This is a buy on dips, sure.
I have enquired with local distributors, makeup gives them a margin of 3%. So, this is not IT kind of business, where margins are high double digits.
Best case, if we consider 10% margins, then for 4000Cr of revenue, gives 400Cr of profits… Still PE is 165.
Now, the question is would we wanna buy a 40% growing business at 165PE…
Well I have bought Dmart, 20% growing business at 125PE.
Then, one year forward PE for Nykaa would be 120.
No offense to anybody being high on Nykka. Valuations look sketch, period! After a big sell off in May, Nykaa’s stock price is staying still on weak retail participants. Given that we have entered a bear market, I could see a strong selloff in Nykaa in the future.
My guess for high valuations in Nykaa might be a ‘big market delusion’ and ‘ecommerce disruption potential’.
The business is good as an investment point of view, don’t get me wrong! But I would start seeing Nykaa as fair value stock, when it comes down to around 500 (aka around 23,000 cr Market Cap).
Disc. Not Invested, Just tracking for fun!
Certainly this is not IT kind of business where there is no proper path to profitability yet. To me this is a new age retail business. The new age dynamic team working on various possibilities and disruptions in retail.
Regarding margins, make up might have less because it is inventory based model. I guess in fashion, they should have more eventually. Also they are expanding their own private label brands in both make up & fashion so that piece should also add up eventually. Regarding their B2B business - where they would act as distributors, margins maybe lesser…however that part of business would give them strong hold on the entire make up ecosystem…
Having said that, i am not sure of what ideal margins are in Make up, fashion & distribution of make up business. Would be prudent to compare with Fashion margin of Trent and maybe make up margins of established global players like Sephora
Also, the distributors you checked with, are they associated with any brands? I would think Nykaa might have different margins for different brands they sell and also there may not be distributors in middle for some now or eventually as they themselves would act as one and directly buy from brands…so as compared to any other player in this business they should have best margins…
Disc. Above thoughts only for academic purposes. I can be completely wrong in all my asessments
Yes. All pan-national brands. As sole distributors if local guys have 3% margin, then Nykaa’s margins won’t be a whole lot different, in the inventory model.
These distributors would make 3% margins in selling to retailers while Nykaa would sell directly to consumers in inventory model…so margins could be different…
I don’t have any detailed idea about the products or the product categories Nykaa in present in, so is the market fragmented and there are lot of generic and local brands that Nykaa has to compete with in order to increase market share?
Are the prices of Nykaa’s products affordable by all of their target customers so that it has a pan India presence? Or Nykaa is more of an urban story, and targeting a specific set of customers, providing them with premium quality with wide varieties and these customers will not shift to other players?
Dmart is not a margin story, it is a sales story, expanding presence story, strengthening its presence story, and capturing market story, with a successful business model. Does Nykaa belong to this category?
To me Nykaa is a discretionary spend, but, if sales are increasing and if one believes the management and also sees their products everywhere in physical stores and/or online, then may be it is not a discretionary spend and part of lifestyle.
Not invested, obviously, but interested.
Looks like research needs some scuttlebutt and checking online reviews, a granular research unlike established business like FMCG, because I think things can change quickly with the arrival of new brands. People who can spend 1000, can spend 1200 if they think they are buying a more premium product. One’s appearance to one’s own self is subjective, unlike taste, it may change, given more options.
As with many things in our country, perhaps there has come a change with lifestyle too, I don’t know, at least in the urban areas, in indeed that is true, this business if run properly and successfully can have a lengthy road ahead, prone to all the threats that exist for all businesses.
@ChaitanyaC
Nykaa is a margin and a sales story. Mostly sales, cuz the management is focussed on sales growth and covering TAM as much as possible without taking on debt.
Threats should be considered when growth dips sharply. Or a competitor appears on the horizon. The way it’s growing, I doubt that’ll happen.
@Investor_No_1 has chosen to buy in a staggered manner. That is wise. Nykaa being a 5L Cr mcap in another decade is a strong possibility. And no one can know which will be the right time to buy.
Just like I believe, Dmart can be a 10L Cr mcap in the long term.
I have learned to pick growth stories, esp established ones. One might end up buying expensive, but that time will heal, since growth is on our side.
The downside is that if the growth falters the stock price will be punished.
What’s throwing people off is Nykaa’s high PE of 1600. But if u plug in a net margin of 15%, then at 4500Cr of sales, we get EPS of 14.2 and a PE of 107
And that is not terrible. Reason: at 1300 a share one year fwd PE would be 65, much like Hindustan Lever!
So, valuation doesn’t seem to bother me, as long as I believe growth of 30% to 40% will be intact for another 2/3 years.
The Ken had covered Nykaa’s acquisition of Little Black Book (LBB) in depth in its story this week. It’s behind a paywall, but here are the summary points:
Can you also mention pointers what is mentioned about any benefits for Nykaa and if the acquisition was a good one in business as well as financial sense? Is it good capital allocation and how would LBB help Nykaa…Thanks
Well, The Ken’s story does not delve deep into that. All it mentions is that Nykaa acquired LBB to strengthen its own content marketing play.
Don’t know if it’s worth your while, but I browsed through LBB, its website is really good. It has a strong reach, and that is something Nykaa can monetize on.
The amount is undisclosed, probably in next Q commentary they will reveal it
Profit of 500 crore with market cap of above 60 000 crore. Huge mismatch
Profit is lot more, but not showing on the PnL statement because a big chunk is re-invested in future growth: advertising, acquisition, employees, supply chain etc. Therefore PE is an astounding 1600.
One could get a true np estimate by considering 15% as net margins.
is it possible to reach 15℅ NPM in this kind of bussiness ?
A good question !!!
In the long run, I expect that the revenue will grow in a non-linear fashion whereas expenses will grow in a linear fashion. In turn, a high single-digit margin is a more reasonable expectation basis nature of all the expenses and the growth trajectory of the business.
Per my opinion, KPI shall be ‘Non-linear YoY revenue growth’. The same would lead to high asset turns (1.5+) and decent ROE (20+).
what is expected margin in future ?
Is this valuation justified ?
Consensus Expectation: 16~18% OPM
This is super-subjective and could be answered only in hindsight. However, key building blocks -Opportunity Size, Scalability, Promoter/Management, Self-Sustainability- are in place. All these factors are immeasurable but very important for a fundamental investor who intends to take up a pre-mortem of the valuation.
On the technical front, Mr. Market is weighing it like gold for the last 3 months but with a negative bias.
I find the management reliable, business disruptive, leadership position and addressable market size to be large enough for a decade of growth at 20% run rate.
Regarding a correct entry price, I am groping in the dark. I assumed 15% as net margins, after I learned from local distributors that they have 3% net margins for beauty products, around 8% gross. Nykaa handling the entire supply chain, super distribution, distribution, retailing etc 15% seemed reasonable. Nykaa has 97 days of cash conversion cycle.
Since, I don’t have a good number, I am going to buy this stock at corrections. And after 50% correction and a visually discerning consolidation, unquestionable, I feel 1300 to 1400 is a good time to invest.
Disclaimer: This is just a conversation, not an advice. I am at complete freedom to renegade.
Does anybody understand the rationale behind the company’s decision of declaring a bonus?
Bonus within a year of IPO and that too of a hardly profit generating company is very odd.
Would like to hear comments from you guys.
