SUMMARY
Shares of Nykaa jumped 4.4% during the intraday trade on the BSE after multiple brokerages reiterated their bullish stance on the beauty and ecommerce startup
Jefferies and Kotak Institutional Equities highlighted the estimated growth in the premium category and said Nykaa was well placed to capitalise on it
JM Financial said that Nykaa Fashion’s non-discounting led approach and higher average order values can enable faster profitability compared to the peers
Shares of beauty and fashion ecommerce major nykaa
jumped 4.4% to INR 150.80 during Monday’s intraday trading on the BSE after several brokerages reiterated their bullish stance on the company and expressed confidence on its premiumisation play.
Brokerage Jefferies said that Nykaa’s premiumisation trend plays well in Nykaa’s favour given the position of the platform. It said that the premium online fashion market, in which Nykaa currently has about a 16% share, is expected to grow faster.
The comments from Jefferies came after Nykaa’s 2023 Investor Day last week. Nykaa provided updates on its business performance, investment in technology, and more on the occasion.
It is pertinent to note that last month, Nykaa MD and CEO Falguni Nayar highlighted the company’s rationale behind premiumisation, particularly in the fashion business, after declaring its Q4 FY23 results.
“We won’t be cluttering our platform with a lot of low-price, affordable brands which may give us a quick conversion… it won’t allow the differentiation that we are keeping for the long term,” Nayar said while talking about the continuous investments in acquiring customers for Nykaa fashion. The fashion vertical saw a degrowth in the March quarter of FY23.
Nayar also said that the company is not chasing the highest possible growth in fashion but is pursuing a way to grow that would not dilute the platform’s “uniqueness” factor.
Meanwhile, Nykaa Fashion’s gross merchandise value (GMV) grew 38% year-on-year (YoY) to INR 664.1 Cr in Q4 FY23 but declined 8.3% sequentially. The vertical’s Average Order Value (AOV), Monthly Average Unique Visitors (MAUV), visits, and order conversion also saw degrowth sequentially.
As per Jefferies’ report, Nykaa believes there is great value in curation that can ease discovery, which is the key challenge for shoppers. While its competitors focus on deep discounts and act as liquidation channels for old-season merchandise, Nykaa’s focus is on near-full-price sales and curated, vibrant collections.
Meanwhile, Kotak Institutional Equities also noted that consumer preference is changing in the beauty and personal care space (BPC) with a shift to premium categories.
“BPC shoppers in India are 60 Mn-70 Mn and Nykaa has reached 18 Mn customers. The premium segment of India’s BPC category will see overall market size expand to about 55% in 2026 from the current 45% as disposable incomes rise,” said Kotak.
The brokerage also said that Nykaa has its target customers in high-income and upper-middle income households, which are set to expand to 29 Mn and 168 Mn, respectively, by FY30.
“We reckon this will aid revenue growth for discretionary categories such as BPC and fashion with both larger order values (tendency to premiumise) as well as higher number of units purchased. As incomes increase, the share of wallet on ecommerce increases substantially,” it added.
Meanwhile, speaking about Nykaa’s fashion business, brokerage JM Financial said while the primary reason for Nykaa’s diversification into fashion was a larger total addressable market (TAM), the startup highlighted that it also aims to capture a more niche segment of the market with higher AOV and become a preferred partner for brands to launch new season styles with this foray.
“This focused approach can potentially enable faster profitability (compared to the peers) due to the non-discounting led approach and higher AOVs generating enough commissions to compensate for the cost of higher returns in fashion,” said the brokerage.
JM Financial reiterated its ‘buy’ rating and price target (PT) of INR 210 on Nykaa, which currently implies an upside of 45.4% to the stock’s last close on Friday.
Meanwhile, Jefferies also reiterated its ‘buy’ rating and INR 200 PT and Kotak maintained its ‘buy’ rating and a fair value of INR 210.
Shares of Nykaa were trading 3.75% higher at INR 149.75 on the BSE on 3 PM IST.
Tech At The Core
Besides being confident about Nykaa’s premiumisation playbook, the brokerages are also confident in the startup’s core tech capabilities.
As per the reports, Nykaa believes that a strong tech backbone is core to its success and hence, it has been steadily investing in tech capabilities. Jefferies’ report suggested that the startup is also piloting a code-writing assistant for its developers and a virtual AI-based voice assistant for customer support.
JM Financial said that Nykaa has been investing in building its ad-tech platform that would drive more use cases for brands that advertise on the platform.
“Once fully operational, the platform would enable near-real-time ad setup and management as well as D+1 ad performance reporting, resulting in higher discovery opportunities for brands and increased ad revenue for Nykaa,” it said.
Investing in tech and processes that help build scale for the future continues to be one of the major focus points for Nykaa in its long-term growth strategy.
However, it must be noted that Nykaa’s profit has been declining for the past few quarters. Its net profit plunged about 70% YoY and 73% sequentially to INR 2.3 Cr in Q4 FY23, while operating revenue grew 33.7% YoY to INR 1,301.7 Cr and declined 11%, sequentially.
