FSN E-Commerce Ventures Ltd, which is the parent company of Nykaa, witnessed some positive developments in its March quarter results. During this period, the company’s consolidated EBITDA margin showed a notable improvement, rising by 147 basis points (bps) year-on-year and nearly 9bps sequentially to reach 5.4%. According to analysts at JM Financial Institutional Securities, this marks the first time in the March quarter that Nykaa’s EBITDA margin has seen sequential growth following a seasonally strong December quarter.
In the March quarter, Nykaa took advantage from multiple aspects that contributed to its performance, including a reduction in fulfillment costs. Particularly in its core beauty and personal care (BPC) segment, the fulfillment cost per order dropped to a multi-quarter low of ₹86. This decline was driven by an expansion of regional warehouse coverage, enabling more efficient operations.
Encouragingly, Nykaa has identified further avenues for enhancing its margins. During an earnings call, the company expressed its intention to closely manage all cost elements. It anticipates a decrease in marketing expenses as the ratio of repeat customers to new customers improves. Notably, Nykaa’s beauty business already demonstrates this positive trend, with existing customers accounting for 78% of the gross merchandise value (GMV). In the relatively newer fashion segment, the ratio of new to repeat customers stands at 50:50. Additionally, the scaling up of Nykaa’s eB2B business, known as SuperStore, is expected to contribute to margin growth.
However, it is important to acknowledge that the demand environment has not experienced a significant upswing, which raises concerns. Although Nykaa’s consolidated GMV has increased year-on-year, the pace of growth has slowed in the past two quarters.
The March quarter typically exhibits weaker performance, resulting in a sequential decline in key operating metrics such as the number of orders. Nevertheless, the drop observed in the last quarter surpassed the decline witnessed in the March 2022 quarter. For instance, BPC orders decreased by 7.4% in the last quarter compared to a 4% drop in the same quarter of the previous year. Notably, this decline occurred despite Nykaa organizing a Pink Love Sale in February. Furthermore, while the number of annual unique transacting customers increased by 0.4 million in the last quarter, it was slightly lower than the 0.5 million additions during the corresponding period last year. Analysts at JM Financial suggest that while Nykaa’s premium customer base has been minimally affected by the macro environment, the pressure on discretionary spending in Q4FY23 did impact the BPC segment. Additionally, the fashion segment experienced a sequential decline of nearly 18% in orders due to subdued discretionary demand.
Nevertheless, Nykaa’s management has prioritized profitable growth, which is a positive signal. Analysts at Nuvama Research note the company’s emphasis on achieving a balanced approach focused on profitability and stable growth rather than pursuing exceptional growth.
It should be noted that Nykaa’s fashion and other businesses continue to face losses. The segments comprise NykaaMan and SuperStore by Nykaa, as well as global brands such as Little Black Book, and Nudge. These initiatives have been financed using cash flows generated from the BPC business.
Looking ahead, analysts at Kotak Institutional Equities anticipate a continuation of this trend in FY24, with the fashion business expected to require more time to achieve EBITDA break-even.
The reduction of losses in the fashion and other segments would significantly contribute to overall margin performance and bolster investor confidence in the stock, which has declined by half from its 52-week high of ₹257.17 per share in June. Ultimately, a rebound in demand and subsequent growth are crucial factors to monitor. While the company suggests that the abatement of inflation concerns will lead to an uptick in demand, it is essential to remain vigilant about intensifying competition in the BPC and fashion sectors, which could potentially hinder Nykaa’s progress.
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