Markets Today: Understanding the risks before investing in Nykaa IPO

FSN E-Commerce Ventures, the operator of online beauty stores Nykaa, has fixed a price band of Rs 1,085-Rs 1,125 for its maiden public share sale. The issue is scheduled to open for subscription on October 28 and close on November 1. At the top end, the company will be valued at Rs 53,200 crore ($7 billion).
 
This will be the biggest IPO since Zomato’s Rs 9,375-crore offering in July this year.
 
Currently, the company is commanding a grey market premium of Rs 610, but is it enough reason to subscribe to the issue? Arun Kejriwal, founder of Kejriwal Research and Investment Services, says:

• Current market fervor favours fintech companies’ exorbitant valuations
• Nykaa should capture 60-70% of current grey market premium on listing
• Valuation looks expensive
• A compelling anchor book will force investors to apply
• Margins in online business look unsustainable
• Nykaa benefitted from Covid; return to near-normalcy to test business model
• Fashion an expensive business
• The IPO will do well with factors working in its favour
• Advice: Apply for the listing pop and exit

 
Deepak Jasani, head of retail research at HDFC Securities, shares some of these concerns:

• Nykaa also operates in internet domain, where valuations are high
• Typically, valuations for such companies discount earnings much earlier
• Threat of competition, disruption in business model
• Q1FY22 results were tepid; operating margins low
• Customer retention, repeat orders key
• Stock could see sell-off if company takes too long to turn profitable

 
 As regards markets today, volatility could be high as investors will prepare for the monthly F&O expiry, also due tomorrow. That apart, stock-specific action amid corporate results will continue to dominate the trend.
 
Over 100 companies are set to announce their Q2 results today. These include ITC, IndusInd Bank, L&T, Maruti Suzuki, and Titan Company.
 
Globally, crude oil prices, movement in the US bond yields, and FII activity will also impact sentiment.