Jefferies projects Nykaa’s CAGR at 20% between FY24 and FY27; sees 28% upside in stock in base case

Following a positive presentation by Nykaa's management, represented by Anchit Nayar (CEO, Beauty E-commerce) and Namrata Penta (AVP, M&A & IR), brokerage house Jefferies has reiterated its ‘buy’ call on FSN E-Commerce Ventures (Nykaa) with a target price of ₹220, implying an almost 28 percent upside. Jefferies has projected that Nykaa could achieve a compound annual growth rate (CAGR) of approximately 20 percent between FY24 and FY27.

In its bull case scenario, growth could reach 25 percent, while in the bear case, it may dip to 15 percent over the same period, said the brokerage.

Furthermore, the brokerage sees Nykaa's target price at ₹250 (45 percent upside) in the bull case scenario and at ₹130 (24.5 percent downside) in the bear case scenario.

"Nykaa has been able to carve out a niche for itself through its focus on BPC, which differentiates it from horizontals (Flipkart and Amazon). In recent years, there has been a surge in the number of customers transacting for the company. Nykaa should benefit from the increasing order frequencies and basket values, as the newer customer cohorts mature. We expect Nykaa to remain in a hyper-growth phase in the medium term as online BPC and fashion penetration ramp up," said the brokerage explaining its positive view.

According to Jefferies, in the base case scenario, Nykaa anticipates a gradual increase in order frequency as its customer base matures. The brokerage firm also projects that the gross merchandise value (GMV) for both the beauty and personal care (BPC) as well as fashion categories will experience a growth rate of approximately 25 percent CAGR.

Meanwhile, in the bull case scenario, Jefferies projects robust growth for Nykaa's beauty and personal care (BPC) segment, estimating a strong compound annual growth rate of approximately 25 percent in orders from FY24 to FY27. It anticipates gradual increases in order frequency and average order value (AOV) as customer segments mature. The BPC gross merchandise value (GMV) is expected to grow significantly at around 30 percent CAGR over the same period. For Nykaa's fashion segment, Jefferies forecasts a 30% CAGR in GMV. Their valuation approach includes assigning Nykaa's BPC segment a multiple of 55 times FY26E adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), and the fashion segment a multiple of 3 times FY26E sales, leading to a price target of ₹250.

However, in the bear case scenario, Jefferies forecasts a moderate order growth rate of approximately 15 percent for Nykaa's beauty and personal care segment from FY24 to FY27. It anticipates that order frequency and average order value (AOV) will remain stable in the near term, influenced by the influx of new customers. The BPC gross merchandise value is expected to increase at a solid 15 percent CAGR over the same period. For Nykaa's fashion segment, Jefferies projects a GMV CAGR of around 10 percent. Their valuation methodology assigns Nykaa's BPC segment a multiple of 35 times FY26E adjusted EBITDA, and the fashion segment a multiple of 1 times FY26E sales, resulting in a price target of ₹130.

The stock has gained over 18 percent in the last one year and has been completely flat in 2024 YTD, giving positive returns in 3 and negative in the remaining 3 months.

It rose 5 percent in June so far after a 7 percent drop in May. Meanwhile, it jumped 9.4 percent and 3 percent in April and March, respectively, but was negative in the first 2 months of the calendar year. It lost 3.9 percent and 6.1 percent in February and January, respectively.

The stock hit its 52-week high of ₹195.40 on January 1, 2024, and its 52-week low of ₹130 on August 14, 2023. Currently, it is almost 12 percent away from its year-high but has advanced 32.5 percent from its year-low.

In FY24, Nykaa reported significant growth across its segments. The beauty and personal care segment surged 25 percent in gross merchandise value to reach ₹8,340 crore, while the fashion segment expanded by 27 percent to ₹3,269 crore. The 'others' segment, encompassing Nykaa's business-to-business (B2B) division Superstore and media arm LBB, experienced robust growth of 59 percent, reaching ₹835 crore.

During a roadshow in the US, Nykaa's senior management disclosed that roughly one-third of its product offerings consist of makeup products, another third comprises skincare items, and the remaining third includes various other products.

Nykaa currently commands about 35 percent of India's online BPC market and is actively expanding its offline presence. Their offline stores typically achieve profitability on an EBITDA basis within a year of launch and achieve full payback within three years.

As per the brokerage, India has 70 crore internet users and 23 crore online shoppers. However, online BPC shoppers are less than a third at 6-7 crore and within that, only 2.5 crore have ever shopped on Nykaa. In this context, BPC has lagged behind electronics. Nykaa Management believes the issue is not affordability, while availability has also gone up. Awareness needs to go up, which remains Nykaa's key focus.

Jefferies further noted that fashion and eB2B continue to improve profitability, adding that BPC margins should be range-bound near term as the focus is to drive growth with any mix/cost savings-led benefits to be ploughed back.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.