Shares of FSN E-Commerce Ventures Ltd., the owner and operator of beauty products and fashion e-tailer Nykaa, declined after Credit Suisse initiated coverage with an 'underperform' rating as it sees "too much optimism priced in".
While Nykaa has created a "dominant position" in the online beauty and personal care segment with improving margins, it is sub-scale in fashion, the research house said. "Fashion has a larger addressable market at $10 billion as compared to $2 billion for beauty, but Nykaa lacks sufficient differentiation in the space."
It expects Nykaa's customer acquisition costs and marketing expenses to continue to be high, due to competition from online incumbents such as Flipkart and Amazon, and expanding presence of Ajio and Tata.
"Nykaa is still sub-scale with less than 1% share in the space," it said.
"We expect Nykaa to remain a part player in the space (2.5% share by FY27) despite 49% revenue CAGR driven by low base and higher marketing spend."
The stock, Credit Suisse said, is pricing in too much optimism, trading at nine times enterprise value to FY24 sales—much higher than established retail players such as DMart (5.2 times) and Titan (6.6 times)—"providing no headroom for likely challenges ahead, particularly in fashion".
Credit Suisse set a target price of Rs 1,100 on Nykaa's stock, implying a valuation of five times EV to FY24 sales, which, it said, is "fair". The target price implies a potential downside of more than 23%.
The research firm also listed certain key risks to its thesis:
Strong success in fashion.
Continued share gain in beauty and personal care business.
Decline in India risk-free rate.
Shares of the company fell as much as 2.9%, before closing 1.2% lower at Rs 1,435.7 apiece on Wednesday. Of the 16 analysts tracking the company, 10 maintain a 'buy', four suggest a 'hold', and two recommend a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 13.7%.
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