Brokerages Cut Price Targets As Nykaa Q3 Disappoints, Stock Slumps Over 5% Intraday

Shares of beauty ecommerce giant Nykaa fell as much as 5.5% to INR 141.4 during the intraday trading on the BSE on Tuesday (February 14) as some brokerages cut the price targets on the stock following its underwhelming Q3 results.

Nykaa on Monday reported a 71% year-on-year (YoY) decline in net profit to INR 8.5 Cr and a little over 33% increase in operating revenue to INR 1,462.8 Cr during the December quarter of 2022. While the revenue was largely in line with market expectations, EBITDA margin stood at 5.3%, below market estimates. 

Nykaa’s executive chairperson, MD, and CEO Falguni Nayar said that weak consumer spending amid the global economic slowdown slightly hurt the company’s revenue and margin during the quarter.

Shares of Nykaa had been gaining momentum since the end of January, and rose over 9% in the last two weeks, helped by an overall upbeat or expected Q3 FY23 performance of its peer new-age tech stocks. However, it shed some of the gains on Tuesday.

Following the announcement of Q3 results, at least three brokerages – JM Financial, Kotak Institutional Securities, and Nuvama Institutional Equities – cut their price targets (PTs) on Nykaa.

Nuvama Institutional Equities cut its PT on Nykaa to INR 195 from INR 251 earlier, which implies an upside of 30.3% to the stock’s close on Monday. 

“Given the recent volatility in the stock, we again bake in a higher cost of capital assumption,” the brokerage said.

Retaining its ‘buy’ rating, the brokerage also stated that a confluence of growth and profitability would be critical for Nykaa’s valuations to improve. 

“Besides, the gross margin miss, an aberration as per management, must reverse else as any structural impact could negate benefits in marketing and fulfilment,” the analysts added.

Nykaa’s gross margin declined 293 basis points YoY to 43.4% in Q3 FY23. 

Meanwhile, Kotak Institutional Securities cut its PT on Nykaa to INR 215 from INR 230 earlier, while JM Financial cut it to INR 250 from INR 280. While JM Financial remained largely positive on the Q3 results, it said that Nykaa’s fashion vertical gained market share at the cost of a sharp dip in contribution margin.

The gross merchandise value (GMV) of Nykaa’s fashion segment rose 50% YoY to INR 724.4 Cr. Nykaa’s total GMV increased 37% YoY to INR 2,796.5 Cr during the December quarter.

Goldman Sachs said that Nykaa’s overall profit was meaningfully below its estimate on lower gross margins and higher than expected spending on eB2B vertical. The international brokerage retained its INR 200 PT on Nykaa and ‘neutral’ rating.

“With no clear signs of a near-term pick up in the BPC growth, and investments likely continuing in growth verticals, we lower our FY23-25 revenue estimates for Nykaa by up to 4%, with consequent EBITDA cuts much sharper at 14%-28%,” Goldman Sachs said.

On the other hand, Jefferies lowered its FY23-26 EBITDA estimates by 1%-2% and also said that the stock would need a pick-up in BPC growth. The brokerage retained a ‘buy’ rating and INR 200 PT on the stock.

Nykaa’s BPC GMV grew 37% YoY to INR  2,796.5 Cr in Q3 FY23.

Shares of Nykaa ended Tuesday’s session 4.4% lower at INR 143 on the BSE.