Why Nykaa Stock Is Selling Even After It’s Down 55% From Its Peak

Nykaa has been in the news lately for not so good reasons. That stocks have been battered by India’s dot-com bubble frenzy for stocks like Nykaa is just one part of it. What also drew attention was the issue of the free shares by Nykaa which were closer to the lock-in expiration for some large investors and when shares were trading near all-time lows. This raised concerns about Nykaa’s corporate governance, leaving many to wonder if this was just an apparent attempt to “manage the share price.” While bonus shares and stock splits add zero to the underlying value of a stock, they play their part in positively influencing stock price movements in the near term for various reasons. Ideally, this shouldn’t be the focus of management trying to create long-term shareholder value, and thus reflect poorly on Nykaa.

With Nykaa now trading near its initial public offering price of €187.50 (adjusted for the bonus issue) a year later, and 55 percent below its peak price of €428.95, it might be tempting for investors to give the stock a second chance. Especially if one feels like they’ve missed that bus, considering the fact that they’re 81 times oversubscribed. However, the issue of moving away from stock remains for the reasons mentioned below.

growth at a cost

Nykaa offers customers a variety of beauty, personal care (BPC) and fashion products across its online and offline platforms. While it is primarily a digital native e-commerce company with the majority of revenue from its online platform, it builds its business around providing customers with a holistic experience (online and physical format stores).

BPC remains the main segment, accounting for about 87 percent of revenue. Fashion and other minor sectors account for the rest. The BPC division operates on the full retail model i.e. it sources, buys/manages inventory and sells products. The fashion division operates more along the lines of a marketplace model, connecting sellers directly with buyers via its platform, which takes a commission on the products sold.

The company is also expanding its portfolio with its own branded products (better margins) in both BPC and Fashion. They are also investing in physical store formats to provide a smoother customer experience. Moreover, it has been collaborating with partners to take its business to international locations. Some of these new initiatives, however interesting, are so small that they’re having an impact right now.

Recently, the company has been doing well in terms of revenue growth. In FY22, revenue grew by 55 per cent to Rs. 3,774 crore and in Q2 FY23 it grew by 39 per cent year-on-year to Rs.1,230 crore. Some of the underlying metrics were also good, with customers for BPC’s business growing 31 percent and showing good momentum.

However, this growth has not translated into better returns in the bottom line. An increase of Rs.1,334 crore in revenue in FY22, translated into a decrease in net profit by Rs.20 crore to Rs.41 crore in the period.

Similarly in the second quarter of FY23, an increase in revenue by Rs. 345 crore led to an increase of Rs. 4 crore in net profit to Rs. 5.2 crore. While the company saw annual EBITDA margin improvement to 5 percent (versus 3 percent a year ago), gains were given up in lower-than-line costs in terms of higher depreciation, interest and amortization expenses incurred to expand fulfillment and physical warehouses. retail stores.

While an argument can be made that these are investments for growth, the opposite is what will be the actual growth when these investments dwindle? There is a high probability that growth, while it could remain good, will reduce post-investment as evidenced by the experience of e-commerce companies globally.


One of the fundamental aspects of retail is that it is a low profit margin business. Amazon, the world’s largest e-commerce retailer, operates with an EBIT margin (e-commerce business alone; excluding AWS/cloud business) of just 2-3 percent. If companies with high volume and volumes have EBIT/PAT margin in low single digits, it’s hard to justify any significantly higher margin for Nykaa in the future.

Even if one assumes a very optimistic scenario of Nykaa replicating its FY22 revenue growth of 39 percent for the next three years through FY25, and being able to increase its PAT margin from the current 0.4 percent to 4 percent (a very difficult task), this means that it is done Today it trades at an unpalatable PE of about 135 times FY25 EPS. It should also be noted that this growth and profitability must be achieved in the midst of competition. Thus, at the current levels, there is a lot of optimism, while not leaving a margin of safety for the risks that could occur. While meeting Nykaa or beating optimistic expectations is not impossible, risk versus reward is unfavorable in this assessment.


Recent events leave a bad aftertaste