Nykaa: Growth vs profitability | Mint

Nykaa noted some downtrading across certain brands. Also, there was higher brand-funded discounts during the festive season. Strong growth in Nykaa’s lower margin eB2B business is another factor that played spoilsport.

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“The gross margin miss, an aberration as per management, must reverse; else as any structural impact could negate benefits in marketing and fulfilment,” said analysts at Nuvama Research in a report on 13 February.

The lower-than-expected margin performance has prompted analysts to trim their Ebitda estimates largely for FY23-FY25. Ebitda is earnings before interest, taxes, depreciation and amortization. Investors were visibly discouraged, pulling the shares down by nearly 5% on Tuesday.

The cut in estimates is mainly due to the fashion vertical. The segment’s gross merchandise value (GMV) growth was robust at 50% year-on-year (y-o-y) and 21% sequentially. But the segment’s contribution profit as a percentage of net sales value fell to 0.9% from 2.7% in Q3FY22. Gross margin fell, too.

“The lack of margin expansion during the quarter suggests both growth and rising margins could be hard to achieve,” said analysts at Goldman Sachs (India) Securities in a report on 14 February.

Nykaa’s average order value in fashion stood at ₹3,959 in Q3. At this rate, “User growth will likely be capped in our view, while driving user growth at the lower end could expose Nykaa to competition from platforms such as Myntra and Ajio as well as adversely impact unit economics,” the Goldman Sachs analysts added.

One point of comfort in Nykaa’s fashion segment was that monthly average unique visitors grew to 19.4 million in Q3. This is a meaningful improvement compared to the previous five quarters when monthly average unique visitors stood at about 16 million each. However, given the slowdown in discretionary spending, the trajectory of monthly visitors needs to be watched.

In fact, this was also a key factor that weighed on growth in Nykaa’s mainstay beauty and personal care (BPC) business. Though the GMV growth here was strong at 26% y-o-y, it was lower than some analysts’ estimates. Also, the last quarter was impacted by change in the festive period, Nykaa’s management said in the earnings call. Driven by an adverse mix, BPC’s gross margin fell too, although the drop wasn’t that steep. However, BPC’s contribution profit as a percentage of net sales value rose to 25.9% from 23.9% in Q3FY22.

Meanwhile, the others segment, which includes businesses such as NykaaMan and the eB2B platform, SuperStore by Nykaa, is seeing improvement in profit metrics. But the vertical remains in the red and is at a nascent stage, thus too small to move the needle.

“While the BPC business remains on a strong footing, it may feed other businesses until such time as these businesses become self-sustaining,” said analysts at Kotak Institutional Equities in a report on 14 February.

Also, rising competitive intensity is a risk. To be sure, Nykaa must balance both growth and profitability across segments to boost sentiment for the stock. Given the muted near-term demand, that is a tall ask.

Nykaa’s shares have more than halved from their 52-week high of ₹315.44 apiece in April.