The fervour around the poster child of Indian unicorn public offerings is fizzling out.
Nykaa’s bumper offering last November got listed at a 78% premium. Shortly after, and now for over a fortnight, it seems to have come off the rails. Of late, investors have been dumping the stock against the backdrop of the US Federal Reserve interest rate hikes. Mirroring Nasdaq, India’s new-age stocks are, in general, getting battered.
The beauty e-tailer’s stock, for instance, hit its lowest of Rs 1,621.80 on January 27, slipping 35% from its all-time high in early December.
There is no doubt this correction was due – in fact, all Indian internet firms have corrected 25%-to-50% from their peaks. Nykaa was valued at a little under $2 billion in the last round ahead of its IPO, while the IPO itself came at $8 billion. Post-listing, its market cap stood at $13 billion, a January 24 Jefferies analyst note says.
“Taking cues from international markets, the domestic market is in a continuous downtrend,” Ravi Singh, vice-president and head of research at brokerage ShareIndia, told BusinessToday.in. “Nykaa may also see a further correction of 5%-8% around Rs 1,500 levels in the next trading sessions.”
Upside of fall
Nykaa’s case is not too alarming, experts say.
“The valuations can be questioned but at least it is a profitable business with real cash flows,” said Hiren Ved, co-founder of Alchemy Capital Management. “Among all the new-age companies that are going for IPOs, so far the only company that has built a sustainable business and can generate sustainable cash flows is Nykaa.”
In its earnings reported February 9, Nykaa’s net profit was down 59% year-over-year largely due to marketing spends ahead of the IPO – a one-time herculean undertaking – but it was still in the green at Rs 29 crore. (For comparison, another Indian IPO star, Zomato, is clocking losses upwards of Rs 430 crore.)
Furthermore, Nykaa’s revenue has still grown 36% year-on-year. For the beauty and personal care segment – the bulk of its business – gross merchandise value increased 32% from a year ago.
A lower price will give long-term investors a compelling entry-point, according to investment bank Morgan Stanley. Milind Karmarkar, senior fund manager at Dalal & Broacha Portfolio Managers, is waiting for the right valuation to buy Nykaa shares. He believes the company has a robust business model. For analyst Sandip Sabharwal, that right price is closer to Rs 1,000.
Bounce back?
Even when the IPO first popped, analysts recommended looking at the longer horizon – a minimum of three years.
It is a promising model in the long run. Already, at least in the online fraction of India’s nearly $29 billion beauty market, Nykaa is the clear winner. Going forward, it is vying for a bigger slice of the offline pie, too.
The company is prioritising long-term sustainability and omnichannel expansion. In 2022, Nykaa will open 300 brick-and-mortar stores, according to analytics firm GlobalData. It has earmarked $15 million for offline expansion in terms of stores as well as fulfilment centres.
Nykaa’s beauty segment has cracked the social media game with a mix of Bollywood celebrities and influencers endorsing the brand. Moreover, it has expanded the product portfolio for its nascent but growing fashion vertical by adding international brands, launching private labels, and collaborating with designers like Nikhil Thampi.
“The retailer’s long term growth strategies will cover these initial costs and help it bounce back to growth in the subsequent quarters,” said Ankita Roy, retail analyst at GlobalData.
Nykaa CEO Falguni Nayar in any case is focussed on fundamentals, not valuations.
This article first appeared on Quartz.
