Equity Research INDIA

January 20, 2023

BSE Sensex: 60858
FSN E-Commerce Ventures ADD
ICICI Securities Limited
is the author and Upgrade from HOLD
distributor of this report Valuation turning palatable; upgrade to ADD Rs129
We had always liked Nykaa's business model. That said, post its listing on the
Company update and
Indian bourses, we've been staying on the sidelines due to valuations beyond our
rating change
ability to comprehend (at peak stock price, revenue CAGR requirement over the
Consumer Staples & next 20 years was 23%). Post ~70% correction from peak, in SoTP, BPC (beauty &
personal care) business now accounts for ~77% of current price, assuming it's a
Discretionary defensible and high-growth business in medium term. Reverse DCF shows 15%
revenue CAGR requirement at 20% EBITDA margin (at TV). We ascribe
Target price: Rs145
Rs100/share for BPC business. Refer our valuation sensitivity (Tables 1 & 2)
wherein the fair value range of BPC business is Rs90-240.
Target price revision We believe cyclical slowdown in BPC and fashion businesses is somewhat priced
Rs145 from Rs175 in.
Shareholding pattern We believe Nykaa continues to present a combination of (1) the largest beauty and
Jun Sep Dec personal care (BPC) business in a growth market (India), (2) good profitability
’22 ’22 ’22 metrics and prudent capital allocation, and (3) omni-channel in the ‘true sense’
Promoters 52.4 52.4 52.3
Institutional (going online to offline). That said, competition may intensify from both vertical
investors 9.5 9.5 17.4 and horizontal peers. While we expect BPC revenue to grow, we believe Nykaa’s
MFs and others 2.0 2.0 4.1
FIs/Banks 0.1 0.0 0.0
journey could be different – it will have to go more mainstream to drive this
Insurance 0.2 0.4 1.9 growth. Growth trajectory in fashion will be keenly watched out.
FIIs 7.2 7.1 11.4
Others 38.1 38.1 20.3 Upgrade to ADD (from HOLD); TP at Rs145.
Source: BSE
 Fair value of BPC business is Rs100 at current assumptions…: As per our
estimates, value of BPC business is Rs100 assuming no operating revenue/profit
ESG disclosure score from fashion and other business (B2B + BPC-Men). This is reflective of revenue
Year 2020 2021 Chg
ESG score NA NA NA
growth (of BPC) settling down to 24% (from current +40%) at the end of first 5 years
Environment NA NA NA (FY23-27E), followed by 16% at the end of next 5 years (FY28-32E) and finally to 6%
Social NA NA NA by FY42E (next 10 years).
Governance NA NA NA
Note - Score ranges from 0 - 100 with a higher score  …at conservative/best estimates value of BPC would range between Rs90-240:
indicating higher ESG disclosures.
Source: Bloomberg, I-sec research We present sensitivity valuation table for Nykaa’s BPC business (refer Tables 1 & 2).
As per most conservative estimate, assuming revenue growth subsides to 6%
(equivalent to terminal growth) at the end of 10th year (FY32E) and operating profit
margin stabilises at 20%, fair value of BPC business stands at Rs89. Assuming
reasonable growth (15-20% CAGR 20-year revenue), BPC business fair value
ranges between Rs100-240.
 …while fair value potential for fashion business lies between Rs14-75: We
conducted similar valuation exercise for fashion and other businesses (refer Tables 3
& 4). Our fair value estimates at different revenue CAGR and operating profit margin
assumptions range between Rs14 and Rs75. Since fashion business is more
margin-accretive (50% higher than BPC), higher revenue growth should be more
value-accretive.
Market Cap Rs368bn/US$4.5bn Year to March FY21 FY22 FY23E FY24E
Reuters/Bloomberg FSNE.BO/ NYKAA IN Revenue (Rs mn) 24,409 37,739 51,642 70,949
Research Analysts:
Shares Outstanding (mn) 2,849.4 Adj. Net Profit (Rs mn) 616 411 549 2,073
Manoj Menon 52-week Range (Rs) 343/129 Dil. Rec. EPS (Rs) 0.7 0.1 0.2 0.7
manoj.menon@icicisecurities.com
+91 22 6807 7209 Free Float (%) 47.7 % Chg YoY (458.1) (78.8) 33.7 277.5
Varun Singh FII (%) 11.4 P/E (x) 189.4 893.7 668.5 177.1
varun.singh@icicisecurities.com Daily Volume (US$'000) 24,417 CEPS (Rs) 1.5 0.5 0.8 1.5
+91 22 6807 7649
Karan Bhuwania Absolute Return 3m (%) (32.8) EV/EBITDA (x) 74.0 223.7 127.2 66.6
karan.bhuwania@icicisecurities.com Absolute Return 12m (%) (61.8) Dividend Yield (%) - - - -
+91 22 6807 7351
Sensex Return 3m (%) 3.1 RoCE (%) 12.5 4.0 6.6 16.3
Akshay Krishnan
akshay.krishnan@icicisecurities.com Sensex Return 12m (%) 2.6 RoE (%) 12.6 3.1 3.9 12.9
+91 22 6807 7632
Please refer to important disclosures at the end of this report
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities

