Nykaa stock dips 18% in 7 trading sessions. What should investors do?

FSN E-Commerce Ventures aka Nykaa which is the leading cosmetics-to-fashion e-retailer has been under pressure on stock exchanges in the last 7 trading sessions. During this time, Nykaa stock nosedived by nearly 18% and is currently near its record low level by end of January 20th. Amidst steep correction in stock price, brokerage ICICI Securities has upgraded its outlook on Nykaa.

On Friday, Nykaa shares closed at 127.25 apiece down by 1.36% on BSE. During the week between January 16 to 20th, Nykaa shares dipped by nearly 14%. The stock also touched a new record low of 123.30 apiece on January 17th.

But Nykaa shares have been on a downward slope since January 12th. Since then, the stock has plummeted by 17.96% on BSE in seven trading sessions.

The free fall in Nykaa shares comes after the expiry of the lock-in period for pre-IPO investors on November 9 last year. Also, the company had credited bonus shares in the ratio of 5:1. Notably, November month also followed the resignation of the company’s Chief Financial Officer Arvind Agarwal. The fashion e-retailer has been criticised for launching bonus shares during the time of expiry in the lock-in period for pre-IPO investors.

Also, in mid-December last year, Nykaa witnessed a block deal. Major investors such as Mirae Asset Mutual Fund, Goldman Sachs Investments Mauritius, Goldman Sachs (Singapore), ICICI Prudential Life Insurance Company, and Canada Pension Plan Investment Board were among the buyers. Among the seller was Kravis Investment Partners II.

Nykaa is yet to announce its third-quarter results for FY23. However, in Q2 of the current financial year 2022-23, Nykaa posted a multi-fold increase in its consolidated net profit at 5 crore as compared to 1 crore in the same period a year ago. The consolidated Gross Merchandise Value (GMV) grew 45%year-on-year (YoY) to 2,345.7 crore in Q2 FY23.

In its latest research note dated January 20th, ICICI Securities analysts said, “We had always liked Nykaa’s business model. That said, post its listing on the Indian bourses, we’ve been staying on the sidelines due to valuations beyond our ability to comprehend (at peak stock price, revenue CAGR requirement over the next 20 years was 23%).”

Nykaa shares on BSE have nosedived by nearly 94% from its listing price of 2,001 apiece, while the stock has plunged by a whopping 89% from its IPO issue price of 1,125 apiece.

ICICI Securities note added that post 70% correction from peak, in SoTP, BPC (beauty & personal care) business now accounts for ~77% of the current price, assuming it’s a defensible and high-growth business in the medium term. Reverse DCF shows 15% revenue CAGR requirement at 20% EBITDA margin (at TV). The brokerage ascribes 100 per share for BPC business.

The brokerage believes that the cyclical slowdown in BPC and fashion businesses is somewhat priced in.

It added, “We believe Nykaa continues to present a combination of (1) the largest beauty and personal care (BPC) business in a growth market (India), (2) good profitability metrics and prudent capital allocation, and (3) omnichannel in the ‘true sense’ (going online to offline).”

That said, the brokerage also believes that competition may intensify from both vertical and horizontal peers.

Thereby, the brokerage’s note added, “we expect BPC revenue to grow, we believe Nykaa’s journey could be different – it will have to go more mainstream to drive this growth. Growth trajectory in fashion will be keenly watched out.” ICICI Securities has upgraded its outlook to ADD on Nykaa shares from Hold with a target price of 145.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.



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