[What The Financials] IPO-Bound Nykaa Turns Profitable As Order Value Shoots Up In FY21

Online beauty aggregator Nykaa has reported a profit of INR 61.9 Cr in FY21, which bodes well for the beauty and fashion omnichannel retailer ahead of an initial public offering later this year. 

Nykaa reported INR 2,452.6 Cr in total revenue in the fiscal year ended March 31, 2021, up 38.10% from INR 1,777.8 Cr in FY20. This is the first profitable year for the company, which reported losses of INR 16 Cr and INR 24 Cr reported in FY20 and FY19 respectively. 

The company stated that revenue growth was supported by an increase in demand for our products in 2021, as a result of increasing online shopping by consumers in the beauty and personal care vertical, as well as the launch of multiple product categories and brands as part of its fashion offering. 

And now the company is looking to raise INR 525 Cr via fresh equity issuance according to the company’s draft red herring proposal (DRHP) filed with the Securities and Exchanges Board Of India (SEBI). According to media reports, Nykaa intends to raise a total of INR 4,000 Cr.

Founded by Falguni Nayar, a former investment banker, Nykaa’s content led business model has pioneered the market for D2C brands in the beauty and personal care (BPC) space since 2012 when it was launched. Here’s what we found reading into its financials for the past three years as disclosed in the DRHP.

Ahead of the IPO, the promoter and promoter group hold a total of 54.25%, which is quite high for a unicorn. Both promoters and investors will make a partial exit through an offer of sale of shares totalling up to 43.1 Mn. Those opting to sell via OFS include promoters Sanjay Nayar Family Trust (4.8 Mn shares), and investors such as TPG Growth IV, Lighthouse India Fund III, Lighthouse India III Employee Trust, JM Financial and Investment Consultancy, Sunil Kant Munjal and others.

In terms of the use of funds raised via the IPO, the company stated it will use it to make investments in its subsidiaries such as FSN Brands and/or Nykaa Fashion for funding the set-up of new retail stores, for capital expenditure of Nykaa E-Retail, for funding the set-up of new warehouses, marketing and general corporate purposes among others.

Nykaa’s Order Volumes, Ticket Size Flourish In 2021

A closer look at the financial performance for FY21, shows that Nykaa’s growth has been supported by higher average ticket size or order values from a chunk of its existing customers. Almost 90% of the platform’s income is earned from sale of products on the marketplace. 

Nykaa’s annual unique transaction customers grew marginally from 5.3 Mn in FY20 to 5.6 Mn in FY21, compared to FY20, and order volume grew by a mere 0.1 Mn year on year, but its average order value (AOV) jumped 35% from INR 1,448 to INR 1,963 during this time. 

The platform had witnessed a 51% increase in transacting customers and a 35% growth in order volume in FY20, compared to FY19 although AOV remained flat during the time. This indicates that new customers may not have added significantly to the platform’s sales. What we need to watch is whether customers will continue this increased spending as the pandemic impact wanes, and as more and more D2C brands and marketplaces focus on the beauty and fashion categories.

The remaining 10% of Nykaa’s income is derived from marketing services to sellers on the marketplace. This component also grew around 38% during the past fiscal and 33% between FY19-FY20.

Another point to be noted is that while the AOV has improved as well as  Nykaa’s gross merchandise value (GMV) or total cost of products sold, it has not converted to a similar growth in gross margin. Higher gross margins means that the company is making more money on each product sold. 

Nykaa’s GMV soared 50% from FY20 to FY21 to INR 4,045.9 Cr but revenue from operations only jumped 26% during the same period. Nykaa reported a marginally lower gross profit margin of 39% in FY21 compared to 42% in FY20. 

That said, a good gross profit margin for online retail is around 45.25%, according to NYU Stern School of Business.

Is Nykaa Shifting Focus Towards Private Labels?

Cost of goods sold increased by 46.70% to INR 1,487.8 Cr during FY21 from INR 1,014.2 Cr for FY20, primarily due to an increase in sale of products that Nykaa purchased from brands or their distributors and manufactured under its owned brands, it stated in its DRHP.

In FY21, Nykaa’s share of other expenses increased by 6.57% to INR 507.9 over FY20 due to higher freight and packaging costs. Meanwhile marketing expenses during the fiscal were down by 19% year on year. 

The company witnessed 3 Lakh additional transacting customers during the fiscal year when marketing spends were down due to the pandemic. In contrast, in FY20 its marketing spend was 34% higher than FY19 and it added almost 2 Mn transacting users showing how deeply retail marketplaces depend on advertising for reach. 

What is interesting is that Nykaa has reduced the share of expenses on finished goods that it was purchasing from 68% in FY19 to 62% in FY21. The company has not shared details about how its in-house brands and private labels have contributed to the business, but it is likely that this is the reason for lower purchases. This is also backed by the fact that spending on raw materials has doubled from INR 17.3 Cr to INR 38.2 Cr during the same time. 

Currently, Nykaa has 13 in-house brands including Kay Beauty (in partnership with actor Katrina Kaif), Nykaa Cosmetics, Nykaa Naturals, Twenty Dresses (apparel) and Pipa Bella (fashion jewellery brand acquired in 2021).

According to Inc42 Plus, India is estimated to have an ecommerce market valued over $200 Bn by 2026 while the larger retail market is expected to reach $1.7 Tn value. 

The overall online FMCG market is expected to reach $21 Bn by 2026 while the online fashion market is expected to reach $43 Bn during the same time. Having reached a decent ticket size and garnered a loyal customer base thanks to its influencer-led approach, Nykaa may just be poised to reap the fruits of its labour come IPO time.