Shares of FSN E-Commerce Ventures jumped up to 5% on November 13 as the operator of the Nykaa reported positive earnings for the quarter ended September 30, 2024 (Q2FY25).

Given the solid results, Nuvama maintained its 'Buy' rating on the stock. However, the brokerage cut estimates due to an overall slowdown in the industry and elevated marketing spending. The target price has been revised downwards to Rs 205 from Rs 220 earlier.

Nykaa reported a 66% year-on-year increase in consolidated net profit to Rs 12.97 crore and its consolidated revenue from operations grew by 24.4% YoY to Rs 1,874.84 crore during the reported quarter.

The BPC (Beauty Personal Care) and Fashion segments of Nykaa reported net sales value (NSV) growth of 25% and 13% YoY and the EBITDA margin was similar to last quarter at 5.5%.

Analysts at Nuvama reckon an improvement in growth in the second half of the current fiscal on the back of higher festive and wedding demand. "We continue to forecast an improvement in profitability on the back of operative leverage, although we have moderated our expectations due to elevated marketing spends," they said.

Investment Rationale

The Beauty and Personal Care (BPC) market in India stands at Rs 1.1 lakh crore, with e-commerce representing only 8% (Nykaa’s share: 37%). Even when adjusting for Nykaa’s specific segments, the core online addressable market (TAM) is projected to reach Rs 25,000 crore by FY26, a 3x growth, said Nuvama.

Nykaa is among the few profitable new-age companies, with a durable competitive moat based on its Authenticity (inventory-based model ensures genuine products), Assortment (the largest collection across platforms), and Engagement (significant content investment, positioning it as a lifestyle platform), according to the brokerage.

Despite rising competition, Nykaa’s exclusive vertical platform and scale have created a reinforcing cycle that supports sustained market share.

In fashion, Nykaa has adopted a niche, curation-focused approach, which management plans to maintain." Though this segment may achieve limited scale, it offers a potential path to profitability—a crucial value driver," Nuvama said.

At 9:22 am, Nykaa shares were trading around 5 percent higher at Rs 188 on the National Stock Exchange (NSE). The stock has rallied around 4 percent this year, underperforming Nifty's 10% gain.

Over the past 12 months, the stock has risen 18%, while Nifty rose 23% during the same period

Nykaa faces key risks, including a potentially smaller TAM in Beauty and Personal Care, rising competition that could erode margins and market share, and the risk of major brands leaving its platform, highlighted Nuvama. Additionally, scalability challenges in its fashion segment may lead to further losses, while higher capital costs could impact profitability and expansion plans.