Nykaa predicts that the beauty segment will show strong performance in Q2 despite delays in the festive season

Nykaa predicts that the beauty segment will show strong performance in Q2 despite delays in the festive season

Nykaa, the renowned Indian cosmetics and beauty retailer, has projected a promising 23% growth for the second quarter of the year, highlighting its enduring resilience in the face of changing market dynamics.

The company’s forecast becomes even more impressive when one considers the delay in the festive season this year, a period traditionally associated with heightened sales.

Founded in 2012 by Falguni Nayar, Nykaa started as an online retail platform for beauty and wellness products and has now expanded into a full-fledged omnichannel presence. With an array of premium and home-grown brands, the company has been at the forefront of revolutionizing the beauty and cosmetics sector in India.

The Q2FY24 revenue report was published by FSN E-Commerce Ventures (Nykaa). Despite the holiday season’s later start, the Q2 performance report shows that the beauty and personal care (BPC) sector has made significant growth.

In addition, the Fashion sector has made an impressive comeback. A 20% year-over-year increase in net sales value (NSV) is anticipated for BPC, helped by the company’s signature July “Hot Pink Sale” event.

Due to the fact that the holiday season began earlier this year than in 2022 (in October rather than September), growth has been somewhat impacted.

In contrast to the weak demand recorded across the board in the garment sector during the same quarter, the fashion industry had good momentum during 2QFY24. Nykaa was able to refine the mix of its main categories and boost order volumes, which led to a predicted y-o-y growth rate for Fashion NSV in the mid 30s percent. When compared to the 14% y/y growth in 1QFY24, this is a significant improvement.

At the consolidated level, Nykaa projects that in 2QFY24, overall NSV will increase by a percentage in the mid-20s and revenue by a percentage in the low-20s. The first half of FY24’s performance portends favourably for the usually better second half of FY24.

We are assuming a strong 20% y-o-y rise in NSV for the BPC segment in the second quarter of fiscal year 24 (after a high 23% y-o-y growth in the first quarter). We expect this upward trend to continue through FY25/26F, with an estimated 24% year-over-year growth.

Compared to the 14% y-o-y increase seen in 1QFY24, we anticipate an exceptional NSV growth of 31% y-o-y in the fashion sector in 2QFY24F. When compared to our prior 15% y-o-y NSV growth projection for FY24F, this view shows significant upside risk. It’s important to remember, though, that the Fashion division may still have an influence on the business’ overall profitability.

We anticipate consolidated sales growth of around 23% y-o-y for 2QFY24F overall, with an Ebitda margin of 5.8%, representing a q-o-q rise of 60 bps. Looking ahead to FY24F, the predicted 22% year-over-year sales growth carries the possibility of considerable upside risk.

However, larger gains in the second half of FY24F will be necessary to hit our Ebitda margin projection of 6.6% for that year. Our target price of Rs 163 is derived from a discounted cash flow analysis that takes into account a 16% CAGR in sales for the years FY25 to FY40 and an Ebitda margin that stabilises at around 15.5%. We continue to rate the stock as Neutral.

The beauty segment has consistently been a strong performer for Nykaa, even during periods of economic downturn or external challenges. This quarter was no exception. Despite the broader market uncertainties and disruptions due to the festive season’s delay, the beauty segment continued to experience robust growth.

With an increasing number of consumers turning to online shopping, Nykaa’s digital-first approach has proven advantageous. The company’s mobile application and website have seen heightened traffic and user engagement.

Nykaa’s vast range of products, from luxury to affordable, caters to a wide consumer base. Their inclusivity in offering products for various skin tones and types has also been a significant driver.

Leveraging influencer partnerships, virtual try-ons, and augmented reality-based features has allowed Nykaa to engage with its consumers in novel ways. This has helped in maintaining customer loyalty and attracting new users.

The festive season in India, marked by significant festivals like Diwali, Durga Puja, and Navratri, is a period when retailers often see a spike in sales. However, this year, a calendar shift led to the delay of this season, pushing it into Q3.

Yet, Nykaa managed to decouple its growth from this traditional sales boost. Their growth projection suggests that their business model, customer engagement strategies, and product diversification can withstand such external challenges.

With Q3 expected to benefit from the festive season rush, Nykaa’s annual outlook remains positive. The company’s continual focus on enhancing customer experience, both online and offline, is anticipated to pave the way for sustained growth. Additionally, their foray into fashion retail and men’s grooming provides a diversified revenue stream, further strengthening their market position.

Nykaa’s anticipated 23% growth in Q2 is not just a testament to its strong operational capabilities but also an indication of the evolving Indian consumer landscape. As the line between online and offline shopping blurs, companies that remain agile, customer-centric, and innovative are poised to lead the market. In this context, Nykaa stands out as a shining example of resilience, adaptability, and growth.