JM Financial feels the recent share price correction in Nykaa provides an extremely encouraging risk reward and hence, it has reiterated ‘buy’ rating on the stock with a March 2023 target of Rs 2,120, around 60 percent upside.
FSN E-Commerce Ventures (Nykaa) | The company will make its debut on the BSE and NSE on November 10. The issue price has been fixed at Rs 1,125 per share.
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FSN E-Commerce Ventures, which is widely known as Nykaa, gained as much as 4.6 percent on February 23, as the company finally settled its pending litigation with L’Oreal.
The share was trading at Rs 1,386.55 on the BSE, up 4.09 percent, with a market capitalisation of Rs 65,705 crore at 1:40pm.
The company informed exchanges on February 22 that the litigation with L’Oreal SA has been settled. “The certified true copy of the Delhi High Court order dated January 21, 2022 was received by the company on February 21.”
In November 2019, L’Oreal SA had filed a case against FSN E-Commerce Ventures and Nykaa E-Retail, alleging copyright infringement and passing-off against Nykaa with respect to its trademark ‘Maybelline’ and the trade dress and colour combination of its product ‘Maybelline New Lasting Drama Gel Liner’.
The District Court in Delhi passed an ex-parte order, against which Nykaa preferred an appeal before the Delhi High Court. Both the companies have decided to go for settlement that was approved by the District Court as well as Delhi High Court.
As per the settlement terms agreed by both companies, modified artwork adopted by Nykaa is approved by L’Oreal. Further, L’Orieal is going to press for reliefs of damages, rendition of accounts and any costs against Nykaa, and both parties are not going to make any claims against the other or claims relating to payment of costs or charges in relation to the settlement, said FSN E-Commerce.
JM Financial expects Nykaa to rally 60 percent by March 2023
Following correction in tech stocks globally, Nykaa shares fell 48 percent from its record high of Rs 2,574 in December 2021. Investors seemed to have raised concerns over its future growth and profitability.
JM Financial feels the recent share price correction provides an extremely encouraging risk reward and hence, it has reiterated ‘buy’ rating on the stock with a March 2023 target of Rs 2,120, around 60 percent upside.
The brokerage believes Nykaa remains a differentiated player with its focus on 3 Cs – Content, Curation and Convenience – creating a rapidly growing and loyal consumer base. “The company’s unique solutions to consumers’ and brands’ pain-points create long-term stickiness that is likely to endure Nykaa’s dominance in BPC (beauty, personal care) while creating a niche positioning in Fashion.
JM Financial is forecasting Nykaa to have 22 million unique shoppers in BPC and 10.9 million shoppers in Fashion. “For BPC, this implies addition of an incremental 14.1 million shoppers.”
According to BCG, India is expected to have 16 million ‘elite’ households with gross annual income above $ 30,800 and 33 million ‘affluent’ households with annual income between $ 15,400 and $ 30,800 in 2025.
“Assuming 60 percent penetration in elite households and 40 percent penetration in affluent households enables over 22 million unique shoppers for Nykaa by FY26. There remains potential upside from incremental users in a household or further penetration,” says JM Financial.
As of December 31, 2021, Nykaa had 96 stores in 45 cities in India with the company planning to reach 300 stores in 100 cities.
Such an aggressive push for omni-channel has raised concerns about a lack of belief in digital and the need for higher capex investments. But JM Financial feels the Nykaa should continue to pursue omni-channel expansion as that enables the company to 1) provide touch-and-feel experience, 2) acquire customers organically, and 3) gain consumer wallet share while digital penetration takes its own time to gain majority.
Nykaa’s platform with focus on 3Cs – Content, Curation and Convenience with the focus on authenticity – has made it a dominant online BPC platform in the country.
With Amazon and Flipkart prohibited from carrying inventory by India’s FDI policy and authenticity being tricky to promise in a marketplace model, they continue to focus on low ticket, massmarket items only. Meanwhile, JM Financial feels large conglomerates that are ramping up their digital presence can certainly become a threat if they dedicatedly decide to pursue this vertical, but the brokerage believes competitors are too distracted by larger categories such as grocery and fashion and BPC still requires a specialised retail capability.
Nykaa has 39 percent share in the online BPC market, followed by 21 percent by Amazon & Flipkart, 10 percent each by Myntra & Purplle, and 8 percent by Good Glamm.
But the Fashion segment continues to be dominated by the horizontals. JM Financial estimates Nykaa to continue building a niche positioning and gain 6 percent market share in the Fashion segment by FY26.
“Nykaa has already become the platform of choice for consumers wanting to shop for the latest season trends and willing to pay full price (<10 percent discount). This is also evident from the AOV (average order value) of Nykaa Fashion at Rs 3,590 in Q3FY22 that is almost 1.5-2.0x of competition.
Nykaa owns 2 percent share in the online fashion segment which is dominated by Flipart, Myntra and Amazon with 31 percent, 26 percent and 26 percent share, respectively.
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