Will Nykaa’s performance tread the Zomato path?

Shares of FSN E-Commerce Ventures are expected to witness their next leg of performance riding on margin improvements which will be akin to Zomato, according to estimates by Nuvama. The domestic brokerage reiterated its buy rating on the Nykaa operator while marginally raising the price target to Rs 192 from Rs 189, as suggested earlier.

Zomato, which is purely a platform play versus Nykaa, an omni channel retailer, draws similarity in terms of online transacting users remaining the key TAM (Total Addressable Market), Nuvama said while suggesting that their unit economics also have similar drivers.

Zomato posted a significant improvement in unit economics/margins which were instrumental in driving upgrades and the consequent stock performance, Nuvama said.

From a low of Rs 49, Zomato has delivered multibagger returns of 258% in less than a year backed by back-to-back quarterly profits.

In Nuvama’s view, a similar trajectory is foreseen for Nykaa where margins record a significant improvement and thereby drive the next leg of performance for the stock.

“We are building in a 390 bps improvement in consolidated EBITDA margins over FY24–26 driven by improvement in advertising income for BPC, driving a marginally higher contribution margin of 130 bps,” Nuvama said in its latest note.Moreover, operating leverage benefits (180 bps), moderation in sales & marketing spending along with the likelihood of a normalised competitive environment and working capital, present tailwinds for this beauty and lifestyle company, the brokerage added.After a bumper listing at a 79% premium at Rs 2,018, Nykaa’s fall has been even colossal. At 1:10 pm today, it was trading at around Rs 169 down by 85% from the issue price of Rs 1,125. On April 26, 2023, it hit a 52 week low of Rs 114.25.

It has remained a laggard yielding nearly 7% returns in the past 12 months, which is a significant underperformance over Nifty which has delivered 27% gains during this period.

Competitive intensity has been one of its biggest nemesis, said the Nuvama note which held the launch of Tata Cliq Palette, Tira and Myntra’s beauty app for triggering the slide. Nykaa’s negative operating cash flows (FY22: -Rs 350 crore, FY23: -Rs 210 crore) and increase in debt from Rs 190 crore in FY21 to Rs 460 crore by FY23 have only added to its woes.

The company reported a consolidated net profit of Rs 16.2 crore for the December ended quarter, which was up 97% year-on-year (YoY) from Rs 8.2 crore in the same quarter last year. Revenue from operations jumped 22% YoY to Rs 1,789 crore in the reporting third quarter as against Rs 1463 crore in the corresponding quarter of previous year.

Following its earnings, several top brokerages took an optimistic view of the prospects of the company. Jefferies, Nuvama, and JM Financial reiterated their buy views while Kotak Institutional Equities suggested an ‘Add’. Meanwhile, Japanese brokerage Nomura maintained a neutral stance on the counter.

Also Read: Muthoot Finance, Manappuram Finance shares soar up to 14% after RBI action against IIFL Finance

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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