Nykaa Q4 Results Review - Growth Acceleration Likely; High Hopes, Rich Valuations Restraining: Dolat Capital

Dolat Capital Report

FSN E-Commerce Ltd.'s (Nykaa) Q4 FY24 revenues were a tad ahead but gross profit/Ebitda was in-line due to lower gross margin in core beauty and personal care segment, a negative. In Q4 FY24 gross merchandise value/revenue /gross profit/Ebitda were +32/28/23/32% YoY and FY24 at 28/24/20/35% YoY.

Nykaa is facing challenge in managing its rapid growth and profitability simultaneously, as investing in growth measures to drive expansion leads to a dip in margins, while focusing on profitability results in slower growth. Moreover, increasing competition, consumption slack, multiple segments under investment mode (viz. fashion, superstore, GCCs etc) are other issues which limit margin/profitability. Margin expansion may remain shortin BPC. Fashion remains key growth and margin driver, partly off-set by others.

In the above backdrop, we alter our revenue estimates by +4/6% for FY25/26E and Ebitda by 4/-2%. Nykaa’s large addressable total addressable market, strong business position in BPC, superior execution and evolution as House of Brands; we expect it to trade at premium.

But steep valuations, growth moderations as base inches up and increase in competition are key risks.

Reiterate ‘Reduce’ rating with target price of Rs 160 at five times FY26E enterprise value/sales (earlier Rs 150 @ five times FY26E EV/S).

At current market price, Nykaa trades at ~100/67 times FY25/26E EV/Ebitda and 372/164 times PE.

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