Nykaa IPO: Brokerages recommend subscribing, but cite valuation concern

The much-awaited IPO of FSN E-Commerce Ventures, which owns online e-tailer Nykaa, will open for subscription on Thursday in a price band of Rs 1,085 – Rs 1,125. While most analysts recommend subscribing to the issue from a long-term perspective, they do caution against the valuation and online segment that the company operates in.

Here’s what leading brokerages said.

Motilal Oswal Securities | Subscribe

We like Nykaa given its leadership position in the online BPC market, customer centric approach, profitable tech platform and capital efficient business model. The issue is valued at 16.1x FY22 EV/Sales on a post issue and annualized basis, which seems to be similar to other Indian unicorns. Investors with a high risk appetite can subscribe for listing gains given fancy for unique and first of its kind listing in the e-commerce space.

Click here for peer comparison with listed digital platforms

Anand Rathi | Subscribe

The valuation of the IPO is rich, demanding a market cap of Rs 53,204 crore. That said, there are no listed companies in India that engage in a similar business. However, considering the future prospects and it being placed at a sweet spot as the first mover advantage, we recommend subscribing for the long-term.

Prabhudas Lilladher | Subscribe

Nykaa’s entry into the fashion segment holds promise. Although we expect lower margins in FY22 (lower ad spend in FY21), we see steady margin expansion led by scale economies. The company has already expanded margins from 1.8 per cent to 6.6 per cent over FY19-21 making it one of the few E-com players to turn profitable. Nykaa can sustain a CAGR of ~35 per cent in sales, 50 per cent in EBITDA over the coming few years with double digit margins. The IPO at 12.6xEV/GMV on FY21 sales and around 4.7xEV/GMV on FY24 sales offers long-term value.

BP Wealth | Subscribe

Nykaa has the highest average order value (AOV) among leading online beauty and personal care platforms and caters to over 5 million active users each month. At the upper end of the price band, the issue is valued at 21.81x EV/Sales on FY21 financials. There is an underlying risk for high valuations but considering factors such as increasing PAT, positive cash flows, huge growth capabilities and confidence in the company’s management, we recommend subscribing to the issue.

Click here for peer comparison with non-listed online BPC players in India

Jefferies | Not rated

Competition seems to be picking-up from a range of players. Though Nykaa’s share in the overall beauty & personal care (BPC) market is just over 2 per cent, it controls nearly a quarter of the online BPC market. The market shares are even higher in online colour cosmetics where Nykaa is over half of the market. With lion’s share in categories like online cosmetics, Nykaa will need to create new categories in order to ensure the growth is industry leading.

Religare Broking | Not rated

The Indian beauty and personal care market is estimated to grow to Rs 2 trillion by 2025 from Rs 1.1 trillion in 2020. The Indian fashion market is estimated to grow to Rs 8.7 trillion by 2025 from Rs 3.8 trillion in 2020. Nykaa is well placed to benefit from growing industry trends. Financial performance has been strong with a revenue CAGR of 48.2 per cent over FY19-21. Operating margins have also seen a marked improvement from 1.85 per cent in FY19 to 6.61 per cent in FY21. Given the positive industry prospects and Nykaa’s strong foothold, we have a positive view on the company for the long term.

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