Why Nykaa shares missed a potential re-rating; stock price target & more

Nykaa reported a 106 per cent year-on-year (YoY) surge in net profit at Rs 17.50 crore on 22 per cent YoY rise in sales at Rs 1,788.80 crore for the December quarter.

Nuvama Institutional Equities in its earnings review note on FSN E-Commerce Ventures Ltd (Nykaa) said that rising competition, increasing debt and visibility on margin improvement are potential reasons for missing the recent re-rating versus other platform peers. The brokerage noted that the consensus estimate is that Nykaa may see a 200 basis points margin improvement in FY25, which it said is key to watch.

Nykaa reported a 106 per cent year-on-year (YoY) surge in net profit at Rs 17.50 crore on 22 per cent YoY rise in sales at Rs 1,788.80 crore for the December quarter. Nykaa’s Ebitda for the quarter jumped 26 per cent YoY to Rs 98.80 crore while its Ebitda margin, excluding ESOP and new business expenses, came in at 6.1 per cent against 5.3 per cent YoY.

Following Nykaa’s Q3 results, Nuvama has rolled forward its target price to December 2024 and suggested a revised target price of Rs 189 from Rs 187 earlier.

“FSN E-Commerce (Nykaa) reported a stable showing with growth sustaining after Q2FY24 with BPC/Fashion reporting NSV growth of 20 per cent/31 per cent. Overall Ebitda margins were in line at 5.5 per cent and saw a 20 bps YoY improvement. There was an impact of 60 bps from ESOP and GCC expansion, which shall continue. Nykaa highlighted that focus remains on accelerating growth,” Nuvama said.

In the case of BPC segment, Nykaa’s GMV was up 25 per cent while its NSV grew 20 per cent, driven by 17 per cent growth in orders.

“On other parameters, the business exhibits decent traction with Annual Unique Transacting Customers (AUTC) rising 16 per cent YoY to 11.1mn. Average order value improved 3 per cent at Rs 2,024. Owned brands GMV grew 40 per cent YoY with share of GMV rising 150 bps YoY to 13.3 per cent. Contribution margin for the segment contracted 180 bps YoY to 22 per cent,” Nuvama said.

Nykaa believes that contribution margins of BPC segment have reached a decent enough level. Divergence in GMV and NSV is on account of higher discounting of new age brands, Nuvama said.

The Fashion segment delivered 40 per cent GMV growth with NSV growth at 30 per cent.

“Contribution from own brands improved 30 per cent YoY taking its share in GMV to 12 per cent. Gross margins for fashion segment improved to 77 per cent. However, fulfilment and marketing spends remained elevated. Overall, fashion business saw decent improvement in contribution margin to 11 per cent versus 1 per cent in Q3FY23,” Nuvama said.

Nuvama Institutional Equities

According to Nuvama Institutional Equities, Nykaa reported a stable quarter with growth sustaining after Q2FY24 with BPC/Fashion reporting NSV growth of 20%/31%. 

Nykaa’s top line came in line with estimates, overall EBITDA margins were in line at 5.5% and saw a 20 bps YoY improvement. There was an impact of 60 bp from ESOP and GCC expansion, which shall continue. Nykaa highlighted that focus remains on accelerating growth, the brokerage firm noted.

It retained a ‘Buy’ rating on Nykaa and raised the target price to ₹189 per share from ₹187 earlier. 

“Rising competition, increasing debt and visibility on margin improvement are potential reasons for missing the recent re-rating versus other platform peers. We and consensus for now build a 200 bps margin improvement for FY25 that is key to watch,” Nuvama Equities said.

JM Financial

While there have been murmurs of rising competition for Nykaa BPC, the company seems to have retained its market share, if not increased it as well. Consolidated GMV for Q3FY24 was at ₹36.2 billion with ₹17.9 billion in revenue. This becomes particularly impressive in light of the tough discretionary environment as evidenced by FMCG results, JM Financial said. 

Considering the tougher demand environment and lower than anticipated ad income, JM Financial reduced GMV and revenue estimates for Nykaa by 0.6 – 1.1% and 0.9 – 1.4% over FY25-28E, respectively. Though BPC marketing expense would normalise, it still expects it to sustain at relatively higher levels and hence lower EBITDA margin by 40-55 bps over FY25-28E. 

It reiterated its ‘Buy’ rating and target price of ₹210 per share and expects the company to be a strong beneficiary of improving discretionary spends. 

At 9:35 am, Nykaa shares were trading 3.80% higher at ₹166.60 apiece on the BSE. 

With Thanks Reference to: https://www.businesstoday.in/markets/company-stock/story/why-nykaa-shares-missed-a-potential-re-rating-stock-price-target-more-416462-2024-02-07 and https://www.livemint.com/market/stock-market-news/nykaa-share-price-jumps-nearly-6-after-q3-results-should-you-buy-the-stock-11707278202446.html