India has the largest population base of Generation Z and Millennials in the world. These next-generation consumers aspire to express their individuality through in-trend beauty, personal care, and fashion products, largely inspired by their friends, family, celebrities, and influencers on social media. Company is well positioned to cater to this need.

Company has a track record of delivering strong financial performance, its consolidated revenue from operations for the FY 2021, 2020 and 2019 was Rs 2440.896 crore, Rs 1767.533 crore and Rs 1111.394 crore, respectively. Revenue grew at a CAGR rate of 48.2% from FY2019 to FY2021.

Company’s GMV(Gross merchandise volume)for the FY2021, 2020 and 2019 was Rs 4045.98 crore, Rs 2684.92 crore and Rs 1650.08 crore, respectively. GMV grew at a CAGR rate of 56.6% from FY19 to FY21. Also,total GMV was Rs 1469.61 crore in Q1 FY22, which grew 238.8% from the three months ended June 30, 2020.

Company’s EBITDA margin improved from 1.85% in FY19 to 6.61% in FY21. Going forward management expects margins to further improve.

Company has strong social media presence, Nykaa runs marketing campaigns on a regular basis. This has played a vital role in boosting sales and acquiring customers.

Company’s strong balance sheet provides it with scope of expansion. It can utilize funds to finance new projects, which can diversify its revenue stream. This will have positive impact on its key financial metrics such as Return on Equity (ROE), Return on sales and more.

Company has developed systems and processes to ensure that the products sold on its platform are authentic and build trust among consumers and brands.Due to its strong commitment to authenticity, the company is preferred destination for luxury and prestige products in India for consumers and brands.

Company has a diverse portfolio of 15 owned brands.Many of the owned brands have a high recall and function as independent brands.

Company’s capital turnover ratio has improved from 3.1 times in the FY 2019 to 4.2 times in the Financial Year 2021. Company has focused on capital efficiency and unit economics, while simultaneously building for scale and growth.

Weaknesses

Rules and regulations governing e-commerce are still evolving. Government is increasingly becoming strict to restrict the ability of online players to offer unfair competition to offline players.

If company fails to acquire new consumers, in a cost-effective manner, it may not be able to increase or maintain profitability.

The products merchandised on platforms such as Nykaa.com, Nykaafashion.com, Nykaaman.com and others, are subject to rapidly changing beauty and fashion trends and constantly evolving consumer tastes and demands. These trends may also cause fluctuations in results of operations between different periods.

There are certain pending litigations against the Company, Subsidiaries, and some of its directors. Any adverse decision in such proceedings may render the company liable to liabilities and penalties and may adversely affect its business.

Company derives a significant portion of its GMV from top three categories. Its GMV of top 3 categories for FY21 stood at 71.3% of total, and for the five months ended August 31, 2021, it stood at 60.3% of total GMV.Revenue may be adversely affected if products in these categories do not perform as well as expected.

Certain brand vendors account for a significant portion of company’s total GMV of online sales and accordingly, any adverse changes in relationships with such brand vendors may adversely affect its business, financial condition, and cash flows. In FYs 2019, 2020, 2021 and the five months ended August 31, 2021, GMV from these top five vendors accounted for 38.1%, 30.8%, 27.9% and 21.5% of total GMV, respectively.

If company, fails to retain its relationships with key brands and social network influencers, or attract new relationships, its reputation, and business may suffer.

The sale of its owned brand products heightens certain risks such as- potential product liability towards consumer risks for any production defects, challenges during import registrations of ingredients/intermediaries in the process of manufacturing and potential infringement risk etc.

Company operates in a highly competitive industry, competitors include many online marketplaces, retailers with physical stores, and brands that take a direct-to-consumer approach. Any failure to compete effectively could have a negative impact on the success of business.

As of August 31, 2021, company had total working capital borrowings of Rs 31.36 crore. Certain of its financing agreements include conditions and restrictive covenants, may limit its ability to pursue business and limit flexibility.

