Discretionary demand is tapering, but Nykaa has some cushion
2 min read . Updated: 16 Mar 2023, 12:16 PM IST
PremiumAs of now, Nykaa does not see a significant headwind from the discretionary demand slowdown since its products are low ticket items
The slowdown in discretionary demand is one factor which affects the performance of companies such as FSN E-Commerce Ventures Ltd, the parent company of Nykaa. Remember that this factor had partly weighed on Nykaa’s gross merchandise value (GMV) growth in the beauty and personal care (BPC) business in the December quarter.
But as of now, Nykaa does not see a significant headwind from the discretionary demand slowdown since its products are low ticket items, the management highlighted at Nomura’s virtual India Corporate Day event. Moreover, Nykaa is seeing a trend in which the consumer is ready to upgrade to more premium products even in highly penetrated categories like shampoo.
“Given the low penetration rate of beauty products and low-ticket size, we think the impact will be quite low on Nykaa," said analysts at Nomura Financial Advisory and Securities (India) in a report on 15 March. The broking firm factors in a revenue of compound annual growth rate of 27% over FY23-28F (F refers to forecast here) and margins to expand to about 12% by FY28F.
Further, Nykaa’s presence across online and offline platforms helps it to be in sync with the changing trend of consumers. As of December end, the number of stores in the BPC segment stood at 135. It will continue to ramp up its retail store network and aims to have 300-350 stores in 100 cities over the next 2-3 years.
In the fashion segment, Nykaa’s management highlighted that it differentiates itself from other online marketplace platforms such as Amazon India, Flipkart, Myntra and Ajio by providing a curated selection. While this augurs well in terms of attracting customers, the segment’s contribution margin does not encourage. In the December quarter, this metric stood at 0.9% versus 2.7% in the same period last year. For the nine-month ended December (9MFY23), the fashion segment had a 2% contribution margin, lower than 2.9% seen in 9MFY22.
To be sure, this vertical drove a cut in earnings estimates of Nykaa post December quarter results. Improvement in margin along with growth across the two key verticals is necessary to aid sentiments of investors in Nykaa stock, which is down by 45% in the past one year