 Terminal assumptions: In terminal value computation, we have assumed FCFF

growth in perpetuity at 6%, while cost of capital (WACC) at 11.1%. Terminal value
contributes c.65% of total value.
 Valuation and risks: We maintain our estimates for FY23-24E. We model revenue
and EBITDA CAGRs of 37% and 83%, respectively, over FY22-FY24E. We
upgrade the stock to ADD (from HOLD) with revised DCF-based target price of
Rs145 (earlier: Rs175). Key risks: (1) Chasing growth at elevated levels can dilute
gross margin, (2) success in fashion business can be difficult given higher
competition in the category. On the upside: Competition in e-BPC space weakens
further.

Table 1: Nykaa beauty business sensitivity (on 20 Table 2: Nykaa beauty business sensitivity (on
year CAGR revenue) operating margin at TV)
10th year revenue 20 year revenue % Operating margin at TV Fair Value
growth % Fair Value CAGR 10.0% 51
6.0% 89 14% 15.0% 77
8.0% 102 15% 20.0% 102
10.0% 118 16% 25.0% 128
12.0% 136 17% 30.0% 154
15.0% 168 19%
20.0% 242 21%
Source: Company, I-Sec research Source: Company, I-Sec research

Table 3: Nykaa fashion business sensitivity (on 20 Table 4: Nykaa fashion business sensitivity (on
year CAGR revenue) operating margin at TV)
10th year revenue 20 year revenue % Operating margin at TV Fair Value
growth % Fair Value CAGR 10.0% 14
6.0% 33 22% 15.0% 23
8.0% 37 23% 20.0% 33
10.0% 42 24% 25.0% 42
12.0% 47 25% 30.0% 51
15.0% 56 26%
20.0% 75 28%
Source: Company, I-Sec research Source: Company, I-Sec research

2
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities
Consolidated
Chart 1: Gross margin Chart 2: EBITDA margin
50.0 46.3 15.0 13.2
45.3
42.7 43.7 44.4
45.0 41.8 41.2 40.6 9.1
39.3 10.0
40.0 6.0 6.3
4.0 4.0 5.0
5.0 3.3 3.3
35.0
30.0 -
23.8
(%)

(%)
25.0
20.0 (5.0)
15.0 (10.0)
10.0
(15.0)
5.0
- (20.0) (17.4)
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 3: Employee cost Chart 4: Marketing & advertisement expense

12.0 16.0
10.0 9.9 13.7 13.7
9.3 9.3 14.0
10.0 8.9 12.0 12.0
8.5 12.0 11.1
7.8 10.5
8.0 9.5
10.0
(%)

(%)

6.0 8.0
6.0
4.0
4.0
2.0
2.0
0.0 0.0
4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

4QFY21

1QFY22

2QFY22

3QFY22

1QFY23

2QFY23
4QFY22

Source: Company, I-Sec research Source: Company, I-Sec research

Chart 5: Fulfilment expense Chart 6: Other opex

12.0 11.4 6.0
10.6 5.4
10.3 5.0 5.1
9.7 9.5
10.0 9.1 5.0 4.6
8.6 4.2 4.0
8.0 4.0 3.5
(%)

