Thursday, February 29, 2024
Manpower of India
HomeInvestmentBroker’s Call: FSN E-commerce Ventures (Buy)

Broker’s Call: FSN E-commerce Ventures (Buy)


Target: ₹210

CMP: ₹150.45

Nykaa’s online beauty and personal care (BPC) business retained its silver lining (forming 68 per cent GMV in FY23), led by advantages of: lower discounting than other categories (capped by global brands); ample penetration opportunity via educating more customers; potential entry of more global/D2C brands; higher spends/larger basket size; and proven unit economics with healthy contribution margin of 26.5 per cent in FY23 and potential for further expansion (levers such as private labels, lower fulfilment costs and higher ad revenue).

Nykaa’s personalised approach for its premium customer base and also factors such as: customer trustworthiness (genuine products); and content initiatives may aid better performance versus competitors, thus driving increased consumer retention/stickiness. Nykaa has also launched a loyalty programme — Prive, to drive frequency for existing customers. It may continue to work closely with current/new D2C/emerging brands to innovate/enhance customer experience.

Nykaa aspires to achieve revenue growth ahead of the industry average. We estimate revenue CAGR of 25.8 per cent in the online BPC segment, led by intensifying competition, near-to-medium term. Nykaa is approaching the end of its peak investment cycle with: BPC offline store count at 145 (lower store addition going ahead); warehouse space at 0.146 million sq ft (0.082 million sq ft in FY22); investment in technology/other initiatives to aid enhanced customer experience; and hefty marketing expenses (11 per cent of FY23 revenue). Healthy growth with ample margin levers of: expansion in private labels, and higher ad spend revenue in BPC/fashion may be the key drivers for profitability.

Nykaa’s core BPC segment is trading at fair 63x FY25E P/E, just 25 per cent higher than traditional BPC peers’ valuations (average target forward P/E for large BPC players is 50x). Expect steady valuation re-rating in BPC, led by strong earnings CAGR of 38 per cent in FY23-25E. Any improved visibility for EBITDA break-even or profit in the fashion business may aid share price performance. We maintain BUY with March-24 TP of ₹210. We value the BPC segment on EV/EBITDA of 60x one-year forward and have not assigned any value to the fashion and others business for now.




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