Daily Voice | First-mover advantage, profitability, growth prospects make Nykaa a top pick, says Jyoti Roy of Angel One

Market Outlook

Jyoti Roy, DVP- Equity Strategist at Angel One, believes that given Nykaa’s unique business proposition and the fact that it has turned profitable in FY2021 will certainly give it an edge over the other IPOs which are lined up.

“Nykaa is our top pick from the list of IPOs lined up. We are more positive on Policybazaar despite premium valuations given the fact they are the only large player in the online insurance distribution business,” Roy says in an interview to Sunil Shankar Matkar of Moneycontrol. Excerpts from the interview:

The Nykaa IPO opens for subscription. Why should investors go for it? What makes it different?

The Rs 5,352-crore Nykaa IPO is garnering a lot of attention given that it is one of the very few profitable unicorns in India. Nykaa is catering to the fast-growing beauty and personal care market which is estimated to almost double to Rs 2 lakh crore by 2025 from Rs 1.1 lakh crore in 2020. Moreover, the beauty and personal care segment has a lower online penetration at 8 percent while online fashion has a penetration of around 12 percent in FY2021. This is significantly lower as compared to other mature e-commerce categories, indicating large headroom for disruption in future.

Given Nykaa’s first-mover advantage and brand recall, I believe that they are well positioned to take advantage of the future exponential growth in the online beauty and fashion industry. Therefore, the future growth prospects for Nykaa justifies the attention that the IPO is receiving despite the fact that there are other IPOs lined up at the same time.

Do you think it is overpriced at a band of Rs 1,085-1,125 per share? What do you think the investor should consider for valuing companies like Nykaa?

At the upper end of the price band, the Nykaa is valued at 21.8x its FY21 revenues. While valuations may appear to be expensive, as I said, Nykaa is one of the very few profitable Unicorns in India. And, I will reiterate that it has a much longer runway for growth given lower penetration for online fashion and beauty products as compared to other mature e-commerce categories. Therefore, given strong growth prospects, first-mover advantage, and high brand recall, we believe that the valuations of Nykaa are justified.

Valuations for new-age tech companies like Nykaa will seem expensive on a P/E basis and hence traditional matrices like P/E are not the right measure to value such new-age tech companies. A better way to value such high-growth companies will be on price to sales basis, keeping in mind the fact they will keep growing at super normal rates in the foreseeable future.

Investors cannot use traditional metrics to value these companies as they might be incurring losses now given the large upfront investments required to build scale and user base. However, once these companies gain scale, upfront investments will come off significantly, allowing them to earn profits which will justify their valuations.

What should investors select from a bunch of IPOs – Nykaa, Fino Payments Bank, Sigachi Industries, Policybazaar and SJS Enterprises – open for subscription?

Given Nykaa’s unique business proposition and the fact that it has turned profitable in FY2021 will definitely provide it an edge over the other IPOs which are lined up. Hence Nykaa is our top pick from the list of IPOs lined up. Policybazaar and Fino Payments Bank are the other IPOs of new age tech companies. As I said, we are more positive on Policybazaar because it is the only large player in the online insurance distribution business.

We like the business model of SJS Enterprises owing to increasing content per vehicle and high growth in the consumer durable space which accounted for 30 percent of the company’s revenue as of the first quarter this year. Moreover, the company has very strong return ratios and is a free cash flow generating company. However, the issue is fully priced at 35.4xFY2021 EPS and does not leave much on the table for investors.

What are the key risks that investors have to consider while subscribing for Nykaa IPO and Fino Payments Bank IPO?

For Nykaa, the key risk factor could stem from increased competition from other large established online retailers like Amazon. While the Nykaa name has become synonymous with online beauty and fashion products, there is a possibility that the other established players with deep pockets will try and replicate Nykaa’s business model, leading to increased competition for the company.

However, we believe that Nykaa is well placed to fend off any potential competition and keep growing at a healthy pace. Similarly Fino Payments Bank faces competition from other payment banks like Paytm, Jio, and Airtel payment banks. Most of the other payment banks are backed by well-established players with deep pockets and reach and can pose stiff competition to Fino Payments Bank.

What could be the final subscription figures for Nykaa IPO on November 1?

While it is very difficult to put an exact number to the subscription number, we expect very strong demand for the IPO especially post the success of the Zomato IPO which was subscribed 38.3x.

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