Nykaa’s eB2B Business Likely To Create Lower Value Than Core Business: ICICI Securities

Beauty ecommerce startup Nykaa’s entry into eB2B space will help it achieve scale but is likely to have lower value creation than its core business, analysts at ICICI Securities in a research note. 

Nykaa launched its eB2B business SuperStore, a one-stop distributor for all beauty, personal care, and wellness products, in April this year. SuperStore had over 45,000 transacting retailers across more than 500 cities and 165 listed brands at the end of June. 

The brokerage said that Nykaa continues to invest in differentiated value propositions that are yielding results, but the investments in new businesses are impacting the company’s EBITDA margins. Nykaa’s EBITDA margin remained flat for two straight quarters in Q1 FY23 at 4%. In fact, despite a year-on-year (YoY) increase in its consolidated net profit in Q1, its net profit declined 33% on a quarter-on-quarter (QoQ) basis to INR 5 Cr. 

ICICI Securities maintained a ‘hold’ rating on Nykaa and cut its target price (TP) to INR 1,250 from INR 1,400. The brokerage noted that one of the key risks to its thesis is the startup’s difficulty in succeeding in the fashion business due to higher competition in the category.

“…competition will likely intensify from both vertical and horizontal peers. While we expect BPC (beauty and personal care) revenues to grow, we believe Nykaa’s journey could be different – it will have to go more mainstream to drive this growth (tougher decisions about brand stretch along the way),” said the analysts at ICICI Securities.

Speaking about Nykaa’s efforts to drive higher frequency through the launch of Nykaa everyday, the analysts said that success in this new initiative too would not be easy for the beauty ecommerce startup as “Nykaa is not the cheapest place for BPC products and neither does Nykaa solve authenticity issue here”.

However, it is pertinent to note that Nykaa’s unit economics for BPC business continues to improve while the fashion business has also maintained its unit economics. Its overall growth in Q1 FY23 was largely driven by growth in its BPC segment that accounted for 69% of its total gross merchandise value (GMV). The fashion segment contributed about 27% to it.

In order to further bolster its fashion segment, Nykaa also forayed into the men’s innerwear and athleisure category in July this year.

ICICI Securities estimates Nykaa’s revenue and EBITDA to rise at a compound annual growth rate (CAGRs) of 42% and 90%, respectively, over the FY22-FY24 period.

Some Analysts Are More Positive About Nykaa

Expressing its confidence in Nykaa’s eB2B initiative SuperStore in a research note last week, brokerage JM Financial said that Nykaa’s revenue and EBITDA will have a CAGR of 43% and 82%, respectively, over the FY22-FY25 period.

The brokerage said that it expects Nykaa’s Q2 FY23 EBITDA margin to improve by about 60 basis points sequentially and 132 basis points YoY on lower fulfillment costs and growth across its BPC, fashion and eB2B verticals.

In fact, JM Financial said that the startup’s growth in Q2 FY23 growth will be led by high festive demand, its penetration in new channels and the launch of newer initiatives like SuperStore. The brokerage has a ‘buy’ rating on Nykaa with a TP of INR 1,780.

After falling for five straight sessions last week, Nykaa shares ended 3.5% lower at INR 1,164.10 on the BSE on Monday. The shares are trading over 40% lower from their listing price.