“Arriving there is what you are destined for. But do not hurry the journey at all…”
Never had someone imagined that these few lines of a poem (Ithaka) can be the inspiration behind a successful business start-up, a unicorn valued more than USD 7 billion and the first profitable one to raise an IPO.
Most important of all, it is led by a Woman who believed in cherishing the journey rather than the destination. That’s Falguni Nayar’s Nykaa for you.
About Nykaa
Incorporated in 2012, Nykaa is the country’s first and largest speciality beauty and personal care (BPC) e-tailer platform, providing a lifestyle retail experience to its customers through creative and entertaining content. Apart from expanding into the fashion world, Nykaa is also trying to entice men through the newly launched Nykaa Man.
With a massive online presence, the company also has around 80 physical stores which compliments Nykaa’s omnichannel business strategy of providing a complete shopping experience to its customers and supporting its strong distribution network.
The company’s USP is taking beauty brands to masses. Imagine getting an Estee Lauder product in a Tier 3 city in India. Nykaa made it possible.
The Nykaa IPO
Nykaa also jumped into the start-up IPO bandwagon, following Zomato’s stellar launch and the likes of Paytm, Oyo, Delhivery, etc.
28th October 2021, is the landmark date in Nykaa’s history, as its holding company, FSN Ecommerce Ventures raised its IPO on this day. The company got listed on the Indian bourses on 11th November 2021 and crossed Rs 1 lakh crore market cap on listing day.
With a price band of INR 1,085 – 1,125/share, the INR 5,352 crore IPO consisted of fresh issue of INR 630 crores and remaining Offer for sale. This means, almost 90% of the proceeds will go to the existing shareholders. The promoter group will hold nearly 52% stake in the company after the IPO.
The company intends to utilize the majority of the fresh proceeds in branding and repayment of borrowings, along with business expansion and capital expenditure.
Why Nykaa went for an IPO
Nykaa is one of the very few profitable start-ups going for an IPO. It reported a net profit of INR 62 crore in FY2021, against a net loss of Rs 16 crore, the previous year. Revenue rose 38% to INR 2,453 crore in FY2021.
With more than USD 7 billion valuation, Nykaa is set to go the public route as the Brain behind the Beauty platform, Falguni Nayar believes that the under-penetrated e-commerce market will ascend high in the future and that is why online e-tailers are enjoying astronomically high valuations. She wants to leave good value on the table for the upcoming investors in Nykaa. Also, going public is a better option to grow as a sustainable organization, and a transparent exit way for its existing shareholders.
Around 54.25% of the shares are owned by the Nayar family. Founder Falguni Nayar and her children (28.53%) will continue to own a majority stake after the IPO, while her husband and promoter Sanjay Nayar Family Trust will sell 4.8 million shares (25.72% stake).
Falguni Nayar’s beauty startup has jolted her to the ranks of the world’s richest. Nayar, who owns about half of Nykaa, is now worth almost $7 billion as shares of the firm nearly doubled on their trading debut Wednesday. She’s become India’s wealthiest self-made female billionaire, according to the Bloomberg Billionaires Index.
TPG, Light House India Fund, JM Financial, Yogesh Agencies, Sunil Kant Munjal (Hero Group), Harindarpal Singh Banga (Hong Kong Group), Narotam Sekhsaria and Mala Gaonkar are likely to divest their stake during the IPO.
Subscription
Nykaa received tremendous response from investors on its final bidding day on 1st Nov 2021. The IPO was oversubscribed by almost 82 times. Maximum traction was seen in the HNI (112.5 times) and QIB segment (92 times), followed by retail 12.29 times and employees 1.88 times. It was commanding a premium of INR 570 in the grey market, more than 50% of its issue price. And its market debut at Rs 2,001 per share (77% premium) on the BSE against the IPO issue price of Rs 1,125. Price band of the IPO was fixed at Rs 1,085-1,125 per share.
Why Nykaa IPO received such positive response
Nykaa’s unique business model and first-movers advantage in the online BPC segment, makes it one of the rare kinds of profitable tech start-ups in India. In FY2021, the company reported strong growth momentum without incurring a considerable cash expenditure, it\’s a good sign of sustainability. Its unique business model, i.e., online retail generated 95% of the sales in FY2021.
Nykaa’s scale of operations with a wide and well-curated product portfolio, solid and enterprising management team, promising growth and profitability potential add to its score of positives.
It’s unique business proposition, aspiring brand image, solid community of loyal customers and strong influencer network, makes it one of a kind of a company. Fun fact – The company does not have a direct competitor in India till date.
Its rising number of transacting customers and growing average order value are other pluses. Between FY2019 to FY2021, Nykaa’s Gross Merchandise Value (GMV) grew at a 57% CAGR to INR 4,046 crore. The projected GMV for FY2022 is INR 5900 crore.
