Fsn E-commerce Ventures - Nykaa - Mirror, mirror, on the wall, is Nykaa a platform at all?

Jay Gandhi, Institutional Research Analyst, HDFC Securities

When a buzzword (platforms) emerges that affords (GOD)LY valuations, investors and businesses tend to tie themselves in a knot to claim a credible association of their business with the term. Hence, many online businesses are termed as platforms, but not all are. This note is an attempt to help investors understand where we believe Nykaa (India's go-to BPC e-tailer + fledgling fashion marketplace) fits in. In our view, Nykaa has the potential to be a hybrid, but as of now (85% of NSV - inventory-led), it shares more characteristics with a busy, efficient, linear online pipeline than a platform. Additionally, Nykaa's TAM seems to be oversold as well. Hence, valuation stencils must be realigned accordingly. Sales/EBITDA/PAT CAGRs of 35/65/113% over FY22-25E and a full recovery in return profile by FY25 is built in (From 5 to 15% over FY22-25). We initiate coverage with a SELL recommendation and DCF-based target price of INR 800/sh (implying 81x Sep-24 EV/EBITDA/5x Sept-24 EV/sales).

Nykaa-more an efficient online pipeline than a platform: A platform's capability to layer on new revenue streams at low incremental production costs aid its scaling process. This ability is absent in online pipeline businesses. Most platforms over CY17-21 (1) grew at 30-120% CAGR (vs. 19- 50% CAGR for online pipelines, despite a smaller base); (2) sported a negative to 15x asset turn (vs. 4-6x for online pipelines); and (3) clocked an EBITDAM expansion of 5-95pp (vs. -5 to 5 pp for online pipelines). Nykaa clocked 50% CAGR over FY19-22; its EBITDAM expanded ~250bp and it has a linear asset turn profile (from 2.7x to 1.9x over FY19-22)-all akin to an online pipeline.

Ad income provides non-linearity in monetization but will be closely contended for: Absence of a potent competitor in BPC e-tailing ensured Nykaa remains over-indexed in BPC ad budgets (accounts for 10-12% of Nykaa's BPC NSV; INR3bn+). This is likely to change with more deep[1]pocketed e-tailers (AJIO, Myntra, and TATA Cliq Palette) wanting their pound of BPC-related ad income. The INR3bn+ ad income also means BPC product margins just about profitable now. (FY22: -1% on NSV) and that its profitability (FY22 EBITDA: INR1.63bn) seems overly reliant on ad income.

Total addressable market (TAM) seems oversold: CMP implies Nykaa's BPC AUTC would hit 40%+ (122mn AUTC) of the relevant TAM by FY42. On an NSV basis, this translates to half the relevant BPC TAM (in AUTC)-a bit far[1]fetched! Especially against the backdrop of (1) increasing competition in the beauty category; (2) thinning population density beyond the top-30 districts. We bake in 25/79mn BPC AUTC for Nykaa by FY27/42, implying 19/26% of relevant TAM (~140/300mn AUTC) and 25/33% value share in BPC by FY42.

Financials: Expect Nykaa to clock 31/49/115% (overall: 35%) revenue CAGR for BPC/fashion/other segments (INR 75.3/10.8/6.4bn) respectively over FY22- 25. AUTC will remain the anchor growth variable across segments. EBITDAM is expected to expand by ~370bps to 8% by FY25 as (1) BPC product margins improve from -1% to 5.6%, courtesy (1) higher private labels; (2) scale-led operating efficiencies; and (3) fashion losses ebb (building in a breakeven in FY26). RoE/RoCE likely to more than fully recover by FY25 (built-in: 21/15%).

Valuation and outlook: 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. Hence, we initiate coverage with a SELL recommendation and DCF-based TP of INR 800/sh (implying 81x Sep-24 EV/EBITDA/5x Sept-24 EV/sales).

Shares of FSN E-Commerce Ventures Ltd was last trading in BSE at Rs. 1153.60 as compared to the previous close of Rs. 1185.75. The total number of shares traded during the day was 283677 in over 15665 trades.

The stock hit an intraday high of Rs. 1209.00 and intraday low of 1142.00. The net turnover during the day was Rs. 331005593.00.

Source : Equity Bulls

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FSNECommerceVentures Nykaa HDFCSecurities Q2FY23 ResultUpdate