NYKAA IPO – Will It Translate Big Opportunities Into Big Profits

Nykaa is one of a very few profitable Unicorns in India, operating a consumer technology platform, having diverse portfolio of beauty, personal care and fashion products and offering an omnichannel experience to the consumers. Backed by Falguni Nayar and private equity firm TPG, Lighthouse India Fund, J M Financial etc  FSN E-Commerce Ventures has received strong subscription on the first day of its IPO and had successfully raised Rs 2,396 crore from anchor investors ahead of IPO.

FSNEV IPO has a price band of Rs. 1085 to Rs. 1125 per share, including fresh equity issue worth Rs. 630.00 cr. and an offer for sale of 41,972,660 equity share of Re. 1 each to garner Rs. 5351.92 cr. based on its upper price band. Kotak Mahindra Capital, Morgan Stanley India, JM Financial, BofA Securities., Citigroup Global Markets and  ICICI Securities Ltd are Joint Book Running Lead Managers (BRLMs) to this offer. Funds will be used for Investment in  FSN Brands,  Nykaa Fashion for funding the set-up of new retail stores, Capital expenditure for setting up new warehouses, repayment of borrowing, customer acquisition etc.  

Nykaa has posted strong revenue during the previous year, and reported a profit of Rs 62 crore in FY2021 . During FY 2019, it reported a loss of Rs 24.5 Crores which got reduced to Rs 16.3 Crores in FY 2020, followed by profit of Rs 62 crores in previous year 2021.

India is projected to become a INR 1,981 billion beauty and personal care opportunity by 2025. Online Beauty and Personal Care Market in India has grown at promising 60% CAGR in the last 4 years, penetrating 8% of the India Beauty and Personal Care Market in 2020.

According to the RedSeer Report,  India is projected to become ₹8,702 billion fashion opportunity by 2025. Nykaa has a large BPC market opportunity of ₹1,120 billion (US$16 billion) growing at 12% per annum to ₹1,981 billion (US$28 billion) in 2025. Nykaa’s fashion opportunity of ₹3,794 billion (US$54 billion) is expected to grow at 18% per annum to ₹8,702 billion (US$124 billion) in 2025. Nykaa has a total addressable market across beauty and personal care and fashion of ₹10,683 billion (US$152 billion).

According to Information provided in DRHP, Company operates in a highly competitive industry and its failure to compete effectively could have a negative impact on the success of our business and impact its margins. Industry is highly competitive and competition will continue to increase from online marketplaces, retailers with physical stores.  Brands that take a direct-to-consumer strategy may directly reach out to customers by removing the intermediary from the distribution and sales process. Bigbasket , Amazon, Flipkart etc are some of the big players in e-commerce space. 

Given the growth of the internet and mobile networks, new competitive channels are evolving and intensifying competition. Both the sellers as well consumers have alternative options for reaching out to each other directly. Further, faster innovation by competitors in providing more efficient or lower-cost services may increase the competition. Nykaa competitor have long operating history and have competitive advantage in terms of   better brand recognition, greater negotiating leverage, greater financial resources and established supply relationships. Besides this, Nykaa competitors are highly capitalized which gives them the leverage to lower prices and fees, increase discounts, and incentives.  Further competitor control products and services which are crucial to the success of Nykaa. This includes internet search, credit card interchange, and mobile operating systems etc and hence providing a better shopping experience to customer. Nykaa’s inability to address key challenges may impact business.

Opportunities are huge for Nykaa, as internet as well as beauty product culture is at a nascent stage and evolving in India. However, Nykaa will have to perform fast on scaling the business as well as achieving the profitability matrix. PE will be extremely high, considering the low EPS and the upper price band of Rs 1125. Nykaa will have to grow at a fast speed to justify valuations and sustain as well as create wealth for shareholders in long term.

Bureau Galactik Views

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