Nykaa stock coverage has been initiated by Jefferies with a target price of Rs 1,650 per share, an upside of 10% from today’s lows. However, a bullish scenario could see the stock rally to Rs 2,300 apiece.
Nykaa share price is expected to zoom as much as 53% from today’s low, according to analysts at global brokerage firm Jefferies. Nykaa shares have slumped more than 26% so far this year to now trade at Rs 1,500 per share. Analysts at Jefferies believe that Nykaa is a unique combination of growth and profitability as the brokerage firm initiates the coverage of the stock. Internet stocks have so far this year faced the wrath of bears not just on Dalal Street but across the globe. Questions around valuations of internet companies remain, however, Nykaa’s leadership positioning in the online beauty space, makes it a favourable bet.
Strong upside seen
Nykaa stock coverage has been initiated by Jefferies with a target price of Rs 1,650 per share, an upside of 10% from today’s lows. However, a bullish scenario could see the stock rally to Rs 2,300 apiece. Under this scenario, analysts have built a 30% CAGR order growth for Nykaa BPC over FY22-26E. Order frequency and AOV is expected to see gradual growth as customer cohorts mature.
Premium to other internet plays
Analysts believe Nykaa is unique as it has been successful in scaling up while not losing focus on profitability. “It is probably the only vertical BPC e-tailer with scale, globally, in our understanding. It is not just a retailer, but a brand in itself,” Jefferies said in the report. Analysts further highlighted that Nykaa is among the most expensive global Internet/consumer stocks.
Nykaa trades at a 30% premium to Zomato on reported sales and even higher on adjusted sales. “On our 2-year forward Ebitda estimates, Nykaa is currently trading at 150x, while most of the peers are at <50x,” they said. The premium valuation is backed by strong growth expectations for Nykaa which is anticipated to outgrow peers.
Strong unit economics and asset-light mode aid growth
Nykaa has been focusing on strong unit economics which gives it an edge over others. “Both BPC and Fashion business have AOVs of more than Rs1,500. AOVs saw a sharp jump for both segments in FY21; while BPC stayed near flat in 9mFY22, Fashion continued to grow,” said analysts. “Since Nykaa also generates revenue from advertising income as well as commission from its marketplace offering (largely for Nykaa Fashion), contribution margin is optically higher,” they added.
The company’s asset-light model is also working in its favour. Nykaa has a manageable working capital requirement of ~40 days of sales, largely due to its inventory-based model in the BPC business. Jefferies expects the working capital to remain steady going forward as well. “Nykaa’s balance sheet is expected to grow stronger as net cash position builds up supported by the strong cash flows,” analysts said. “Given limited cash burn and asset-light balance sheet, dilution in promoter shareholding has been lower than what is typically seen in other consumer internet plays,” they added.