Nykaa’s back in fashion

on March 21, global ratings firm of note, Edelweiss, initiated its coverage of Nykaa with a strong ‘buy’ rating, predicting a 53% upside to its current stock price. this came just days after a similar prediction by another such firm, Jefferies, and caused a spike of around 3% in Nykaa’s share price on March 22.

why are major firms bullish on the beauty e-tailer?

building presence

in Nykaa’s first quarterly report post-listing (Q2 FY22), one number dominated the headlines, that its profit had fallen 96% over the year-ago quarter. while that trend continued in its Q3 FY22 report card, Nykaa not only pared that number to a 58% drop over the year-ago quarter but also showed an increase on a sequential comparison. it reported a profit of Rs 27.9 crore for Q3 vs Rs 1.2 crore for Q2 despite its expenses increasing 20% over that period, to Rs 1,067.3 crore. what this means is that the company seems to have figured out, despite a generous increase in outlay, how to make even more than it is spending. it is spending wisely as well, acquiring fashion and beauty brands, and expanding its offline presence.

on March 10, Nykaa opened its 100th physical store on the occasion of International Womens’ Day. overall it has a physical presence in 45 cities across India, with more than half of them in tier 2+ cities. the vision from the leadership appears very clear, to go where its customers are rather than wait for them to come to it. with overall e-commerce penetration at around 8% in India and beauty being a category where customers prefer a physical touch, a phygital strategy seems to be the right one to adopt.

need for speed

the biggest reason investors are interested in new-age tech stocks is their potential for growth. it is often the case that large corporations with successful and profitable businesses often see their share prices plateau at a certain level. consider ITC as an extreme example. whereas upcoming tech stocks still have a fair amount of room for growth, even if it comes at the cost of profitability.

from that perspective, Nykaa is a fairly unique choice that offers the best of both worlds. it is one of a handful of listed new-age tech stocks that is actually profitable. that is perhaps why it is one of the few 2021 market debutants from that category which still trades at a premium to its listing price. its stock price of Rs 1,550/share on March 22 was still around 37% above its issue price of Rs 1,125/share, while the likes of Zomato (~0%), Policy Bazaar (-24%), CarTrade (-64%), Paytm (-74%), and others have been decimated by the bear market.

with the faith still, by and large, intact in India’s retail consumption growth story, many mutual funds and rating firms have highlighted Nykaa as the horse to bet on. with a successful phygital approach and relative strength on the market at its back, it might well emerge as a big winner five-ten years down the line.