Nykaa's strong performance in Sept quarter bucks new-age tech bloat

Nykaa has already expanded to 15 cities, not states. Ergo fulfilment costs are already down. Distance from warehouse to customer has therefore, shrunk

At a time when listed new-age technology-led businesses are struggling to be profitable and improve share price, online fashion and cosmetics retailer Nykaa has managed to improve its profitability parameters and narrow its share performance.

A standout feature in the second-quarter (Q2) results of the company was an improvement in margins and profitability. Net profit was up nearly 330 per cent year-on-year (YoY).

While margin performance was driven by growth in revenue, the company is also making structural changes that allow it to control cost better.

For instance, Falguni Nayar, executive chairperson, managing director, and chief executive officer, Nykaa, explained that although inflationary pressure resulted in fulfilment costs going up, the company countered them by ramping up its warehouse presence in the country.

“We earlier had a strategy of having warehouses in four cities. Now we have expanded to 15 cities, which means the kilometres covered from our warehouse to the customer has shrunk. This has helped keep our fulfilment costs in check in an otherwise negative environment. We are also controlling employee costs. Although there’s no hiring freeze, we are careful about adding more,” said Nayar.

The company said its fulfilment costs have come down from 10.5 per cent to 9.4 per cent -almost a 100-basis point (bp) improvement.

Marketing costs have come down to 7.8 per cent this quarter of 2022-23 (FY23) – almost a 200-bp improvement YoY.

The beauty business has delivered almost a 650-bp incremental margin on the contribution level.

HSBC Global Research report stated it has a ‘buy’ call on the company’s stock, with structural attractiveness supported by a strong Q2 performance.

“With its leading scale, reach, and broad product range, Nykaa is a rare combination of profitability and sustainable exponential growth in our view. We expect revenue to double every two to three years in the coming decade,” the brokerage said in its report.

The report further added that the company’s strategy of long-term value capture in beauty and personal care is augmenting core e-commerce operation with a growing pan-Indian store network, raising structural barriers for others and upping its game in consumer experience.

“Building a portfolio of its own skin and beauty brands, and extending its overall proposition to other retailers through the eB2B SuperStore by Nykaa. This should make Nykaa’s long-term evolution not just a platform owner, but a formidable brand owner,” said the report.

A Jefferies report has recommended a ‘buy’ on the stock.

“We upgrade our FY23 through 2025-26 earnings before interest, tax, depreciation, and amortisation estimates by 24-33 per cent on better margins and retain ‘buy’ with an unchanged price target of Rs 1,650,” it said.

What is also giving analysts confidence in Nykaa’s strategy is the expansion and investment plans in other segments.

“Investments continue as the company ramps up other segments, which include Nykaa Man, eB2B (SuperStore), cross-border, and acquired brands. SuperStore has scaled to over 73,000 transacting retailers across 650-plus cities,” said the Jefferies report.

More importantly, the company’s share price has improved vis-à-vis peers that listed at the same time.

Nykaa’s issue price was Rs 1,125 per share and it touched a high of Rs 2,206 per share on listing day. The company’s share price on Tuesday closed at Rs 1,153.6 per share. The company’s share price has already gone ahead on the issue price.

The company’s stock price has corrected 17 per cent from its high of Rs 2,492 per share on December 1, 2021.