Unpacking Nykaa’s Falling Shares: What Could Be Behind the Beauty Retailer’s Falling Shares Woes?

Nykaa, the popular Indian e-commerce company specialising in beauty and wellness products, has seen its shares tumble over the past few months, causing concern among its shareholders. The falling shares are having a significant impact on the shareholders, both financially and emotionally.

When Nykaa made its debut in bourses in November 2021, it got listed on the stock exchange at INR2,080, a star steller entry; one would say, at an 80% premium over its IPO initial public offer price.

What worked well for Nykaa was the fact that as compared to all the other new-age IPOs that debuted in the markets that year Nykaa stood apart as it was the only profit-making company by far.

It made market headlines; among all New Age IPOs that went public in 2021, Nykaa was the only one with some profits. However, today things are far stretched from the glorious entry; the stock touched a record low of INR120.50 on March 31, 2023.

Nykaa shares are down almost 68% from their peak in November 2021 to INR126 (ex-bonus price) and are down 33% from their IPO issue price (INR187.50).

Financially, shareholders are seeing a reduction in the value of their investments in Nykaa. Shareholders who purchased Nykaa’s shares at a higher price are now facing a loss as the shares continue to fall. This can be particularly troubling for investors who had hoped to make a profit by investing in Nykaa’s growth story. They may question their decision to invest in the company and wonder if they should sell their shares before the price falls further.

A company that apparently had everything going for it – a solid business plan, renowned promoters, and most significantly, a loyal customer base today is struggling to keep its place and hold in the market.

Nykaa: Competitiveness Increases
Reliance Retail probably has a bit of a hand in the falling stars of Nykaa; just a month ago, it launched its omnichannel platform for beauty products – Tira, and with that, the competition in the beauty products segment gets a new twist, hampering the already competitive markets in which Tata Cliq Palette, Myntra and Nykaa so far are the prominent players.

Reliance Retail launched its flagship Tira store at Jio World Drive in Bandra-Kurla Complex in Mumbai, along with the Tira app and website launch. The store spans 4,300 sqft and has nearly all brands Nykaa and Nykaa Luxe cover.

Those watching the development agree that rising competition could be a factor downing Nykaa stock considering Reliance Industries has a tendency to disrupt markets where it makes an entry.

High Profile Exits
Another factor that could be affecting the stocks of Nykaa is the recent spate of exits from the company.

In January 2023, the company was hit with high-profile exits, with five of its senior officials quitting one after the other. These were Manoj Gandhi, chief commercial officer; Vikas Gupta, chief executive of the wholesale business and three senior executives from the fashion business, namely — Gopal Asthana, chief business officer; vice-president-finance Lalit Pruthi; and Shichi Pandya, vice-president – of private labels.

While Nykaa attributed these exits to the annual appraisal and usual churn, it makes one wonder what is happening within the company.
However, the company maintained that the overall departure is small in the context of company size.

The Run In With SEBI
It also faced flak for an alleged violation of the ‘spirit of law’, while towing the line with the ‘letter of law’ when it declared a bonus issue, the record date of which coincided with the pre-IPO investors’ lock-in period, pressing the market regulator Securities and Exchange Board of India (Sebi) to come up with rules to curb such mishaps in future.

The bonus issue timing, which at that time seemed like a genius idea, turned out to be a corporate governance nightmare. The incident even initiated Sebi to change the rules. At a recent press conference, while Sebi chairperson Madhabi Puri Buch did not name the company, the regulator slammed such a practice saying it violated the ‘spirit of law’.

“In terms of bonus issues, we found that there have been some problems. Even before the previous shares issued by the issuer were traded and listed, they came up with bonus issues. We believe again, letter of the law, there was nothing barring them, but then spirit of the law. It was completely wrong,” Buch said at a press conference on March 29. More than one company have been found violating the spirit of law while announcing bonus issues recently.

Sebi clarified that a listed company can now announce bonus issues of shares only after obtaining approval from the stock exchanges to list and trade all the pre-bonus securities.

