Nykaa IPO: Is it worth investing?

Nykaa roots from the word Nayaka as a celebration of the one in the spotlight: beautiful, confident, and perfect. 
Brands-brands-brands, be it Domestic or Cult, the company has been the one-stop-shopping destination redefining the art of e-retailing beauty & personal care in India.

Nykaa’s IPO is open today, and we (especially the ladies) are psyched about it. The company also claims to be India’s largest omnichannel beauty destination. Sounds too good to be true, right?
Indeed we as customers love what Nykaa offers, but today, we will let you take a closer look at its industry, financials, risks & advantages from an investor’s point of view. Do you know what’s even better? With this blog, you can understand the long-term prospects of Nykaa.

Let’s get started!

Industry Overview

Starting with the industry overview, The Company operates in 2 major divisions:

• Beauty and Personal care (BPC)

• Fashion

Let’s start with the BPC market. This market in India was sized at ₹1,267 billion in 2019, which had grown at a CAGR of 13% in the last 3 years. Then the market dropped due to COVID-19 to ₹1,120 billion in 2020. 

But we know how strong the correlation is between ‘beauty products & women!’ It is projected that the market will grow ahead at a CAGR of 12% to reach ₹1,981 billion in 2025. The majority of contribution comes from offline stores. However, we cannot overlook online penetration. Currently, the online penetration of BPC market stands at 8%. 

Talking about India’s fashion market, it grew at a CAGR of 12% from ₹4186 billion in 2016 to ₹5838 billion in 2019! Now, it is projected that the market will grow at a higher CAGR of 18% from 2020 to 2025. The fashion industry is estimated to be valued at ₹8702 billion in 2025. Here, online penetration is low by merely 8% as compared to the Chinese and American markets, where online penetration is more than 30%.

Nonetheless, while both the industries seem large, there isn’t any single player who has a larger market share in this segment. So, without further ado, let’s dive into an overview of Nykaa.

Nykaa: An Overview

Let’s start with FSN E-Commerce Ventures Limited because “Gangadhar (FSN E-Commerce Ventures Limited) hi Shaktimaan (NYKAA) hai.” Haha! For better clarity, FSN E-Commerce Ventures Ltd operates as Nykaa.

Nykaa was established in 2012 as a digitally native consumer technology platform, delivering a content-led, lifestyle retail experience to consumers, blaa blaa blaa blaa... Uh-huh! Well, this is what their prospectus says. In simple words, they sell lifestyle and personal care products of national/international brands from their website and stores. :)

Revenue Streams of Nykaa

As said earlier, the company has 2 sources of revenue: a) Beauty and personal care (BPC) b) Fashion.

BPC
In the BPC segment, the company extensively offers 197,195 SKUs (stock-keeping units) from 2,476 brands primarily across make-up, skincare, haircare, bath & body, fragrance, grooming appliances, personal care, and health & wellness categories. 
Nykaa’s portfolio includes domestic, international, luxury and prestige, premium, niche, and cult brands. Along with this, it has its own brands such as “Nykaa Cosmetics,” “Nykaa Naturals,” and “Kay Beauty.” 

Fashion ​​​​​​
Nykaa fashion has a wide assortment of offerings across various price points to cater to women, men, and children of diverse demographics. Nykaa Fashion houses 1,350 brands and over 1.8 million SKUs with fashion products. This segment, too, includes established national, international, luxury brands and emerging labels and designers. Nykaa also has its own fashion brands, “Twenty Dresses,” “Nykd by Nykaa,” and “Pipa Bella.”

The company has an Omnichannel presence that means it serves customers through online as well as offline modes.
Online: In this digital world, Nykaa has its online presence through mobile apps, websites & mobile sites. Cumulative downloads of mobile applications have reached 43.7 million. Nykaa Man is a new mobile app and website developed by Nykaa to serve the grooming needs of men.

Offline: Although most of the company's sales come from the online segment, the company has opened 73 physical stores across 38 cities to provide customers with a seamless experience. So thoughtful!
These stores are bifurcated into 3 three formats:

• Nykaa Lure - showcases prestige and luxury international and domestic brands.

• Nykaa On-trend - sells current best-selling products chosen across beauty and personal care brands.

•  Nykaa Kiosks - free-standing units that sell owned brands.

The Company has 6 direct Subsidiaries as of date: 

(i) Nykaa E-Retail Private Limited 

(ii) FSN Brands Marketing Private Limited 

(iii) Nykaa Fashion Private Limited 

(iv) Nykaa-KK Beauty Private Limited 

(v) FSN International Private Limited and 

(vi) FSN Distribution Private Limited.

Major IPO details

Why does Nykaa need this IPO?

Well! Nykaa as a company has used its retained earnings chiefly to grow itself. There were few funding rounds, but it seems like private investors are sizing down their position with this IPO. The company intends to use proceeds from the IPO for 4 major reasons:

• Investment of ₹ 42 Cr to fund the set-up of new retail stores.

