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How much time does your partner take to get ready? Well, let’s say it’s a lot. Looking good is a basic human need, and it is a bit more pronounced for the female gender due to psychological and cultural reasons. Beauty, personal care and fashion products are an age old industry which is evergreen. We may shift from offline to online or from chemical based to natural/vegan etc. but the need would always be there.
Fashion is a broad term, but if we focus on beauty products, what comes to mind are face, body, eye, lip and nail products.
Based on our research, the beauty products market in India is significantly smaller than the Middle Eastern or the South East Asian market. Even Western Markets are ahead of India on spend per capita. Beauty Products Market in India was worth around USD 20 Billion in 2020. Market is expected to grow at around 14 to 15% in the next 5 years, driven by an increase in disposable income. However, the Indian beauty products market lags far behind when it comes to online penetration, with only 8% penetration compared to 45% in Korea.
This is where Nykaa comes into play. Nykaa is a consumer technology platform selling beauty, personal care and fashion products. The company was launched in 2012 to focus on Beauty and Personal Care segment and is now an Omni-channel player with around 80 physical stores across 40 cities. Since the beauty products market is vulnerable to fake products, Nykaa uses the inventory model to improve authenticity.
So why should you invest in Nykaa?
Nykaa is a market leader with around 40% of the market share, and further online growth is only expected to boost their position in the market even more. Nykaa focuses on a Content-led business, with 1300 influencers and a YouTube channel with 1.1 million subscribers. An excellent management team, extensive brand deals and the fact that it is a profitable startup at the EBITDA level are all points that reflect positively on Nykaa.
So what is our view on company valuation?
The stock price of the Company has almost doubled since the IPO in November 2021. The stock market, flush with liquidity, has been looking for a good start-up growth story. And Nykaa is a profitable one so it fits the bill perfectly. Company trades at Price to Revenue (annualized Q2 FY22) ratio of 30x. On an overall basis, business is good but is significantly overvalued at the current levels.
What are the risks to the analysis?
Competitive intensity is expected to go up. Horizontal players like Amazon and Flipkart are increasing their focus on the segment. Other players like Reliance and Tata Digital are also looking to enter the space. Lack of profitable alternatives in start-up space can keep retail investors interested in the short/medium term.
So would you invest in Nykaa?
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