NEW DELHI: Shares of Nykaa have fallen 39 per cent from their 52-week high levels. According to Edelweiss, the correction is a reflection of the risk-off on consumer tech and a miss on customer addition last quarter, which the brokerage believes is a one-off and will reverse as management focus on growth remains clear.
Initiating a buy call on the stock, Edelweiss suggested a target of Rs 1,859 for the stock, suggesting a potential 20 per cent upside. The stock was up 3 per cent at Rs 2,574 on Tuesday.
As a thumb rule, said Edelweiss, it does believe any sales multiple for Nykaa has to be at a premium to Indian retailers. “Using different discounting periods (FY24 and FY30) gives us a target of Rs 1,950-2,100,” it said.
Edelweiss said Nykaa is a new-age digital company with a long runway for growth and that the traditional valuation multiples such as forward EV/Ebitda or PE will still not reflect the true value of the business.
“Also, the issue with using comparable is that there is no clear comparable to Nykaa. While Zomato has similar global peers, in the case of Nykaa, its business model is unique,” it said.
To capture the true cash flow potential, Edelweiss said it has looked at explicit forecasts till FY41 (i.e. a 20-year horizon), post which it builds-in another nine years till the business achieves maturity in cash flow growth.
“We thus arrive at a discounted cash flow (DCF)-based target price (TP) of Rs 1,859 at a weighted average cost of capital (WACC) of 10.8 per cent. We have also looked at the sensitivity to change in WACC and certain key long-term assumptions,” it said.
The beauty and personal care (BPC) industry is at present an Rs 1.1 lakh market with the e-commerce share at 8 per cent. Nykaa’s market share here is 37 per cent.
“Even adjusting for segments relevant for Nykaa, we believe, the market opportunity remains significant at Rs 25,0oo crore in 2025 (FY26), a 2.7 times potential. Also, BPC will see higher wallet share from millennials/Gen-Z, which make-up 50 per cent of India’s population (70 crore), the largest such base globally,” it said.
Nykaa’s fashion business, launched in 2018, is focused on curated content and full price sales. Edelweiss said while Nykaa has a strong right to win in the BPC space, fashion remains a different ball game altogether.
For Nykaa, it said, given the competitive scenario, the management remains clear in continuing its niche positioning.
“This will see Nykaa achieving limited scale, but offers a potential path to profitability. We also build-in a market share of 5 per cent by FY26 (FY21: 1.5 per cent) with the segment breaking-even by FY28,” Edelweiss said.
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