Nykaa IPO: How much beauty can this stock add to your portfolio?

E-commerce unicorn has an efficient business model and enjoys an early bird advantage; valuation raises concern, given the increasing competition

Nykaa's share in the overall BPC (beauty & personal care) market is estimated at 2%. But it controls nearly a quarter of the online BPC market. Pic: https://www.nykaa.com/

Beauty products e-tailer Nykaa’s much-anticipated initial public offering (IPO) opens to subscribers on Thursday, October 28, at a price band of at ₹1,085-1,125 a share. The maiden offer, which closes on November 1, comes at the height of the festival season, seeking to tap Indians’ penchant to make investments around Diwali time.

Given the frenzy around the IPOs of other e-commerce firms — such as Zomato in the past and Paytm in the future — Nykaa’s public issue has caught a fair share of investor interest. The company, which enjoys a significant market share in the beauty and personal care products space, is expanding its presence in the fashion segment as well.

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Analysts point out that the unicorn’s fundamentals are strong, in that it enjoys a significant first-mover advantage in the online beauty products space, has an efficient business model, and a strong brand recall. Yet, its valuation for the IPO, at over $7 billion, is raising some concern.

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Financial background

On sale are fresh equity shares aggregating to ₹630 crore, and an offer for sale (OFS) of about 4.2 crore shares by promoters and other existing shareholders. The total size of the IPO is ₹5,352 crore, making it the biggest IPO after that of Zomato, at ₹9,375 crore, in July.

Nykaa, founded in 2012 by former investment banker Falguni Nayar, has stuck to the traditional e-tail model, selling around 4,000 beauty and personal care products and fashion brands on its website and app, rather than adopt a marketplace model like Flipkart or Amazon. It has an offline presence as well, with about 80 brick-and-mortar outlets across 40 cities.

Promoters currently hold an over 50% stake in the firm, which is a boost for investor confidence. Media reports indicate that the Nykaa app has witnessed 55.8 million downloads. For fiscal year ended March 2021, over 88.2% of the company’s online gross merchandise value (GMV) came through the app. It posted a net profit of nearly ₹62 crore during the year, against a loss of ₹16 crore in FY20.

What analysts say

Most analysts agree that in terms of listing gains, Nykaa may prove a good buy for investors. ‘Listing gains’ refers the profit you make when the stock begins to trade on the exchanges, against what you paid during the IPO.

Can you hold on to the shares for the medium or long term? Here, analysts have varied views. There is some unease over the valuation, and how sustainable it is.

Prabhuas Lilladher, a brokerage, has given a ‘Subscribe’ rating to the IPO. “We believe Nykaa’s entry into the fashion segment holds promise with focus on premium customers, curated and managed marketplace offering over 1.8 million SKUs, private labels like NYKD, Pippa Bella, 20 dresses and industry leading AOV (average order value) of ₹3,977 and about 25% contribution to GMV in 5MFY22,” it said in a note to investors.

Anand Rathi has given a ‘Subscribe – Long Term’. “The valuation of the IPO is rich, demanding a market cap of ₹53,204 crore. That said, there are no listed companies in India that engage in a similar business. However, considering the future prospects and it being placed at a sweet spot as the first mover advantage, we recommend subscribing for the long term.”

Jefferies, which has not given a rating, noted the rising competition in the beauty & personal care (BPC) space but expressed confidence on Nykaa’s market position. “Though Nykaa’s share in the overall BPC market is just over 2%, it controls nearly a quarter of the online BPC market. The market shares are even higher in online colour cosmetics where Nykaa is over half of the market. With lion’s share in categories like online cosmetics, Nykaa will need to create new categories in order to ensure the growth is industry leading,” it said.

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