2) lower advertising revenue by brands (ad revenue grew just 3.2% YoY in 9MFY24), aligning with our view in our report (refer Sustains BPC leadership). Profitability woes persist as margins have largely plateaued out in BPC for now, as management focus is to drive better growth and expand the online BPC category, even if it comes at the cost of more discounts. NYKAA’s online BPC EBITDA surged at a CAGR of 68% (FY21-23), per our assessment, but it may see a CAGR of 29% in FY24E-26E), on lower ad revenue growth and higher discounts.

Fashion segment – Traction continues

NYKAA’s fashion business (28% GMV contribution in Q3) saw another healthy quarter in profitability – Contribution margin (as percentage of revenue) grew 250bps QoQ (up 480bps YoY in 9MFY24) to 10.7% on: 1) higher revenue from existing customers, 2) private label expansion (11.5% contribution to fashion GMV) and 3) lower marketing expense. Growth in online fashion was strong as GMV surged 39.8% YoY, equally led by growth in order volume and AOV. Per our assessment, consolidated losses for Fashion and others business have pared down marginally from INR 2,280mn in 9MFY23 to INR 2,010 in 9MFY24, led by focus on efficiencies in fashion and eB2B.

Valuations: Maintain Accumulate; TP pared to INR 185

Revenue from NYKAA’s core BPC segment may see a CAGR of 22.0% in FY24E-26E, slightly lower than our prior expectations, on increased competitive intensity from quick commerce companies/competitors in online BPC. With no big improvement in profitability, BPC is already trading at premium valuations of 68x/40x FY26E EV/EBITDA and P/E respectively, which offers marginal  upside from current levels for BPC. Expect online fashion business to turn EBITDA positive in FY26, which may better segmental valuation and drive re-rating. We up our valuation multiple for the fashion business due to healthy growth and good execution on profitability. We pare SoTP-TP to INR 185 from INR 200, post a cut in earnings estimates due to BPC, which may be partially offset by the positive impact from online fashion business. We value BPC at 45x one-year forward EV/EBITDA and Fashion business/others at 4x/1.5x one-year forward EV/sales respectively.

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