Nykaa trades 11% lower on weak Q1 earnings; Kotak, Nomura downgrade stock

Shares of FSN E-Commerce Ventures Ltd, the parent company of online fashion and cosmetics retailer Nykaa, fell more than 11% after posting poorer results for the June quarter.
As of 09:40, the stock is trading at Rs 134 on BSE, down 8% from the previous closing price. The stock hit an intraday low of Rs 130 per share and fell as low as 11.11%.
Brokerage firm Kotak Institutional Equities downgraded the stock from “buy” to “extra” and lowered its target price to Rs 165 from Rs 210 per share previously. Nomura Research also downgraded its rating from ‘buy’ to ‘neutral’ and lowered its price target to Rs 163 from Rs 183 per share. Nykaa reported a 24% year-on-year increase in revenue for the first quarter of fiscal 2024. This growth was driven by a 24% increase in gross merchandise value (GMV) of the segment, respectively. beauty, personal care and health (BPC), along with a 12% expansion in the fashion GMV. Despite this positive trend, reported revenue was 6% lower than Kotak’s forecast, mainly due to a 2% shortfall in GMV BPC and a larger 14% shortfall in GMV fashion. Its consolidated net profit fell 27% to Rs 3.3 crore.
The gross margin (GM) figure was 43.5%, marking a decline of 89 basis points for the quarter due to the growing importance of the e-B2B segment in the overall product offering. Contribution margin (CM) of the BPC segment saw a notable improvement, increasing by about 179 basis points year-on-year to 24.6%. In contrast, the fashion segment’s CM fell about 80 basis points to 4.6%. Analysts said the drop in earnings could be attributed to a number of factors, including increased discounts, lower ad revenue and a shortfall from GM, among others. Difficult macroeconomic conditions have had an effect on slowing growth in the fashion sector, while the BPC segment maintains its position with the highest growth rate.
Management’s outlook remains cautiously optimistic about growth prospects in various segments. Their concerted efforts aim to improve profitability through strategies such as optimizing the product mix and implementing cost reduction initiatives.
“We are concerned about: (1) high price pressures in the beauty segment, (2) negative impact on ad revenue as brand owners take time to adapt to the platform – form new ad technology, (3) slower D2C brand ad spend on Nykaa, (4) slower apparel net sales growth, (5) limited beauty margin expansion and (6) the 2-7 year delay to break even in Reliance’s eB2B segment makes us cautious,” said Macquarie.

The brokerage firm maintained its “underperformer” rating but raised its target price slightly to Rs 120 per share from Rs 115 per share.
Kotak says an eB2B business may need ongoing investment for several years before breaking even. In addition, the start of operations of a new company in the GCC region can put additional pressure on the company’s financial resources.
“Due to these factors, we have revised our earnings per share (EPS) guidance for fiscal years 2024, 2025 and 2026. These revisions resulted in declines of 29%, 19%, respectively. and 17%. This adjustment reflects weaker first-quarter performance, continued investment in the eB2B business, and meticulous efforts to adjust growth rates and margins in the fashion and BPC segments. ,” the report added.