Nykaa IPO: All You Need To Know Before Subscribing

India’s top e-commerce site for beauty products, Nykaa, will launch its three-day IPO on Oct. 28, joining the booming frenzy for tech maiden offers.

Founded in 2012 by Nayar, a former investment banker, the beauty retailer platform now offers more than 2,600 domestic and international brands of everything from eyeliner and mascara to shampoos. The Mumbai-based firm sells through its website and in physical stores.

As of Aug. 31, the firm's mobile application was downloaded 55.8 million times, and in the five months ended Aug. 31, 88.2% of its gross sales came through online channels.

Nykaa also has 80 brick-and-mortar stores across 40 cities. The physical stores are in three formats—Nykaa Luxe, Nykaa On Trend and Nykaa Kiosks. Before the pandemic, while 8-10% of the gross merchandising value came from physical retail, it is now less than 5%. The company, however, expects that in the long term it could contribute 12-15% of the total business.

While Nykaa’s share in the overall beauty and personal care market is barely over 2%, it controls nearly a quarter of online sales in the segment. Its share is even higher in online colour cosmetics where Nykaa accounts for over half.

The multi-brand beauty and personal care platform will be India’s first woman-led unicorn to debut in the public markets.

Promoters of Nykaa include:

1. Falguni Nayar

2. Sanjay Nayar

3. Falguni Nayar Family Trust

4. Sanjay Nayar Family Trust

The promoters and seven other related entities hold about 54.22% stake in the company.

Nykaa said net proceeds from the initial share sale will be used towards investment in subsidiaries for starting new retail stores and capital expenditure towards new warehouses.

The most significant chunk will go towards acquiring and retaining customers and repayment or prepayment of borrowings.

Nykaa is among the few profitable online retailers in the country. It reported a net profit of Rs 62 crore in FY21, compared to a net loss of Rs 16 crore in FY20. Total revenue rose 38% year-on-year to Rs 2,441 crore in FY21.

While competition has been around even before Nykaa, it has picked up in the online beauty and personal care segment following the foray of brands such as Purplle, and other direct-to-consumer brands such as MyGlamm. The interest comes on the back of an opportunity that Jefferies estimates to be worth $16 billion.

Nykaa also faces competition from the established e-commerce players like Amazon, Flipkart, Myntra, AJIO (owned by Reliance) and the upcoming Tata digital super app.

“Given the attractiveness of the category and unit economics (led by gross margins), we do see a pick-up in competition in coming years from the likes of Reliance Retail, which are deep-pocketed,” Jefferies said in a note. Competition will, however, take time to ramp-up to establish connect with customers, it said.

Nykaa’s valuation at the upper price band works out to 809.3 times its price to earnings.

Investors will have to consider risks like:

• Failing to acquire new consumers or failing to do so in a cost-effective manner means the firm may not be able to increase its revenue or maintain profitability.

• Changing regulations in India could lead to new compliance requirements that are uncertain, such as amendments to the Consumer Protection (E-Commerce) Rules, 2020, that restricted online seller from "flash sales", restrictions on usage of the brands associated with the e-commerce entity for promotion or offer for sale of goods/services, introduction of a “fallback liability” on the e-commerce entities, among others.

• Certain brand vendors account for a significant portion of its total GMV of online sales and any adverse changes to relationships with such brand vendors can adversely affect its business, financial condition, cash flows and results of operations.

• Heightened competition could negatively impact the success of its business or affect margins. Its competitors include a number of online marketplaces, retailers with physical stores, and brands that take a direct-to-consumer approach, and could remove them from the distribution and sales process.

Watch | Nykaa's Falguni Nayar talks about the company's plans going ahead.