Nykaa would need to make big investments to sustain growth in the beauty products segment as customers are demanding more physical stores to experience products: Macquarie
The brokerage said that the entry of big players like Tata Cliq and Reliance Retail in the beauty vertical can exacerbate the problems for Nykaa
Macquarie also raised concerns on the fashion vertical as Nykaa’s success in the business is yet to be proven
Brokerage Macquarie on Monday (March 6) initiated its coverage on beauty ecommerce giant with a target price of INR 115, implying a 27.2% downside to the stock’s close on Friday (March 3), and flagged profitability concerns due to the need for investments to sustain growth.
The brokerage said that Nykaa, India’s largest beauty e-retailer, faces risk to its beauty segment margin as growth moves to smaller towns/offline and competition threat looms.
“With larger D2C brands increasingly looking to move offline and customers demanding more physical stores to experience products, we believe Nykaa would need to reinvest leverage gains to sustain growth,” said the brokerage.
It also said that the entry of big players like Tata Cliq and Reliance Retail in the beauty vertical can exacerbate the problems for the startup.
It must be noted that Reliance Retail recently forayed into the beauty ecommerce category with a platform named Tira.
Shares of Nykaa fell as much as 2.8% to INR 145.55 on the BSE during the intraday trading on Monday. However, they recovered to end the day at INR 149.55.
Beyond Nykaa’s beauty and personal care (BPC) segment, Macquarie raised concerns on the fashion vertical saying that its success in that business is yet to be proven.
“We remain concerned about Nykaa’s ability to profitably grow in the fashion segment where the company offers a curated marketplace of third-party/newly developed own apparel brands. An analysis of offline retailers indicates that players using a curation-led approach with third-party brands have seen limited success,” the brokerage said.
Nykaa reported a 70.7% year-on-year (YoY) decline in its consolidated net profit to INR 8.5 Cr in Q3 FY23, while its operating revenue rose 33.2% to INR 1,462.8 Cr during the quarter. Nykaa’s GMV in the BPC segment and fashion segment rose 37% YoY to INR 2,796.5 Cr and 50% to INR 724.4 Cr, respectively.
Speaking during the company’s earnings call, Nykaa MD and CEO Falguni Nayar said that weak consumer spending amid the global economic slowdown hurt Nykaa’s December quarter revenue and margin.
However, Macquarie, in its initiation report, said that it remains cautious on Nykaa’s profitability. “Limited operating history and need for growth investments make us cautious on EPS,” it said.
Last month, HDFC Securities also downgraded its rating on Nykaa to ‘sell’ from ‘reduce’. The brokerage cut its FY24/FY25 EBITDA estimates on the startup by 8% each to account for higher gestation in fashion and B2B business.