Nykaa, Fino Payments Bank IPOs: In the long run, competition from deep-pocket players and their ability to constantly improve the platform to stay ahead of the race will be a challenge, says Gaurav Hinduja
Sunil Shankar Matkar
November 01, 2021 / 11:32 AM IST
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Gaurav Hinduja, Fundamental Research Analyst, GEPL Capital, is excited about fashion and beauty e-commerce platform Nykaa and Fino Payments Bank, whose IPOs are now open for subscription, foreseeing a decent growth for both companies.
Nykaa, an online marketplace for beauty and wellness that also has offline stores, is an exciting opportunity owing to the large addressable market size with low online penetration rates, and large headroom to grow in Tier 2 and 3 cities, says Hinduja.
Digital payments are expected to grow at a 25-27 percent CAGR over FY21-FY25E and Fino Payments Bank will be a key beneficiary given the established platform, resources and operating leverage kicking in, he says in an interview to Moneycontrol. Edited excerpts:
Why should investors go for the Nykaa IPO? Why is there so much craze for Nykaa when four more IPOs are also available?
Nykaa is a one-of-a-kind e-commerce platform that believes in creating value for its customers and vendors by taking the conversation away from heavy-discounting-led commerce and more towards content-led commerce that serves a dual purpose of educating customers and helping brands build awareness.
Nykaa is an exciting opportunity owing to the large addressable market size with low online penetration rates, and large headroom to grow in Tier 2 and 3 cities with a proven and profitable business model.
The growth potential in Nykaa is reflected in its gross merchandise value (GMV) which has grown a strong 57 percent CAGR through FY19-FY21. We expect this momentum to continue, given increasing digital penetration and rising e-commerce penetration in the hinterland.
Also read: MC Interview | Nykaa deserves premium valuation and it’ll remain for some time, says Karan Taurani of Elara Capital
Do you think its Rs 1,085-1,125 price band is steep? What are the criteria that one should consider for valuing Nykaa like companies?
On a post-issue annualized basis, the offer is priced at around 15.35x price to FY22 sales, which is comparable with other recently listed unicorns like Zomato and CarTrade, despite showcasing a positive EBITDA for the last three years along with increasing margins (around 200 bps) to 6.6 percent for FY21.
An important criterion to consider is the average order value (Rs 1,886 for beauty and personal care and Rs 3,197 for fashion for five-months in FY22) – which is almost double the industry average.
Another impressive number is customer retention, where around 70 percent of the GMV (gross merchandise value) as on FY21 is contributed by existing customers.
The sustained traction in GMV along with a rapid and efficient ramp-up of the fashion vertical despite the COVID-related impact is also something that should be considered.
Also read: Nykaa IPO day 3: Experts give a thumbs up to the public issue
Which IPO should investors pick from among—Nykaa, Fino Payments Bank, Sigachi Industries, Policybazaar and SJS Enterprises?
Nykaa and Fino Payments Bank are our preferred picks. Both in some way are a play on the untapped market of Tier 2 and 3 cities in terms of financial and technological inclusion.
Fino Payments has a lean merchant-led distribution model requires minimal capital expenditure and is PAT accretive right from onboarding.
The income has seen a strong 46 percent CAGR during FY19-FY21, it turned profitable in FY21 (on a full-year basis). Digital payments are expected to grow at a 25-27 percent CAGR over FY21-FY25E and Fino will be a key beneficiary given the established platform, resources and operating leverage kicking in.
Nykaa has also made sizeable investments into acquiring high-quality repeat customers, a scalable technology platform and a proven model in terms of successful vendor relations—all of which will reap benefits as digital adoption becomes a common theme.
Also read: Fino Payments Bank IPO: 10 key things to know about the issue, company
What are the key risks that investors have to consider while subscribing to Nykaa and Fino Payments Bank IPOs?
In the long run, competition from deep-pocketed players remains a key concern for both. The ability to constantly improve the platform and stay ahead of the race will be a challenge.
Nykaa’s beauty and personal care (BPC) vertical is more inventory-led, so as that scales, a lot more capital will have to be tied up in the inventory. The ability to maintain a healthy working capital cycle and inventory turn will also be something to look out for.
Fino is valued at 31.9x FY21 book value, which doesn’t leave much headroom for multiple expansion and could limit returns for investors in the short term.
Moreover, as most of the cost structure is variable (based on commissions) the upside in terms of margins could be limited.
What could be the final subscription figures for Nykaa IPO on November 1?
The anchor book, which was subscribed around 40x, is a great testimony for the investor appetite for the issue. We definitely expect the same to garner massive investor interest.
Should one look at the grey market premium while subscribing to any IPO?
Yes, although volatile and not regulated, the grey market premium is a great indicator of the prospects for listing gains in the short run.
As per sources, the GMP for Nykaa on the first day of the issue is currently at around 60 percent, at a premium of around Rs 625-Rs 650 per share.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
