With higher market valuation, Nykaa can fall over 30%: HDFC Securities

“Nykaa is an efficient online business, its success in part is due to the absence of potent competitors (this is gradually changing). Ex-ad income, lack of non-linear monetization levers forces us to realign our valuation compass somewhere between a linear business and a pure platform,” HDFC Securities said.
The brokerage believes that Nykaa is more of an efficient online pipeline than a platform and its capability to layer on new revenue streams at low incremental production costs aids its scaling process.

The brokerage also believes that the Rs 3 billion+ ad income of Nykaa also means BPC product margins are just about profitable now and that its profitability seems overly reliant on ad income.


“TAM seems oversold if one slices it by HH income and population density, we bake in 26/33% share in BPC AUTC/NSV, while price suggests Nykaa owns 40% of the relevant TAM/50%+ by NSV -- a bit of a stretch. In Fashion too, right-to-win isn’t clear, we remain generous in our estimates for both segments within the realm of plausibility,” the brokerage said in its report.

“Nykaa expects to clock 31/49/115% revenue CAGR for BPC/fashion/other segments respectively over FY22- 25. AUTC will remain the anchor growth variable across segments. EBITDAM is expected to expand by 370 bps to 8% by FY25 as BPC product margins improve from -1% to 5.6%, courtesy of higher private labels, scale-led operating efficiencies and fashion losses ebb (building in a breakeven in FY26). RoE/RoCE likely to more than fully recover by FY25 (built-in: 21/15%),” it added.