Nykaa - The Going Seems To Be Getting Tougher: HDFC Securities

HDFC Securities Institutional Equities

We recently met FSN E-Commerce Ventures Ltd.'s (Nykaa) management to primarily track our core thesis and what it holds. Our three-point thesis was-

1. Total addressable market seemed oversold;

2. ad revenue will be closely contended for; and

3. Nykaa seems more like an efficient pipe business than a platform.

All three still hold! While management highlighted that beauty and personal care offers an upside from product cross-selling, purchase frequency and market share gains, its performance doesn’t quite add up.

Annual unique transacting customers growth less than order growth less than net sales value growth i.e. it seems to be getting tougher to add new consumers.

Beauty and personal care ad revenue, the single non-linear variable in the P&L stands at high-single digits of gross merchandise value as per management (our estimate: ~7%; down 50-100 basis points YoY). While Nykaa intends to improve on its ad tech stack, the jury is still out on its success in the backdrop of rising competition.

Another point highlighted was most of the fulfilment efficiency gains seem behind (especially in beauty and personal care); there may be room in customer acquisition costs and product margins, but these are more a function of the competitive landscape and Nykaa remains in customer recruitment mode. This makes the operating levers more linear versus a platform.

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