Nykaa: Bumper debut leaves limited room for upside

If you had applied for the Nykaa listing and sold your allotted shares at listing, you would have made a nice profit in your pockets. Nykaa shares quoted at an impressive 2,018 INR apiece on the NSE today – a gain of 79 percent from the issue price of INR 1,125.

Nykaa (FSN E-Commerce Ventures), a leading omnichannel beauty and personal care multi-brand retailer, came out with an IPO on October 28th. The issue closed on November 1 and was signed 82 times in total. It received a subscription of about 91 times by qualified institutional buyers and 12 times by retail investors. Much buzz surrounded the IPO, thanks to the company’s strong presence in the online Indian beauty and personal care market (BPC), and the fact that it is profitable unlike many other e-commerce platforms.

Nykaa wins 78% on the stock exchange listing

Expensive valuation

At the issue price of INR 1,125, the company’s valuation was a bit stiff. At the time of listing, Nykaa was valued at an enterprise value-for-sale (EV sale) ratio of around 22 times, based on its FY21 sale. Following the bumper listing, the share valuation has risen further to an electricity sales ratio of almost 39 times. With the stock price rising up to 2,235 ₹ 2,235 intra-day on the listing day, Nykaa’s market value broke the 1 lakh crore mark of ₹ 1 lakh crore. The company was valued at 53,200 crore at the time of listing.

Although there are many positive sides to the business front, the potential for further stock upside may be limited given the steep valuation.

What is good, what is not

Nykaa has grown at a rapid pace over the last few years, as evidenced by the growth in its key results, such as unique transaction customers, average order value and gross commodity value. Nykaa reported revenue of ₹ 2,441 crore (up 38 percent year-on-year), EBIT of ₹ 94 crore (up 338 percent) and a net profit of ₹ 62 crore (₹ 16 crore loss a year ago) in FY21.

Nykaa IPO accounted for 82 times

The high growth potential of the Indian BPC market and Nykaa’s strong presence in this market, its broad product portfolio and reputation for authentic products are factors in favor of it. However, it remains to be seen how these will translate into a more sustainable profit growth for Nykaa over time. The company became profitable at operating level (EBIT) in FY19 and at PAT level in FY21. It reported revenue of ₹817 crore, EBIT of ₹ 7.4 crore and a net profit of ₹ 3.5 crore in the June 2021 quarter.

Nykaa’s progress in the highly competitive online fashion field (presence of many fashion-only and diversified players) must also be monitored. Moreover, while Nykaa is expanding the portfolio of its own high-margin products, these are still a small proportion (10 percent of revenue in FY20) to have some impact right away.

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