Nykaa - Margin Outlook Clarity Surfaces: ICICI Securities

ICICI Securities Report

In our preview note, we had flagged certain questions. FSN E-Commerce Ventures Ltd. (Nykaa), in its investor day presentation, has touched upon most of them. Management clarified that it is now focusing on growth in the core beauty and personal care segment and will reinvest savings from scale efficiencies to usher growth higher. Hence, medium-term BPC contribution/Ebitda margins will likely stay flattish.

Although short of street’s expectations, the sharp profit improvement outlook in fashion/eB2B segments is a positive surprise. Also, the rapid scale up of its global store and some of its owned brands – ‘Dot & Key’ and ‘Nykd’ – were definite bright spots in Nykaa’s operating performance.

We reckon, while material re-rating of Nykaa is contingent on the execution of its ambitions, clarity on growth/margin outlook should benefit the stock. Upgrade to Add from Hold.

Key risks On the upside:

1. Ad-revenue recovery which would boost profitability.

2. Faster-than expected profit delivery in fashion vertical.

On the downside:

1. Chasing growth at elevated levels can be dilutive of gross margin.

2. Success in fashion business can be difficult given higher competition in the category.

3. Increase in competitive intensity from other channels (quick commerce) and other players (Tira/Purplle) in the BPC segment.

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