Following the bonus issue saga, the then-group CFO, Arvind Agarwal, quit Nykaa in November to join PayU a month later.

Nykaa’s Push To Starve Off Competition
In Q3 FY22, Nykaa posted a 26% growth in online sales for its beauty and personal care (BPC) segment in gross merchandise value (GMV). The company is pushing for more discounts because of increased competition.

On April 5, in its business update, Nykaa conveyed that its BPC business has seen higher year-on-year growth rates in Q4 FY23 compared to Q3 FY23. It added that the average order values and conversion rates have been robust, aiding revenue growth. For FY23, the company expects percentage revenue growth rates to be in the early thirties.

However, it expressed concerns as the consumer pullback in discretionary spending has impacted the fashion business, leading to a subdued growth in net sales value in the March quarter. Nykaa expects its percentage revenue growth rates in the fashion business to come through in the late teens during the quarter.

Nykaa is currently working with 2,000 brands in BPC and fashion, where the brand mix and other costs may differ. There could be specific differences quarter-to-quarter. Offline sales in BPC accounted for 8.6% in Q3 FY23. The company plans to open another 50 stores next year. The profitability of the BPC is used to build B2B and other fashion brands. And it is this business that would face stiff competition.

Falling Shares Of Nykaa
The falling share price is also affecting the morale of Nykaa’s shareholders. Many investors believed that Nykaa was a high-growth company with significant potential in the Indian market. However, the falling share price is causing doubt and uncertainty among shareholders about the company’s ability to grow and generate profits in the future. Some investors may be losing faith in the company’s management and their ability to steer the company in the right direction.

What Are The Analysts Saying?
Elara Capital has cut Nykaa’s overall revenue estimates for FY24 at 1% and 11% for FY25. Still, the broking firm retains a ‘buy’ on the stock at a target price of INR238 based on EV/Ebitda of 65x for the BPC segment.

Head of equities at Anand Rathi Shares, Varun Saboo, stated that the big worry would be Reliance entering the space, considering that so far, there was no competition. Hence, for Nykaa, there was no substantial threat; however, if one were to see the track record of Reliance, whenever it enters a particular industry, there is some disruption across present players.

Nykaa’s Many Firsts
Founded in 2012, it was the first of its kind beauty retailer in India that focused on selling BPC products and created content to educate consumers; thus, Nykaa was seen as a trendsetter in the BPC industry.

India’s beauty and personal care market is estimated to be USD18.3 billion by the end of the 2023 calendar year, as per market research firm Euromonitor International.

Analysts Opinion
Managing partner of the US-based Ansid Capital, Anurag Singh, points out that even at INR125 per share, Nykaa’s valuation would still be around USD 4.2 billion. Still, the maximum potential valuation for the company over the next three years should not exceed USD3 billion, according to him.

He said the stock still looks overvalued and wouldn’t be surprised if it dips to INR100 as funding is fast drying up. The following two years will be tough to ride, and investors are moving to cash generators in this time of crisis.
Nykaa is very small and surprisingly showing signs of stagnation,” he added, “At this time, I’d stay away from companies born out of easy capital access over the years. It’s about time New Age disruptors face some disruption of their own.”

What Is The Outlook For Nykaa?
With the grim scenario, however, institutional investors have increased their stake in the company.
Institutional investors in December 2022 had increased their stake to 17% from 9% in March 2022, and such a stake has been the highest ever since the company went public.

At the same time, foreign institutional investors have upped their stake in the company to 11.06% at the end of December from 6.57% at the end of September.
Meanwhile, Mutual Funds have raised their stake in the company to 4.06% at the end of December from 2.04% at the end of September.

In Conclusion: What lies for Nykaa will be closely watched; Nykaa houses many brands, many of which were not easily accessible to customers earlier, and Nykaa also enjoys the first-mover advantage.

At the same time, with Isha Ambani leading Reliance Retail, markets sentiments are that the BPC business may succeed; it would be interesting to see how things come into motion as competition plays out.