Nykaa’s parent company FSN E-Commerce Ventures Ltd failed to impress investors with its December quarter (Q3FY23) results. Gross margin at 43.4% missed analysts’ estimates and was lower by nearly 300 basis points (bps) year-on-year (yoy) and 200bps sequentially. A basis point is one hundredth of a percentage point. Unsurprisingly, the company’s shares were trading about 5% lower in Tuesday morning trade on the National Stock Exchange.
Why Margin Contract? Higher brand discounts and consumer downgrading impacted gross margin last quarter. True, the gross merchandise value growth of the beauty and personal care (BPC) segment and the fashion segment was around 26% and 50%, respectively, year-on-year. But this came at the cost of profitability. Gross margins of both verticals declined, but the fashion segment’s decline was much steeper at 1010bps yoy to 71.7%. In comparison, the BPC segment’s gross margin fell 180 bps.
“The gross margin miss, an aberration according to management, should reverse as any structural impact could negate gains in marketing and fulfillment,” Nuwama Research analysts said in a report on February 13.
Nonetheless, the impact of the weaker gross margin on the overall EBITDA level for Nykaa was less pronounced due to operating leverage and savings in marketing and fulfillment expenses. Ebitda (earnings before interest, tax, depreciation and amortization) margin was only 94bps lower year-on-year at 5.3% and increased 38bps sequentially.
“While the BPC business remains on a strong footing, it may feed into other businesses until these businesses become self-sustaining,” analysts at Kotak Institutional Equities said in a report on February 14. The broking firm has raised the loss estimate from the fashion business, cutting Nykaa’s EBITDA by 3-4% for FY24-25.
To be sure, BPC’s growth in GMV was lower than some analysts’ expectations and less than the growth seen in the second quarter when the measure was 39% year-over-year. Against this backdrop, better-than-expected growth in BPC business and improvement in margins are important to support investor sentiment.
“Given the recent volatility in the stock, we again strike at higher cost of capital estimate, giving a target price of Rs 195 (earlier Rs 251),” said Nuwama report. Nykaa shares are now trading at around Rs 143.
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