Nykaa Q2 Results: Stock Slides Nearly 3% Despite Optimism Of Brokerages

A day after Nykaa 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), the startup’s shares declined almost 3%, ending Wednesday’s session at INR 1,153.60 on the BSE.

While net profit grew on an annual basis during the September quarter, it was almost flat on a sequential basis. The beauty ecommerce giant registered a 39% YoY growth in operating revenue to INR 1,230.8 Cr in Q2, with gross merchandise value (GMV) rising 45% to INR 2,345.7 Cr. 

The growth in GMV was largely driven by the beauty and personal care (BPC) vertical.

While brokerages are mostly upbeat about Nykaa’s performance, at least three of them revised downward their price target for Nykaa post the announcement of Q2 results. HSBC Global Research lowered its price target (PT) to INR 2,170 from INR 2,180 earlier, which still implies an upside of 88% to the stock’s last close.

Meanwhile, JM Financial trimmed its PT for Nykaa shares to INR 1,680 from INR 1,780, implying an upside of over 54%. Kotak Institutional Equities also cut its fair value to INR 1,615 from INR 1,640, implying almost a 40% upside to the stock’s last close.

Retaining the ‘buy’ rating and a PT of INR 1,650, international brokerage Jefferies said that though Nykaa’s fashion business is at an early stage, a low single-digit quarter-on-quarter (QoQ) growth is “disappointing”.

Nykaa reported lower-than-expected growth for its fashion vertical. In Q2, the GMV for the fashion vertical stood at INR 599.1 Cr as against INR 582 Cr in Q1 FY23 and INR 418.8 Cr in Q2 FY22.

Nykaa also stated that the moderate growth in the vertical was a strategic call as the company was focusing more on profitability.

On the performance of fashion vertical, Jefferies said, “The segment disappointed on multiple counts. Orders grew just 8% YoY and declined 7% QoQ. GMV grew 43% YoY but growth in net realisations was much lower at 20% on account of higher returns. GMs were lower than estimates resulting in a contribution miss.” 

However, the brokerage upgraded its FY23-FY26 EBITDA estimates for Nykaa by 24%-33% on better margins. It also said that the stock is expected to be volatile ahead of the expiry of the lock-in period for its pre-IPO investors on November 10.

Shares of Nykaa were on a decline over the last two weeks, touching an all-time low of INR 975.5 last week. The shares have fallen as much as 25% in a span of a month.

HSBC Global Research, which also retained ‘buy’ rating on Nykaa, opined in its latest report that though the shares have corrected partly due to the global tech sell-off on rising yields and the company’s impending lock-in expiry, Nykaa’s valuation is now even more “appealing” and “under-appreciates” the structural growth opportunity in BPC.

The startup’s GMV in the BPC segment grew 39% YoY to INR 1,630.1 Cr in Q2 FY23. It was also a 9.5% rise from the previous reported quarter.

The brokerage expects the BPC ecommerce market to clock about 30% CAGR in the coming decade and views Nykaa as a structural winner of large-scale BPC and lifestyle opportunities. “Fashion business could also potentially surprise in the next five years,” it added.

Meanwhile, brokerage JM Financial said that Nykaa’s BPC growth was very impressive in the light of the competitive intensity from players like Amazon and Myntra. “In light of the impending lock-in expiry, we believe that Nykaa becomes a screaming buy under INR 1,000 and any dips should be used as an accumulation opportunity,” it added.

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