An Overview on Nykaa's IPO

Nykaa is an Indian e-commerce company, founded by Falguni Nayar in 2012 and headquartered in Mumbai. It sells beauty, wellness and fashion products across websites, mobile apps and 76 offline stores. It is a unicorn start-up, and as of 2020, was valued at ₹85 billion.

Nykaa entered the ecommerce market when Amazon and Flipkart were already leading the charge. But instead of selling everything from books to mobile phones, Nykaa, with local makeup sellers, brought international cosmetic brands to India - similar to French cosmetic giant Sephora.

The company has a diverse portfolio of beauty, personal care, and fashion products, including their own brand products manufactured by them. The company operates under 2 major verticals:

• Nykaa: Beauty and personal care
• Nykaa Fashion: Apparel and accessories

Nykaa Founder

Falguni Nayar is an Indian business woman who was a former investment banker at Kotak Mahindra for 19 years. She founded NYKAA, derived from the Sanskrit term for heroine with a seed investment in 2012

Omnichannel beauty retailer Nykaa will be the first woman-led Indian unicorn to launch an Initial Public Offering (IPO).

Nykaa IPO

The online beauty store had received approval from the Securities and Exchange Board of India (SEBI) on October 14 for the IPO. Beauty start-up Nykaa will launch its three-day initial public offering (IPO) on October 28, adding that the company plans to raise up to Rs 5,200 crore through it.

The IPO dates have been fixed from October 28 to November 1, and it will involve a fresh issue of Rs 630 crore. The price band of the initial share sale is fixed at ₹1,085-1,125 per share.

A total of 41,972,660 shares would be available through offer-for-sale (OFS), the report added. The company is seeking a valuation of around $7.4 billion in the IPO. Sanjay Nayar, TPG, Lighthouse and Sunil Munjal are among the selling shareholders.

IPO objective

Nykaa plans to use the proceeds from the IPO for

· Setting up new retail stores and delivery warehouses

· Pay off part of the debt

Nykaa now boasts of over 1,500 brands in its portfolio, including leading luxury labels like Bobbi Brown, L’Occitane and Estee Lauder, and it has even opened 68 brick and mortar stores in the country.

The company reported a net profit of ₹61.9 crore for FY21 as compared to a a loss of ₹16 crore in the previous fiscal. Its revenue from operations jumped to ₹2,441 crore from ₹1,768 crore, making it possibly the only profitable unicorn that is going public.

How Nykaa is different from other brands

When Nykaa launched in 2012, the online beauty space had a couple of players such as Urbantouch and Purplle. Urbantouch was shuttered in March 2013 after being acquired by Fashion &You. And while Purplle is still around Nykaa has a much higher brand recall in the beauty vertical.

Nykaa CEO Anchit Nayar said the company has reached the breakeven point with INR 1229 Cr revenue in FY 19

For CEO (retail) Anchit Nayar, the strong customer trust and brand recall are Nykaa’s biggest strengths. Anchit, son of Nykaa founder Falguni Nayar, has been leading the company’s omnichannel efforts.

Nykaa stands out from other ecommerce players because of its inventory model. Products are bought from brands and distributors, and then sold directly to the customers. Unlike a marketplace model, where third party sellers list products, Nykaa has a stronger hold on what it sells, which arrests counterfeit products from making it to the platform.

Nykaa - Revenue Model

It uses digital marketing as a means to market their website. The average cart size of Nykaa is Rs.1250 - Rs.1550. It allows its users to purchase cosmetics, skincare, haircare and fragrances. The revenue produced by operations was recorded at $249.81 million (FY20).

The platform follows an inventory-led model and has got its own private model. Expenditure is increasing more than double of the financial years. However, the Mumbai-based online platform almost turned out to be beneficial and profitable for itself as well as for its consumers.

Revenue of Nykaa E- Retail Private Limited between financial year 2017 and 2020(in billion Indian rupees)

The Indian online marketplace Nykaa experienced an exponential growth since 2017. Starting with a revenue of only a little more than two billion Indian rupees, the yearly revenue amounted to 18.6 billion rupees in the fiscal year 2020. Nykaa covered a wide price range from luxury products to mass products, but its main source of revenue was the sale of make-up.

Most e-commerce players in India are burning cash to acquire new customers and expansion in new cities. However, Nykaa stands out with its strong focus on unit economics.

Below are different reasons that lead to the high margin for the company -

· Its main source of revenue is BPC and fashion, both of which have high margins.

· They procure directly from brands.

· The company focuses on luxury and premium products.

· The average intake margin of 35% is one of the key factors that drive Nykaa's strong unit economics.

Risks

Regulations

The biggest risk to Nykaa today is the impending regulation by Ministry of Consumer Affairs. All e-commerce platform companies are under scrutiny for selling private labels merchandize and as per draft regulations, Govt of India is mulling the option of banning platforms ability to sell any private label goods.

If this regulation is passed, it will hamper Nykaa’s investment into its own private label brands and result in some headwinds for the company. The company owns a portfolio of 13 private label brands as of 2021.

This regulation is still very much under development, so we do not know if and when it may be passed into law. The best way to tackle this risk is to keep a close eye on any new developments, esp. if you’re thinking of investing in the company.

Increasing competition

The second biggest risk is the increased competition from new vertical e-commerce players. Both start ups and established companies are entering Nykaa’s turf and challenging it’s market share.

Myntra announced its foray into BPC goods in June 2021, It was the latest to announce its foray into Beauty and Product Category.

Then there are start-ups like Purplle, who have been trying to compete with Nykaa since the beginning.

Even though Purplle started before Nykaa, it has lost market share and struggled to keep up with Nykaa’s pace.

Though entry of these new players means increased competition, I believe Nykaa will still be able to protect its market share, thanks to its content moat we discussed earlier.
Nykaa is more than a platform to its customers today, it’s a platform built on their trust.

Nykaa - Future Plans

The company is aiming towards expanding its offline business. It wants to expand its offline evidence by opening 180 stores by 2024. Nykaa - the multi-brand beauty product company will expand its physical existence by opening more than 180+ stores all over India and also it holds a dream of growing its offline business more and more in the upcoming years.

Nykaa would be the fourth major internet-based start-up to be listed on the exchanges after Zomato, Nazara and Car trade Tech. The online opportunity in India is attracting players across categories. Recently Nykaa has acquired the Indian skincare brand Dot & Key. This is the first D2C (direct-to-consumer) beauty brand acquired by Nykaa. The firm plans to list on 11 November on the leading stock exchanges BSE and NSE. On Monday 25 Oct 2021, the shares were seen trading at Rs 1785 a piece nearly 60% premium, in the grey market, according to the people who deal in unlisted shares of the company

However, there are challenges in terms of competition, counterfeit products in the market and supply chain inefficiencies.After a small pause, primary market is set to witness mega start up IPOs. As the countdown of Nykaa IPO begins, market looks passionate for the company as unlike the cash burning and loss-making start-ups, Nykaa is a profitable one.