(%)

6.0 3.0

4.0 2.0

2.0 1.0

0.0 -
4QFY21

1QFY22

2QFY22

4QFY22

1QFY23

2QFY23

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
3QFY22

Source: Company, I-Sec research Source: Company, I-Sec research

3
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities
BPC
Chart 7: Number of visits Chart 8: Monthly average unique visitors
250 234 25
221 222 22 22
201 194 205 211 204 20
200 20 19 19
171 17 17
16
150 15 13
(mn)

(mn)
93
100 10 8

50 5

- -
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 9: Orders Chart 10: AOV

2,158
2,092
9.0 8.4 2,500
8.1

1,976

1,967
1,910

1,872
1,832
7.5

1,780
8.0

1,763
7.2

1,716
7.0 2,000
5.8 5.8 6.0
6.0 5.4
1,500
5.0
(mn)

4.0
(Rs)

4.0
1,000
3.0
1.9
2.0 500
1.0
0.0 -
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 11: GMV Chart 12: Annual unique transacting customers

18.0 16.3 10.0 9.1
15.1 9.0 8.6
16.0 14.9 8.0
8.0 7.5
14.0 12.6 7.0
11.5 11.7 7.0 6.5
12.0 10.7
9.6 6.0 5.5 5.6
10.0 4.8 5.1
(Rsbn)

8.5
(mn)

5.0
8.0
4.0
6.0
3.9 3.0
4.0 2.0
2.0 1.0
0.0 0.0
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company, I-Sec research Source: Company, I-Sec research

4
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities
Fashion
Chart 13: Number of visits Chart 14: Monthly average unique visitors
140 18
122 16 16 16 16 16
115 115 113 118 16
120
98 14 13
100
12
77 10
80 10
(mn)

(mn)
56 8 7
60
6
40 29 4
4
2
20 10 2
- -
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 15: Orders Chart 16: AOV

3,940
1.5

3,732
1.6 4,500

3,616
3,558
1.4

3,242
1.3 1.3 1.3 4,000

3,153
1.4

3,064
2,905
1.2 1.1 3,500
2,343

2,207
3,000
1.0
0.8 2,500
(mn)

(Rs)

0.8 0.7
0.6 2,000
0.6
1,500
0.4 1,000
0.2
0.2 500
0.0 -
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23
Source: Company, I-Sec research Source: Company, I-Sec research

Chart 17: GMV Chart 18: Annual unique transacting customers

7.0 2.5
5.8 6.0 2.1
6.0 2.0
2.0 1.8
4.8 4.8
5.0 1.6
4.2
4.0 3.7 1.5 1.3
(Rsbn)

(mn)

2.6 1.0
3.0 1.0
2.2
2.0 0.6
1.4
0.5 0.4
1.0 0.4 0.2 0.2

0.0 0.0
1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

1QFY21

2QFY21

3QFY21

4QFY21

1QFY22

2QFY22

3QFY22

4QFY22

1QFY23

2QFY23

Source: Company, I-Sec research Source: Company, I-Sec research

5
6
(Rs)
0
100
200
400
500

300

Nov-21
Price chart

Source: Bloomberg

Dec-21
Dec-21
Jan-22
FSN E-Commerce Ventures, January 20, 2023

Feb-22
Mar-22
Apr-22
Apr-22
May-22
Jun-22
Jul-22
Aug-22
Aug-22
Sep-22
Oct-22
Nov-22
Nov-22
Dec-22
Jan-23
ICICI Securities
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities

