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Jefferies Cuts Target Price On Nykaa As Urban Consumption Slows

Jefferies maintained its 'buy' rating but reduced its target price to Rs 200 from Rs 275.

<div class="paragraphs"><p>A Nykaa store. (Source: Company website)</p></div>
A Nykaa store. (Source: Company website)

Shares of FSN E-Commerce Ventures Ltd. gained even as Jefferies cut its target price on Nykaa's parent due to slowing urban consumption.

"We reduce our price target...on lower multiples to factor in the pullback in valuation for retailers in the context of near-term slowdown concerns," Jefferies said in a Feb. 6 note.

The brokerage maintained its 'buy' rating but reduced its target price to Rs 200 from Rs 275, still implying a potential upside of 41% from current levels.

Nykaa's stock has underperformed the index, much like its listed internet peers, Zomato Ltd. and One97 Communications Ltd.

Jefferies summarised investor feedback on what's "ailing" Nykaa:

  • Slowdown worry: Concerns on urban demand are rising due to factors like a high base and slowing IT hiring.

  • Competition: Fashion brands like Myntra and AJio have increased their assortments as well as marketing spends in the beauty space. Reliance Retail is reportedly set to make an entry through a focused brand, Tira. The Tata group is also eyeing an opportunity, and Shoppers Stop has unveiled SS Beauty stores with a plan to go online.

  • Ad income: Tighter access to capital has forced D2C players to reduce cash burn. This may impact brand investments, resulting in lower ad income for Nykaa, which enjoys high margins.

  • Working capital: Nykaa saw a sharp 50% jump in working capital days in March 2022, and the number stayed high in September 2022 due to quicker payments to D2C players.

  • Share activity and supply: The share bonus around the lock-up expiry negatively surprised some, while there has been an incessant supply in the stock as a third of the large pre-IPO holders have fully exited, based on Jefferies' calculation.

However, Jefferies said, Nykaa remains a "strong play on the Indian Internet as well as discretionary consumption themes."

"The market will attract more players, but Nykaa enjoys an advantage, given its early move into beauty and personal care, strong brand relationships, and content platform, among others."

The recent years have seen a surge in transacting customers for the company, it said. "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 ramps up."

Shares of the company gained as much as 1.74% to Rs 140.35 apiece, compared with a 0.2% decline in the S&P BSE Sensex at 9:55 a.m. Of the 20 analysts tracking the company, 15 maintain a 'buy' rating, three suggest 'hold,' and two recommend 'sell.' The return potential of the stock implies an upside of 128.4%.

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