A Deep Dive into Nykaa IPO
Nykaa (FSN E-COMMERCE VENTURES LIMITED)
It is the first Indian unicorn to file for an IPO, and it was founded and run by a woman.
They are a digitally native consumer technology platform, delivering a content-led, lifestyle retail experience to consumers.
IPO size ~$0.7 Billion or ~ Rs 5,300 Crore (increased since DRHP filling) at the valuation of ~$7.1 Billion or Rs 53,000 Crore with the fresh issue of ~$84 Million or ~ Rs 630 Crore.
In January, the company has raised its Series E5 round at a valuation of Rs 15,000 crore, or around $2 billion, which means valuation is ~3.5x since January.
IPO Objectives based on RHP:
About the Company:
Website:
https://www.nykaa.com/
Founded: 2012
VC Funding: Rs 4-5B
Headquarter: Mumbai, India
Employees: 2,045 (47% Women)
Vision: Bring inspiration and joy to people, everywhere, every day
Mission: To create a world where our consumers have access to a finely curated, authentic assortment of products and services that delight and elevate the human spirit.
Founder and CEO: Mrs.Falguni Nayar
SHP Pre IPO:
Most of the new tech start-ups founder has diluted their stakes before IPO, whereas for Nykaa, the Nayar family still holds 51% post IPO.
India’s E-commerce at a glance:
India has a median age of 28 years vs 38 years in China and the US
375 million Indians are Generation Z (in the 10-24 years age group)
and 333 million Indians are Millennials (in the 25-39 years age group), accounting for 51% of the Indian population in 2020. India has a base of 300-350 million average monthly active social media users in 2020, more than 80% of the active users on social media platforms belong to the Generation Z and Millennial segment.Approximately 70% of online shoppers belong to the non- Metro cities.
India vs China Online consumer market
Industry Overlook:
India’s BPC (Beauty and Personal Care) Market is poised to grow at 12% CAGR to ₹1.9T
The fashion market is poised to grow at 18% CAGR to ₹8.7T
Business Model:
Inventory led vs marketplace model
Inventory-led Model (Nykaa): It’s when a company sources directly from brands & sellers and stocks it. There are no multiple sellers selling one product, unlike marketplaces where buyers get to choose from several merchants
Advantages for Nykaa: This approach ensures sourcing directly from brands or their authorized distributors.
- Guarantee the authenticity of products
- Ensure availability and timely delivery
Marketplace Model: The company acts as a meeting ground for buyers and sellers without storing goods. But they do offer shipping and payment assistance by tying up with selected logistics players and financial partners.
They have a diverse portfolio of beauty, personal care, and fashion products, including their owned brand products (13 products) manufactured by them.
Omnichannel experience; lifestyle retail platform, but also as a popular consumer brand.
Online and Offline Presence:
The offline channel comprises 80 physical stores across 40 cities in India over three different store formats as of Aug 31, 2021, with a wide geographical presence of stores and warehouses. Store format is shown below:
Online: As of Aug 31, 2021, they had cumulative downloads of 55.8 million across all mobile applications and 88.2% of their online GMV came through mobile applications. So let’s dig deeper!
The average rating of the app, 4.54/5 with 0.8 Million counts, is good.
Another statistic on the app reviews: I use this metric to look for fake reviews
Net Promoter Score (NPS) for Nykaa is 35, just for comparison, Tesla has a score of 94 and Peloton of 92.
Products:
BPC has 256,149 SKUs from 2,644 brands primarily across make-up, skincare, haircare, bath and body, fragrance, grooming appliances, personal care, and health and wellness categories as of August 31, 2021.
Fashion has 1,434 brands and 2.8 million SKUs across women, men, kids, and homes divisions.
The biggest advantage for Nykaa is its content-based Ecosystem.
2.1 million Nykaa Prive members - Loyalty program
Consumers may also try on certain products virtually through a “Virtual Try-On” feature on its mobile application.
Network Effect:
Lifestyle Platform:
And now it’s time for some numbers:
Income Source
From operation
Sales of products
Sales of services; (i) Marketing support revenue (ii) income from the marketplace
Other income; (i) logistic services (ii) Expiration of reward points
100% CAGR in the last 5 years!
GMV (Gross Merchandise Value) and order: Increasing steadily in both the categories.
Annual Unique Transacting Consumers have increased from 3.5 million in the Financial Year 2019 to 5.6 million in the Financial Year 2021 for the beauty and personal care vertical and from 2,637 in the Financial Year 2019 to 0.6 million in the Financial Year 2021 for the fashion vertical.
Marketing and advertising expenses: I would like this to be steady or increasing as in the growth phase you have to acquire the market share or else you will lose the race.
As a percentage of revenue from operations, fulfillment costs increased slightly from 9.67% in the Financial Year 2019 to 9.79% in the Financial Year 2020, then decreased to 8.92% in the Financial Year 2021. 94% of Orders are delivered within five days in the beauty and personal care vertical and 72% of Orders are delivered within five days in the fashion vertical, for the quarter ended March 31, 2021. Five days to order is a bit too much.
Served 24,817 pin codes, covering 86.4% of the serviceable pin codes across the country.
AOV (Average order value)
Approximately 63% of chat queries are being answered by chatbots. So they can focus more on sales and brand improvement.
GM (Gross Margin) Most important metric for any growth company.
EBITDA and Margin
Debt, Rs. 1880 M as of 2021 with D/E= 0.4 and cash of 2480 M
The capital turnover ratio has improved from 3.1 times in the Financial Year 2019 to 4.2 times in the FY 2021
One-liner for cash flow 2021: CFO Rs 1498 M, has positive CFO/FCF due to high operating leverage.
Summary of key metrics:
Risks:
Customer Acquisition Cost due to the competition
Change in the search engine ranking algorithms: In the web search, they might not come to the top place. Currently, at my location, Myntra, NNNOW comes first for an Eye Liner search on Google.
Delay in inventory sell.
Government policies: Online retailers, restrictions on conducting “flash-sales.”
As of July 29, 2021, 32 of the pending trademark applications were facing opposition from third parties. For instance, DKNY has opposed the registration of NYKD mark in India.
Competition:
Nykaa competes with organized multi-brand and exclusive retailers, unorganized merchants, horizontal online platforms like Amazon, Flipkart, Paytm Mall among others, and vertical online platforms such as Myntra, Purplle, Myglamm, sugar cosmetics, Boddess among others.
Global peers: Sephora (From which Mrs. Nayar got the idea to start Nykaa), Sally Beauty, Ulta Beauty, Nordstrom.
Conclusion:
There is no doubt about the business and its future success, promoter, TAM, but the valuation at which IPO coming is mind-boggling.
P/S for $ULTA- 2.4, $SBH- 1, $JWN-0.6, Nykaa at ~22 is very expensive
Even established player like $ULTA and $SBH has GM upward of 45%, so not sure how will Nykaa sustain them.
FY21 – EPS Rs 1.34 | ROE – 12.62% | BV – 15.5 | P/E – 839.5x
Content-based Ecosystem will drive the next phase of growth.
Cheers, and Thank you for your time.
Great thread by Aditya:
References:
Nykaa DRHP, RHP, Sensortower, Appbrain, Jefferies Research