Financial summary
Table 5: Profit and loss statement Table 7: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY21 FY22 FY23E FY24E FY21 FY22 FY23E FY24E
Net Sales 24,409 37,739 51,642 70,949 Operating Cashflow 1,771 1,110 1,084 2,989
Operating Expenses 22,842 36,107 48,770 65,463 Working Capital
EBITDA 1,567 1,633 2,872 5,485 (273) (4,649) 2,485 (659)
Changes
% margins 6.4 4.3 5.6 7.7 Capital Commitments (437) (940) (1,807) (2,128)
Depreciation & Amortisation 716 964 1,621 2,085 Free Cashflow 1,062 (4,479) 1,762 202
Gross Interest 307 465 760 870 Cashflow from
Other Income 118 270 275 243 (861) (5,088) (2,223) (503)
Investing Activities
Recurring PBT 661 473 766 2,773 Issue of Share Capital 1,029 8,729 - -
Less: Taxes 45 60 214 698 Inc (Dec) in Borrowings (1,406) 541 1,952 (171)
Less: Minority Interest (1) (2) (2) (2) Dividend paid - - - -
Net Income (Reported) 616 411 549 2,073 Chg. in Cash & Bank
Extraordinaries (Net) - - - - 106 (297) 1,490 (472)
balance
Recurring Net Income 616 411 549 2,073 Closing cash & balance 836 659 2,149 1,677
Source: Company data, I-Sec research Source: Company data, I-Sec research

Table 6: Balance sheet Table 8: Key ratios

(Rs mn, year ending March 31) (Year ending March 31)
FY21 FY22 FY23E FY24E FY21 FY22 FY23E FY24E
Assets Per Share Data (Rs)
Total Current Assets 9,630 19,271 19,980 22,509 EPS 0.7 0.1 0.2 0.7
of which cash & cash eqv. 2,477 2,670 4,160 3,689 Cash EPS 1.5 0.5 0.8 1.5
Total Current Liabilities & Dividend per share (DPS) - - - -
4,712 5,779 7,837 10,669
Provisions Book Value per share (BV) 5.4 4.7 4.9 5.6
Net Current Assets 4,918 13,492 12,143 11,839
Investments 274 960 1,314 1,805
Net Fixed Assets 2,315 4,980 8,918 11,165 Growth (%)
Capital Work-in-Progress 20 98 98 98 Net Sales 38.1 54.6 36.8 37.4
Total Assets 7,527 19,529 22,473 24,907 EBITDA 93.3 4.2 75.9 91.0
PAT NM (33.3) 33.7 277.5
DPS NM NM NM NM
Liabilities
Borrowings 3,400 7,226 9,620 9,982
Deferred Tax Liability (780) (1,152) (1,152) (1,152) Valuation Ratios (x)
Minority Interest 8 56 56 56 P/E 189.4 893.7 668.5 177.1
Equity Share Capital 151 474 474 474 P/CEPS 87.6 267.0 169.1 88.3
Face Value per share (Rs) 2 2 2 2 P/BV 23.8 27.4 26.3 22.9
Reserves & Surplus 4,748 12,925 13,474 15,547 EV / EBITDA 74.0 223.7 127.2 66.6
EV / Sales 4.8 9.7 7.1 5.1
Less: Misc. Exp. n.w.o.
Net Worth 4,899 13,399 13,948 16,021
Total Liabilities 7,527 19,529 22,473 24,907 Operating Ratios
Source: Company data, I-Sec research Raw Material / Sales (%) 61.1 56.4 55.1 55.1
Employee cost / Sales (%) 9.5 8.6 9.7 9.0
Other exps / Sales (%) 22.9 30.6 29.7 28.1
Other Income / PBT (%) 17.8 57.0 35.9 8.7
Effective Tax Rate (%) 6.8 12.7 28.0 25.2
Working Capital (days) 39.3 113.2 65.0 50.5
Inventory Turnover (days) 74.5 84.7 70.0 65.0
Receivables (days) 11.5 9.1 8.1 7.1
Payables (days) 47.3 35.0 34.5 34.0
Net D/E (x) (0.1) 0.0 0.0 0.1

Profitability Ratios (%)

Net Income Margins 2.5 1.1 1.1 2.9
RoACE 13.4 5.7 7.0 17.1
RoAE 15.2 4.5 4.0 13.8
Dividend Payout - - - -
Dividend Yield - - - -
EBITDA Margins 6.4 4.3 5.6 7.7
Source: Company data, I-Sec research

7
FSN E-Commerce Ventures, January 20, 2023 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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