Nykaa Rating: Brokerage starts with ‘hold’, 12% looks bad; Online BPC Co.
Even as FSN e-commerce ventures, Nykaa’s parent company has established itself online as a Go-to Beauty and Personal Care (BPC) brand, the company needs to ‘go more mainstream’ and compete with established players to grow it. ICICI Securities said in a report. The brokerage has started coverage of the company with a ‘hold’ rating. ICICI Securities has set a target price of Rs 1,250 per share, slightly above its IPO price limit. The brokerage saw Nykaa’s stock fall nearly 12 percent since its last close on Monday.
Nykaa stock has been revised since listing last year; Sustaining growth is a challenge
The company had set an IPO price of Rs 1,085 per share and Rs 1,125 per share when it was listed in November last year. The shares were listed on a bumper list at a 78 percent premium but the stock has since corrected. Shares of Nykaa fell nearly 30 percent year-over-year and from a record high of 44 percent.
“We expect Nykaa to move further into the mainstream to follow the high growth rate, which will make it face competition from horizontal and other ecommerce (mass) players. To make this point, Nykaa does not offer the best price for a product (in the online world) and may need a change in its low-discount strategy to move forward widely, ”ICICI Securities said in a note on Monday. However, the problem that the company has solved is that it provides access to beauty products that are authentic, it was not a problem in the mass market, it added.
The brokerage further said that although it sees the company’s revenue and EBITDA CAGRs at 40.5 per cent and 63 per cent, respectively, during the FY21-FY26 period, it sees some risk with the stock. Brokerage added that the main risks are that the company is chasing high growth, which may be less than the total margin and may be difficult to succeed in the fashion business, due to high competition in the segment, brokerage added.
What can Nykaa do? Tap male grooming, acquire more brands
The brokerage said, “Nykaa is expected to be a major beneficiary of the D2C disruption in the BPC business where several smaller brands will fight for space on specific platforms,” adding that it sees Nykaa driving growth in the following four areas:
i) Brand acquisition
ii) E-B2B strengthens its position by expanding into space (as a distributor)
iii) Newborn male invests in grooming department, and
iv) Strengthens offline presence and warehousing capacity.
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