Nykaa: After a 56% decline in 2022, stock rebounds 18% this year; what lies ahead?

After an almost 56 percent fall in 2022, FSN E-Commerce Ventures, the parent company of Nykaa, has shown signs of a modest rebound, rising over 18% in 2023 YTD. The turnaround began in May, breaking an almost 11-month hiatus, and was followed by monthly gains of 18.83% in June. Between May 2022 and April 2023, the stock was in the green in just 1 month - February 2023, up 2.3%.

The positive momentum continued with a substantial increase of 26.16% in November. This suggests a recovery or improvement in investor sentiment and confidence in Nykaa's performance, potentially driven by factors such as positive business developments, improved financials, or market perception shifts. However, in December, the stock has already lost 3.6 percent.

It has gained 5.2 percent in the last 1 year, hitting its 52-week high of ₹183.40 on December 18, 2023. However, it is still away from its record high of ₹428.96, hit around the time of its listing (November 26, 2021).

The stock has still advanced over 60 percent from its 52-week low of ₹114.25, hit on April 26, 2023.

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Will the recovery continue in 2024?

Nykaa's stock has drawn mixed sentiment from different brokerage houses. Nuvama expresses a bullish outlook, maintaining a target price of ₹187, suggesting a potential upside of 9%. However, the brokerage notes concerns about rising competition and increasing debt, identifying them as factors affecting longer-term visibility and potentially hindering recent re-rating compared to other platform peers.

JM Financial is also optimistic, offering a ‘buy’ rating and a target price of ₹210, indicating a substantial upside of 23%. The brokerage is confident in the earlier-than-expected profitability of Nykaa's Fashion segment.

On the other hand, ICICI Securities projects a target price of ₹185, implying an 8% upside. While acknowledging the stock's de-rating over the past year due to concerns about the fashion segment, ICICI Securities anticipates a re-rating in the near term, especially with the support of a robust festive season in the December quarter.

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In contrast, JPMorgan and Macquarie adopt a bearish stance, maintaining 'underweight' and 'underperform' ratings, respectively. JPMorgan sets a target of ₹125, suggesting a potential downside of 27%.

These varied assessments highlight the complexity of market perceptions surrounding Nykaa, with some foreseeing positive trends and others expressing caution, particularly in relation to competitive pressures and debt levels. Investors should carefully consider these perspectives alongside their own research before making investment decisions.

Technical view by BP Equities

The brokerage reiterates a ‘buy’ on Nykaa for the target of ₹210 (22.5 percent upside) and stop loss at ₹166.

The pattern analysis on the daily timeframe shows that the price action crossed the threshold of stage 1 into stage 2 with the highest volume recorded during the quarter. This validates a strong breakout and a cue of buyers yet holding strength, it said.

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"The breakout candle created an imbalance amidst the weak seller's in-turn creating a fair value gap acting immediate support zone. Following the pivotal shakeout near 177 levels, the price action retraced to the fair value support and showed resilience to further drawdown yet another time upholding the mentioned support zone. This further indicates a base of accumulation before the uptrend potentially resumes.

While the relative strength compared to Nifty shows improving relative performance, the 50-period volatility trails at lower levels. This minimizes the chances of any unruly move. The daily and weekly RSI are trading well above their medians indicating a thrust in the price momentum. All in all, Nykaa is trading 20 percent above our previous recommendation and we anticipate further potential upside," added BP Equities.

Earnings

Nykaa's parent company, FSN E-Commerce Ventures, disclosed its slowest quarterly revenue growth since its stock market debut. The subdued performance is attributed to intense competition in its key Beauty and Personal Care (BPC) segment. In the September quarter (Q2), the consolidated BPC gross merchandise value (GMV) experienced a 23% year-on-year (Y-o-Y) growth. The company noted an increase in discounting activities in this segment, driven by the proliferation of domestic brands and a growing number of international brands prioritising the Indian market.

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Despite the challenging market conditions, it reported a 50% Y-o-Y increase in net profit, reaching ₹7.8 crore for Q2, compared to ₹5.2 crore in the same period last year. It also marked an improvement from the ₹5.4 crore profit reported in the previous quarter. This suggests that while revenue growth may be slow, the company has managed to enhance its profitability, possibly through effective cost management or other strategic measures. The company’s consolidated revenue from operations, meanwhile, grew 22 percent to ₹1,507 crore, up from ₹1,230.8 crore a year ago, and ₹1,421.8 crore in Q1 FY24.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.