Nykaa to face competitive heat but its omni-channel experience maybe the game changer

• Nykaa was able to increase its revenue by ₹1,300 crore in the fiscal year 2022.
• ICICI Securities anticipates much higher competition for Nykaa in the time to come.
• The brokerage recommends investors to hold on to the stock.

Even though Falguni Nayar-led ecommerce titan Nykaa was able to grow its revenue by ₹1,300 crore in FY22, brokerage firm ICICI Securities believes that it is not the right time for retail investors to buy more shares. On the other hand, it isn’t a stock to get rid of either.

The brokerage firm raised its target price from ₹1,250 to ₹1,300, while maintaining its ‘Hold’ rating. Nykaa’s shares were trading higher than this target – at ₹1,370 at 10:13 am on Monday, after a marginal rise in the early morning trade.

Nykaa’s top spot might be in danger

Nykaa’s revenues for the fourth quarter of FY22 were in line with analyst estimates. Yet, competition in the segment is likely to intensify over time.

“That said, competition will likely intensify from both vertical and horizontal peers. While we expect BPC [beauty and personal care] revenues to grow, we believe Nykaa’s journey could be different – it will have to go more mainstream to drive this growth (tougher decisions about brand stretch along the way),” ICICI Securities said in their latest report.

Apart from traditional players like Amazon, Flipkart and Meesho that sell everything from clothes and cosmetics to groceries to items in the home category, Nykaa also competes with businesses like Purplle that work in the same domain as the company. Purplle is currently valued at over $700 million.

In the short term, the company also faces the risk of a bad consumer sentiment which can affect discretionary spending - that can impact demand.

‘Nykaa’s strengths can’t be replicated easily’

The long-term prospects for the company are good. ICICI Securities highlighted that Nykaa is currently functioning in a golden spot with three aspects working in its favour. First, it continues to be the largest beauty and personal care business in India. Second, it has a good profitability metric and prudent capital allocations. Three, it is omni-channel in a true sense.

“Its strength of content-driven and inventory-driven models in BPC will continue to be key differentiators – the former is a long-drawn journey and cannot be built by a new entrant just on the strength of capital,” the report added.

Nykaa reported a revenue of ₹3,774 crore for FY22, representing an increase of about ₹1,300 crore. Its net profit, however, declined by ₹20 crore during the same time frame.

As per ICICI estimates, its revenues could touch a billion dollars in the next two years. In the same time frame, its profits might also grow proportionately, as per the report.

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