India’s top e-commerce site for beauty products, Nykaa, will launch its three-day IPO on Oct. 28, joining the booming frenzy for tech maiden offers.
The IPO by the company, formally known as FSN E-Commerce Ventures Ltd., comprises a fresh issue worth Rs 630 crore and an offer-for-sale by promoters and existing investors to offload 4.19 crore shares worth around Rs 4,721 crore, according to its red herring prospectus.
The firm has set a price band of Rs 1,085-1,125 apiece, giving it a market value of up to Rs 53,204 crore, or about $7.1 billion. That compares with Nykaa’s valuation of $2.2 billion after its funding round a year ago.
“Last year, when we did the fundraise it was a Covid-impacted month, and from a certain perspective we needed to bolster our resources, and that valuation was right in the context then,” Falguni Nayar, founder and chief executive officer at Nykaa, told BloombergQuint in an interview. Business has continued to grow in the last one year, she said, citing numbers:
- Between FY19 and FY21, the gross merchandise value grew at a CAGR of 66%.
- In the first quarter of FY22, the beauty segment grew 178% year-on-year
- The fashion vertical, launched last year, has also grown at a fast pace.
All of that, she said, reflects in the valuation.
- Face value: Re 1 per share.
- Price band: Rs 1,085-1,125.
- Fresh issue: Rs 630 crore.
- Offer for sale: Rs 4,721 crore.
- Listing: National Stock Exchange and BSE.
- Book running lead managers: Kotak Investment Banking, Morgan Stanley India Company, BofA Securities India, Citigroup Global Markets India, ICICI Securities, and JM Financial.
What’s Nykaa’s Business
Founded in 2012 by Nayar, a former investment banker, the beauty retailer platform now offers more than 2,600 domestic and international brands of everything from eyeliner and mascara to shampoos. The Mumbai-based firm sells through its website and in physical stores.
As of Aug. 31, the firm’s mobile application was downloaded 55.8 million times, and in the five months ended Aug. 31, 88.2% of its gross sales came through online channels.
Nykaa also has 80 brick-and-mortar stores across 40 cities. The physical stores are in three formats—Nykaa Luxe, Nykaa On Trend and Nykaa Kiosks. Before the pandemic, while 8-10% of the gross merchandising value came from physical retail, it is now less than 5%. The company, however, expects that in the long term it could contribute 12-15% of the total business.
While Nykaa’s shares in the overall beauty and personal care market is barely over 2%, it controls nearly a quarter of online sales in the segment. Its share is even higher in the online colour cosmetics where Nykaa accounts for over half.
Who Owns Nykaa
The multi-brand beauty and personal care platform will be India’s first woman-led unicorn to debut in the public markets.
Promoters of Nykaa include:
- Falguni Nayar
- Sanjay Nayar
- Falguni Nayar Family Trust
- Sanjay Nayar Family Trust
The promoters and seven other related entities hold about 54.22% stake in the company.
Where Will The Money Go?
Nykaa said net proceeds from the initial share sale will be used towards investment in subsidiaries for starting new retail stores and capital expenditure towards new warehouses.
The most significant chunk will go towards acquiring and retaining customers and repayment or prepayment of borrowings.
Nykaa is among the few profitable online retailers in the country. It reported a net profit of Rs 62 crore in FY21, compared to a net loss of Rs 16 crore in FY20. Total revenue rose 38% year-on-year to Rs 2,441 crore in FY21.
While competition has been around even before Nykaa, it has picked up in the online beauty and personal care segment following the foray of brands such as Purplle, and other direct-to-consumer brands such as MyGlamm. The interest comes on the back of an opportunity that Jefferies estimates to be worth $16 billion.
Nykaa also faces competition from the established e-commerce players like Amazon, Flipkart, Myntra, AJIO (owned by Reliance) and the upcoming Tata digital super app.
“Given the attractiveness of the category and unit economics (led by gross margins), we do see a pick-up in competition in coming years from the likes of Reliance Retail, which are deep-pocketed,” Jefferies said in a note. Competition will, however, take time to ramp-up to establish connect with customers, it said.
Nykaa’s valuation at the upper price band comes out to be 809.3 times its price to earnings
Investors will have to consider risks like:
- Failing to acquire new consumers or failing to do so in a cost-effective manner means the firm may not be able to increase its revenue or maintain profitability.
- Changing regulations in India could lead to new compliance requirements that are uncertain, such as amendments to the Consumer Protection (E-Commerce) Rules, 2020, that restricted online seller from “flash sales”, restrictions on usage of the brands associated with the e-commerce entity for promotion or offer for sale of goods/services, introduction of a “fallback liability” on the e-commerce entities, among others.
- Certain brand vendors account for a significant portion of its total GMV of online sales and any adverse changes to relationships with such brand vendors can adversely affect its business, financial condition, cash flows and results of operations.
- Heightened competition could negatively impact the success of its business or affect margins. Its competitors include a number of online marketplaces, retailers with physical stores, and brands that take a direct-to-consumer approach, and could remove them from the distribution and sales process.