• Capex of ₹ 42 Cr for funding the set-up of new warehouses.

• ₹ 156 Cr to repayment or prepayment of outstanding borrowings.

• Expenditure of ₹ 234 Cr to acquire and retain customers by brand awareness and advertising.

• General corporate purposes. 

By now, you must have gotten a good insight into Nykaa and what the IPO is all about. Let’s delve into the financials and the pros & cons of applying in the IPO. 

Financials of Nykaa

Now that we have a narrative about the company let’s back the story with numbers and move to financials. The graph below shows how revenue is increasing at a CAGR of 48.2% and now the company has even started making profits. 

48.2% CAGR Insane!! Do bacteria grow at this pace?

You must have come across two jargon in the company financials- AOV and GMV. Both these matrices are essential when evaluating an online retail company.

AOV (Average Order Value) - AOV, as the name suggests, shows the average value of an individual order that the company receives. If you look closely, AOV has been increasing in the fashion segment of Nykaa. This tells us that people are ordering more valuable products from the company!

GMV (Gross Merchandise Value) - GMV refers to the total value or volume of goods sold via that e-commerce platform. An increase in GMV means more people are using that platform, leading to more sales and vice-versa. In Nykaa’s case, GMV is increasing for fashion as well as BPC segments. That means that the company is doing phenomenally well in both segments.

The bottom line, numbers are backing the narrative. In fact, numbers are better than narrative.

Why should you apply?

• Promoters have a high skin in the game even after IPO proceeds. The promoter holding dilutes from 54.22% to just 52.56% after the IPO.

• Every product on the platform has dozens and dozens of reviews. This builds trust in customers as they get genuine reviews to read.

• Why do you think people opt for Nykaa when e-commerce giants like Amazon and Flipkart already serve the market? That’s because these giants face problems with counterfeit products. Nykaa takes due care that they do ship original products to their customers.

• With so many national and international brands available on their website Nykaa becomes a one-stop solution for all beauty products and fashion.

• Nykaa markets products primarily through Instagram influencers. This creates a sense of authenticity among their customers. In fact, Nykaa has its own youtube channel Nykaa TV to educate people on beauty products and personal care.

• Foreign brands like ‘Huda Beauty.’ that weren’t available in India could be accessed through NYKAA’s website. Nykaa imports these brands for its customers.

• The company has had immense data gathered from its customers since 2012. Now leveraging this data by studying customer preferences, the company is building its own brands for soap, perfumes, etc. This can make them gain higher margins. 

• External factors like the growing young population, increasing urbanization, increasing per capita income, low data charges, and high internet penetration provide tailwinds to the growth of Nykaa.

• The company is a leading player in its sector.

Why should you avoid applying?

• The top 3 categories contributed to 84.9% of GMV in 2019 and 71.3% in 2021. A significant portion of revenue comes from 3 categories only. Heavy competition in this area can taper off margins.

• There have been several brands that have tried to infringe IP rights through the use of Nykaa’s logo and cloning their website design.

• Ongoing litigations like DKNY have opposed our NYKD mark registration in India as their names sound similar. Similarly, 31 more pending trademark applications are facing opposition from third parties.

• As most sales come from online channels, delivery plays a vital role as it is the only physical interaction a company has with its customers. On-time and satisfactory delivery of orders carries utmost importance in this scenario. Nykaa relies on third-party couriers like Aramex, Blue Dart, Delhivery, Ecom Express, ExpressBees for its package delivery, unlike Amazon. Although these are all good courier services, the point that we are trying to make is that this adds to Nykaa’s dependency on third-party services.

• Promoter Falguni Nayar Family Trust has pledged shares aggregating to 1.45% of the company's pre-Offer Equity Share capital to NBFC Infina Finance Private Limited. Furthermore, 2.89% could be pledged ahead. 

• Increasing home-grown brands can lead to chaos as they would compete with third-party brands present on Nykaa’s platform. This can lead to the withdrawal of renowned third-party brands.

• With this Price to EBITDA and P/S ratio, this seems an exorbitantly expensive IPO.

Conclusion:

“Don’t just satisfy your customers, delight them”  -Warren Buffett.

Taking mister Buffett’s words to heart, Nykaa is driven to delight its customers and aims to provide a one-stop solution to keep up with the wide variety of products available to them at their fingertips for all their beauty and fashion needs. 

Backed by adept promoters, the company checks all the boxes on its “success bucket list” without breaking a sweat. So Nykaa Isn’t just a pretty dolled-up face but has the brains and brawn to survive the long run. Our only concern about this fashion and beauty conglomerate is the high IPO pricing.

Would you take a chance on this brand? Let us know in the comment section!

*Disclaimer: The stock discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.