Company’s Promoter, Falguni Nayar Family Trust, has pledged 20,311,800 Equity Shares(aggregating to 4.35% of Company’s pre-offer Equity Share capital) in favor ofInfina Finance Private Limited. Any exercise of such pledge by the lender could dilute the shareholding of Promoters, which may adversely affect business and prospects.

Factors such as inflation, increased labor, and employee benefit costs, increased rental costs, and increased energy costs may increase operating costs, which could adversely affect results of operations.

Valuation

In Q1 FY2022, consolidated sales were up by 183.05% to Rs 816.99 crore compared to Q1 FY2021. OPM increased by 1901 bps to 3.30% which led operating profit of Rs 26.94 crore compared to loss of Rs 45.35 crore. Other income increased 96.06% to Rs 4.72 crore, while interest cost rose 3.37% to Rs 9.01 crore and depreciation increased 33.81% to Rs 19.50 crore.PBT after EOstood at Rs 3.15 crore compared to loss of Rs 66.23 crore. Tax credit for Q1 FY2022 was of Rs 0.37 crore compared to tax credit of Rs 11.72 crore in Q1 FY2021. Net profit stood at Rs 3.41 crore compared to loss of Rs 54.14 crore.

For FY 2021, consolidated sales were up by 38.10% to Rs 2440.90 crore compared to FY 2020. OPM increased by 202 bps to 6.61% which led to 99.16% increase in operating profit to Rs 161.43 crore. Other income increased 13.80% to Rs 11.74 crore, while interest cost fell 30.69% to Rs 30.70 crore and depreciation increased 12.80% to Rs 67.13 crore. The PBT after EO stood at Rs 75.34 crore compared to loss of Rs 12.43crore. The tax expenses for FY2021 were Rs 13.39 crore compared to tax expense of Rs 3.91 crore in FY2020.Net profit stood at Rs 61.85 crore compared to loss of Rs 16.61 crore.

The annualized EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 1.3 for FY2021. On the upper price band of Rs 1125, P/E works out to 865.38 for FY2021.There are no listed companies in India that engage in a similar business.

At the higher price band of Rs 1125, the offer is made at around 21.71 times pre-IPO EV/FY2021 sales.

Online beauty and personal care (BPC) retail platforms are effectively resolving challenges faced by both consumers and brands with the help of superior application of technology, efficient supply chain and quality control, access to a wider selection of products and brands including niche luxury brands, original content and advice from experts, door-step deliveries, and wider geographic reach. Online channel accounted for 2% of the India BPC market in 2016. Following this, the sector grew at a strong 71% CAGR over the next three years to penetrate 6% of the BPC market in 2019, at Rs 70 billion. The sector further grew at 30% from 2019 to 2020 to reach Rs 91 billion. Online channels accounted for approximately 8-10% of the overall BPC market in Financial Year 2021 and the five months ended August 31, 2021. Growing online shopping penetration in Tier 2+ cities, consistent investment for growth of the sector, rising affinity for branded products that are available online with a wide assortment, increasing need for convenient shopping experience, rising adoption of e-commerce by Generation Zs and Millennials who are the key growth enablers in the BPC category and higher consumer trust on products bought online, are the key drivers of growth in the market. There is a large headroom ahead for further penetration in India, as suggested by higher penetration in the developed markets such as the United States (20-25%) and China (35-40%).

According to the RedSeer Report, which has been exclusively commissioned and paid for by the company in connection with the Offer, Nykaa has a large BPC market opportunity of Rs 1,120 billion (US$16 billion) growing at 12% per annum to Rs 1,981 billion (US$28 billion) in 2025. Nykaa’s fashion opportunity of Rs 3,794 billion (US$54 billion) is expected to grow at 18% per annum to Rs 8,702 billion (US$124 billion) in 2025. Nykaa has a total addressable market across beauty and personal care and fashion of Rs 10,683 billion (US$152 billion).