How healthy is Nykaa, Financially?
The pandemic caused severe economic impediment not only in India, but across the globe. However Nykaa witnessed revenue growth in the last two years. In FY2021, its operating revenues increased to INR 2,441 cr (+38.1% y-o-y), primarily due to higher online sales. Higher average ticket size or order values from its existing customers is the primary driver for Nykaa’s revenue growth. Almost 90% of the income was generated from sale of products on the marketplace.
Although Nykaa follows the omnichannel business mode to provide a complete shopping experience to its customers, online business is the key revenue driver for the e-tailer. EBITDA margins improved to 6.61% in FY2021 from 4.59%, on account of higher gross profits mainly from the in-house brands, coupled with lower marketing spends during the pandemic.
As of March 31st 2021, Nykaa had sufficient free cash flows (FCF) and liquidity on its balance sheet to cover its operating and capital expenditure for the next one year. In addition, expected proceeds from the IPO will further enhance the company’s resources. Ample liquidity and positive FCF is a rarity among start-up companies, and Nykaa is one of such breeds.
Nykaa’s capital structure is pretty resilient, reflected by reducing leverage ratio of 0.38x (0.83x in FY2020) and negative net debt to equity ratio of -0.1x in FY 2021 (0.3x in FY2020), indicating more than adequate liquidity to cover its borrowings. The company’s emphasis on unit economics and capital efficiency is the key differentiator for its overall growth and scale of operations. It’s strong financial fundamentals makes it what it is – an inspiring and unique investment opportunity in the digital ecosystem.
One of the key reasons for Nykaa’s promising growth momentum is the underpenetrated online BPC market. As per Redseer, Online Beauty and Personal Care Market in India has grown at promising 60% CAGR in the last 4 years, penetrating only 8% of the India Beauty and Personal Care Market in 2020. We can imagine the potential this market has in the coming years.
Some Points of Caution
Although Nykaa is in a sweet spot with its unique business model and first mover advantage in the BPC online market, its high valuations trigger a point of caution.
The company is valued at INR 53,200 crore (USD 7 billion), escalating from INR 9,100 crores (USD 1.2 billion) in 2020. In a short span of time, Nykaa’s valuations shot up immensely. One of the key reasons for such unrealistic valuations is the investor euphoria prevailing in the market. It is believed that irrationally high valuations leave nothing much for IPO investors.
Even though Zomato opened astronomically high on Dalal Street, it could not get the initial traction after a few days of listing as the company’s financial fundamentals remained questionable. Its upper management recently said that the IPO was the desperate result of the company’s threatening cash crunch. It does not even have a definite profitability roadmap to substantiate its growth claims.
Moreover, Nykaa turned profitable at the operating (EBIT) level in FY2019 and at the PAT level in FY2021 only. Although the company’s customer base is rising and profitability is improving, the margins are relatively low. Further, Nykaa’s EBITDA margins are expected to remain stagnant over the next couple of years and move up, thereafter.
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Source: The Hindu Business Line
Increasing Competition in the Market
Till date Nykaa did not have a direct competitor in the Indian BPC market. However, low entry barriers and strong growth potential has enticed the well-established business conglomerates like Reliance, Tata, etc. to invest in the online BPC space. These legends with a recognized brand image and profound investment options, pose a significant competition to independent start-up companies like Nykaa. Further, the company also faces arduous competition from online giants Amazon, Myntra, Flipkart, Ajio, etc., as these companies are also foraying into the emerging and lucrative BPC retail market.
Beauty lies in the eyes of the beholder
The kind of response Nykaa’s IPO garnered shows the investor’s faith in the company’s strong growth potential in an under penetrated market. Its diverse product portfolio, omni-channel existence, customer loyalty, enterprising promoters, along with sound financial metrics drive bullish investment sentiments.
However, the start-up IPO rush is on and euphoric investor sentiments drive exorbitantly high valuations. Nykaa’s valuation poses some amount of caution to the investors, along with general risk factors such as indirect competition in the online retail ecosystem, dependence of external sellers and suppliers, fragmented fashion market, etc. Eventually, it is the company’s strong business fundamentals and performance metrics that will decide its sustenance in the long run. Also, how the Indian markets will absorb the excessive capital rush, such IPOs are bringing in, is something to watch out for.
For now, the festive season is on and it’s the time to celebrate the digital stories of the Indian start-up ecosystem.
Disclaimer: The article and its contents are prepared based on internal Omnifin Research and public sources. The article does not intend to provide any kind of investment recommendation or influence any investment decision. The images of the company belong to respective trademark owners.