ICICI Security Upgrades Nykaa to ‘Add’ From ‘Hold’, Lowers Target Price To INR 145

ICICI Securities has upgraded beauty ecommerce firm Nykaa to ‘ADD’ from ‘HOLD’ following the recent decline in its share prices. However, it lowered the target price to INR 145 from INR 175.

In a research note, the brokerage said that Nykaa presents a combination of the largest beauty and personal care (BPC) business in a growth market, good profitability metrics, prudent capital allocation, and is omni-channel in the ‘true sense’ (going online to offline).

While ICICI Securities expects Nykaa’s BPC revenue to grow, it believes that the beauty ecommerce startup will have to go more mainstream to drive this growth. The brokerage also said that Nykaa’s growth trajectory in the fashion segment will be keenly watched out.

Citing the reason for the ‘Hold’ rating on the stock earlier, the brokerage’s analysts said, “We had always liked Nykaa’s business model. That said, post its listing on the Indian bourses, we’ve been staying on the sidelines due to valuations beyond our ability to comprehend (at peak stock price, revenue CAGR requirement over the next 20 years was 23%).”

Nykaa witnessed a bumper listing on the exchanges in November 2021. The shares listed at a premium of nearly 80% to the issue price. However, the global tech sell-off and the expiry of its lock-in period for pre-IPO investors in November 2022 led to a sharp decline in the share price of Nykaa, with its market capitalisation declining around 60% in 2022.

ICICI Securities said that after 70% correction from its peak price, BPC business now accounts for about 77% of current price, assuming it’s a defensible and high-growth business in the medium term.

Highlighting the key risks, it said that chasing growth at elevated levels can dilute gross margin, while success in fashion business can be difficult given higher competition in the category.

On the upside, it said that weakening of competition in the digital BPC space is likely to benefit Nykaa. Nykaa has been under pressure of late, with its share price falling nearly 18% this month. On Friday, the shares settled 1.4% lower at INR 127.25 on the BSE.

However, many analysts are bullish on the stock. Earlier this week, brokerage HSBC said that Nykaa’s valuations are now even more “appealing” and under-appreciate the structural growth opportunity in the BPC space.

Maintaining the ‘buy’ rating on the stock, HSBC adjusted its target price to INR 361.67, reflecting the lowered denomination post bonus share issue

The Falguni Nayar-led company reported a 344% year-on-year (YoY) jump in its net profit to INR 5.2 Cr during the September quarter of financial year 2022-23 (FY23).

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