Nykaa IPO — Yay or Nay?

The IPO minting machinery in Indian markets is running full throttle. Next stop: FSN E-commerce Ventures aka Nykaa. The online fashion and beauty retailer filed its prospectus with SEBI for an IPO scheduled for end of this year or early 2022.

Nykaa is the brainchild of Falguni Nayar, who has received wide appreciation for launching the IPO of the country’s first woman-led unicorn. As founder and CEO, she leads the promoter interests in the company as well, which comprises her husband’s and her own family trusts.

IPO Facts

The issue size hasn’t been disclosed officially but media reports confirm that the company aims to raise ₹4,000cr ($539.7m) in the IPO (₹525cr ($70.8m) via fresh equity and 4.31 crore equity shares via offer for sale). Post-issue valuation is expected in the range of ₹35,000–40,000cr ($4.7–5.3bn).

While this would imply a 200x+ EV/EBITDA multiple, we have increasingly seen such names trade on operating metrics (such as GMV). In that context, a 56.6% two-year GMV CAGR to ₹4,046cr ($545.9m) in FY21 bodes exceedingly well. This is further reinforced by a fairly accommodative gearing ratio of 0.21x.

The company intends to sell a little over 10% of its equity. It also allocated shares worth 64.3 crore under ESOP. A total of 17 investors will be shelling a part of their stakes in the IPO. The Nayar Family Trusts (combined) currently hold over 53% stake which makes Nykaa one of the few new-age firms where the promoter group owns more than half the company even after a billion dollar valuation.

Business Layout

Nykaa has traded the popular online-only operation (like most other e-commerce entities) for an omnichannel strategy — retail business that integrates different shopping methods like online, physical shops or via phones. Founded in 2012, the startup now offers over 2,500 brands in a host of product categories like beauty, wellness, accessories, apparel etc.

It caters to over 1.5 million orders in a month and accounts for an estimated 30%+ of online beauty and personal care market revenues in the country at present — quite a remarkable figure! With multiple endorsements from Bollywood stars (like Katrina Kaif and Alia Bhatt), some of whom are also investors in the company, Nykaa has quickly bolstered its brand value and drawn young customers. While there might have been a general economic downturn from COVID-19, online businesses such as Nykaa have certainly seen a fillip.

The business is focused more on creating accessible merchandise than on discount shopping. It has remained prudent with spending and its revenue bases have been built through a community of influencers who leverage content on social media and networking sites to market products. As much as 10–15% of beauty content on Indian YouTube is generated through the Nykaa ecosystem.

As the company grew, it also began marketing its own portfolio of branded products. It expanded to offline retail in 2015 and currently operates a network of 74 stores across 38 cities. It offers over 5,000 brands and 130,000 products through both its online and offline channels.

Company Financials

In 2019, Nykaa turned profitable, making it a rarity among Indian startups who have struggled to generate profits despite their unicorn valuations. Nykaa drew early investors like Sequoia India (in 2014) and late ones like TPG and Steadview Capital (in 2019). It has raised a total of $145.9m in over 12 financing rounds to-date.

As of now, the company’s acquisitions include 20Dresses (online fashion styling platform) and Pipa Bella (online jewellery brand).

The diversified portfolio is a strong selling point for Nykaa which has helped it to expand customer bases steadily. It has a strong balance sheet — 0.21x gearing ratio and 0.64 in terms of net debt-to-EBITDA making it reasonably positioned to drive a period of expansion with meaningful debt capacity on the books.

Increasing on-ground retail presence which currently exists in three formats — Nykaa Luxe, Nykaa On-Trend and Nykaa Kiosk — is a clear growth driver which warrants a fair bit of opex and capex. While there is modest sequential improvement in EBITDA margins, it stands at 6.61% which appears to be somewhat low. It is an interesting metric to keep a close eye on. A double digit EBITDA margin (coupled with double digit EBITDA growth) would paint an even more pleasing picture in the future but at this point this is very much a growth story — with potential rising faster and deeper into the Indian markets.

The inventory model of operation and strong social media presence has ensured continuous stock presence and brand promotion among the targeted crowd. To top it off, a sizable online operation also lends high capital efficiency for fashion businesses which are subject to frequent changes in trends.

There are however working capital borrowings, to the extent of ₹3,462.84m ($46.7m) which reflect the nature of the business and typical payment cycles, but nonetheless, pose moderate risks in terms of flexibility in planning and pursuing business expansion activities.

Based on GMV (Gross Merchandising Value) growth, Nykaa Fashion is one of the fastest-growing fashion platforms in India. In terms of competition, there are no public-listed entities which operate in the same industry. However, peers like Myntra, MyGlamm and Purplle have business convergence with Nykaa.

In any case, Nykaa, by virtue of its early entry, expansion, omnichannel strategy, inventory model and competitive pricing, remains the market leader in this nascent industry.

Industry Outlook

As of 2020, fashion and Beauty and Personal Care (BPC) together make up 35% of the discretionary retail space in India. The BPC market alone is projected to be valued at ₹1,981bn ($26.7bn) by 2025 registering a CAGR of 12% from 2020.

Although an immense explosion in online multi brand retail has propelled e-commerce sales in India, the online penetration in BPC retail has been slow (2% in 2016 to 8% in 2020). But there is immense headroom for further penetration enabled by the rising adoption of e-commerce by Gen Zs and millennials. The rising working women population, discretionary spending and online presence in non-metro cities is likely to be a growth driver as well.

The fashion market, on the other hand, is largely dominated by unorganised retail chains which constitute a wide number of local apparel, footwear and accessories stores. This means concentration of sales in traditional retailers which serve across broad demographics.

This is where online omnichannel retailers like Nykaa are eager to buttress their presence through increased consumer and product-based segmentation and appeal to targeted audiences.

The omnichannel combines unique online preferences of consumers with flexible logistics in hyperlocal deliveries, store pick ups, etc. Although online content offers more versatility in offers and a wider customer reach, presence through brick-and-mortar retail stores has become crucial in creating personalised customer experiences. Years of fashion consumerism has developed on this exact notion of “feeling the fabric” before wearing it.

However, there are considerable challenges presented in this market ranging from high inventory costs, operational inefficiencies and reduced margins. Smaller sellers, especially, find it more difficult to compete due to the dominance of established brands, supply chain barriers and constrained resources to spend on marketing.

Nykaa, through its scale and presence in both offline and online retail, can fill these gaps and create more opportunities for business. With its technological expertise, quality control and organised e-commerce policies, Nykaa has what it takes to capitalise on the immensely growing large addressable fashion and BPC market in India today.

(Originally published August 6th 2021 in transfin.in)