IPO Analysis: FSN E-Commerce Ventures Ltd (Nykaa)

IPO Rating: Invest for long-term  

About the company:

Nykaa is engaged in retail business online and offline with a diverse portfolio of beauty, personal care and fashion products. The company was formed in 2012 and is heading to be not only a lifestyle retail platform but also a popular consumer brand. It operates in two business verticals:   

• Nykaa: Beauty and personal care   

• Nykaa Fashion: Apparel and accessories  

The online channel is accessible through mobile application and website, among which the mobile app is popular as 4.37 crore cumulative app downloads were witnessed as of March 31, 2021. With this, it has become one of the largest mobile application bases retail platforms. Mobile app contributes 86.7% to the online gross merchandise value (GMV). Nykaa also has 73 physical stores spread across prime cities of India.  

Sectorial contribution to GMV: 

Its beauty and personal care offering is quite extensive with 197,195 SKUs from 2,476 brands as of March 31, 2021. With the launch of its mobile app in 2012, it gained significant market share in the segment. It outsources the manufacturing of the products and sells them under its various brands such as Nykaa Cosmetics, Nykaa Naturals, Kay Beauty, etc.  

The fashion is relatively new as it was launched in 2018. As of FY21, it housed 1,350 brands and over 1.8 million SKUs with fashion products across four consumer divisions: women, men, kids and home. However, as shown in the above chart the contribution from fashion products is increasing.   

Competitive Strengths:  

• One of India's leading speciality beauty and personal care companies.  

• Major brands offering their products on Nykaa's platform for sale.  

• Capital efficient business with strong growth and profitability.  

• Company's advanced technology platform.  

• Founder-led company with an experienced management team.  

Financials:  

The company faced net losses of Rs (24.54) crore and Rs (16.34) crore in FY19 and FY20 respectively. However, the profitability improved significantly in FY21 as it registered a profit after tax of Rs 61.95 crore. The net profit margin in FY21 was at 2.54 per cent.   

Source: Nykaa DRHP 

Industry outlook: 

India has the second largest urban population in the world. Generation Z and millennials account for 70 per cent of the smartphone users in India which are also the active consumers of social media content. This has made Indian retail industry a huge opportunity. 

The beauty and personal care segment is projected to grow at a CAGR of 12 per cent to reach Rs 1,981 billion in 2025 implying a CAGR of 7.7 per cent from the pre-COVID-19 market in 2019. The fashion market is projected to grow at 18 per cent CAGR over the next five years to reach Rs 8,702 billion by 2025. 

IPO issue details: 

It will be listed on the Exchanges on November 11, 2021. A retail-individual investor can apply up to a maximum of 14 lots (168 shares or Rs 189,000). The net proceeds generated from the IPO will be utilized to invest about Rs 42 crore in certain subsidiaries for setting up new fashion stores, to incur capex of Rs 42 crore for setting up warehouses for certain brands, to repay debt of Rs 156 crore availed by Nykaa E-Retail, and to spend Rs 234 towards marketing and branding. 

Recommendation: 

The Nykaa IPO is one of the most awaited among others and has created a lot of excitement among the investors. The macroeconomic scenario has looked favourable making the industry outlook positive. The trend is growing in urban areas as well as Tier III and Tier IV cities, which presents huge headroom for growth in the industry. As far as the company specific factors are concerned, the company has a strong e-retail hold and also has offline channels to build brand proposition. Both the segments: beauty and personal care and fashion, have seen good traction in last several years. The company has performed well given the covid hit financial year. It has also been successful at retaining the customers. In FY19, of the total customer base 55 per cent were existing customers, rest were new customers. In FY21, 70 per cent customers were the existing customers, clearly reflecting the value delivered by the company and customer loyalty towards Nykaa.  

Talking about the financials, the topline has been strong but PAT margins have been poor. But the overall financial position and business model looks comfortable.  

Hence we recommend our reader investors to invest in the IPO for long-term perspective.