Nykaa, India’s largest beauty e-retailer, has been given a target price of INR 115 by brokerage firm Macquarie, indicating a potential 27.2% decline in the company’s stock value. The brokerage firm has initiated coverage of the beauty e-commerce giant and highlighted profitability concerns due to the need for investments required to maintain growth. Nykaa could potentially suffer a decrease in profits due to their beauty products spreading to smaller towns and customer-base shifting from online to offline market. Furthermore, there is increased competition from other players making it difficult for Nykaa to keep up. The arrival of giants in the beauty sector such as Tata Cliq and Reliance Retail can be perceived as a possible impediment to the growth trajectory of startups.
Nykaa shares fell by 2.8% on the BSE during intraday trading on Monday but later recovered to end the day at INR 149.55. Macquarie also raised concerns about Nykaa’s fashion vertical, stating that its success in that business segment has yet to be proven. The firm said that it remains cautious about Nykaa’s profitability due to its limited operating history and the need for growth investments.
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Nykaa’s consolidated net profit for Q3 FY23 declined by 70.7% YoY to INR 8.5 Cr, while its operating revenue increased by 33.2% to INR 1,462.8 Cr during the quarter. Beauty and personal care segment saw a significant 37% year-on-year growth of GMV to INR 2,796.5 Cr while GMV in fashion segment jumped up by 50% YoY to INR 724.4 Cr. During the earnings report, Falguni Nayar, CEO & MD of Nykaa, referenced that a weakened global sector and consumer spending had negatively impacted Nykaa’s income & profit margins.
Macquarie’s research suggests that Nykaa may face difficulty in expanding profitably in the fashion industry, as it offers a curated selection of both third-party and self-developed apparel labels. The company is of the opinion that those leveraging a curation-focused strategy with external brands have not achieved the desired success.
HDFC Securities recently downgraded Nykaa’s rating to ‘sell’ from ‘reduce’. They also reduced their EBITDA estimations for FY24 & FY25 by 8% due to the prolonged growth of their fashion & B2B business.
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In conclusion, Nykaa’s growth and profitability are at risk due to the entry of big players, the need for investments to maintain growth, and the uncertain success of the fashion vertical. It is essential for the company to innovate and find new ways to maintain profitability and grow sustainably in the competitive market.
