Nykaa’s IPO – Overview

Not for the first time in 2021 and certainly not for the last, we witnessed the public market debut of a technology company provide stellar returns to investors. 2021 has been a year like no other for Indian equity markets, but what is noteworthy is that it has resulted in a convergence of private market and public market valuations. To go one step further, it seems that now private market valuations are having a direct impact on public market multiples. Interestingly, this could result in legacy companies considering their options for sacrificing a portion of their profitability for growth.

Nykaa is one such company which crossed a valuation of 1 Lakh Crore on listing day. At current levels, the company trades at a Price to Sales of ~40x with a Price to Earning multiple upwards of 1600x! If one was quoted the ~40x number, one would most likely assume that this refers to earnings multiple rather than sales (despite being a discount to Zomato’s valuation of 54x P/S). Indeed, there are multiple voices within the market echoing similar concerns with Nikhil Kamath of Zerodha tweeting “Nykaa lists at 1600 times price to earnings. They sell cosmetics online, Paytm next, the best thing for a value stock investor might be to go on a really long holiday right about now.”

While many macro factors have played a role in the Indian stock market rally over the past year, it is imperative that we look at the company independently of these factors to ascertain it growth potential. As such, we have included a brief overview of the company below along with industry factors which could play into our investment rationale.

Company Overview

FSN E-Commerce Ventures Limited or “Nykaa“, incorporated in 2012, is a multi-brand beauty, personal care and fashion platform. The company boasts a diverse portfolio of products, including owned brand products, allowing it to establish itself as both a retail platform as well as a popular consumer brand. Further, Nykaa provides Omni Channel experience through mobile applications, websites and 80 physical stores across 40 cities. This online model allows for ~2.0 million SKUs from 3,826 national and international brands to consumers across business verticals, which normally becomes a constraint in physical retail set-up. As of August 31, 2021, the company had cumulative downloads of 55.8 million across all its mobile applications and during the five months ended August 31, 2021, 88.2% of its online GMV came through our mobile applications.

  1. Beauty and Personal Care – This segment is managed through an inventory led model, ensuring direct sourcing from brands to maintain authenticity of all products sold. Moreover, such an inventory led model also ensures consistent availability products.
  2. Fashion – This segment, unlike beauty and personal case, is operated through a marketplace model where it does not carry any inventory and pushes orders directly to its partners. This is a capital efficient model for the fashion business and allows for a wide array of offerings as there is no need to maintain inventory.

Nykaa is founded and promoted by Falguni Nair, a former managing director at Kotak Mahindra Capital Company. She serves as a great example of the more recent phenomenon of professionals turning entrepreneurs – what we term as next-gen entrepreneurs.

Industry Landscape

The Indian consumption story is a recurring investment theme across categories and while it has certainly played out over the past 20 years, there continues to exist a significant growth potential. Indian retail, in particular, is expected to grow from Rs. 55 Lakh Crore in 2020 to Rs 91 Lakh Crore by 2025. Further, the retail market has grown at a CAGR of 5% over the last four years, driven by rising middle class, soaring income levels, increased spending by youth, increasing demand from Tier III & IV cities and rural markets, improvement in infrastructure and entry of new domestic as well as global brands. More importantly, once the impact from the COVID 19 pandemic ameliorates, we would expect to see a 11% growth CAGR until 2025.

With regards to the beauty and personal care market, we note that the segment has been growing at 13% for the last 3 years and despite the reduced spending due to Covid, is expected to grow at 11% until 2025. As we narrow our focus down to the online beauty market, we see a stark difference with growth at over 60% for the past 4 years. Further, this is expected to continue at more than 30% CAGR as online beaty products take up a larger chunk of the overall market. 

Investment Rationale

  1. Strong headroom in online beauty, personal care, and fashion markets –
    1. Online BPC/Fashion markets remain underpenetrated and are expected to deliver a strong CAGR of 12% and 18% across BPC and Fashion segments. This will be driven by increased digital adoption and rising adoption of e-commerce by Gen-Z and Millennials
  2. Strong/ Sticky Customer Base –
    1. Nykaa’s key strength exists in their ability to retain customers, resulting in a healthy growth in GMV over the years. The brand has innovated for customer satisfaction and purchasing behaviour by integrating across touchpoints. This has ensured their ability to meet customer needs and maintain a high level of loyalty
  3. Private label portfolio to fill potential gaps –
    1. Consumer insights collected by Nykaa also aid the company in identifying gaps in the market which have not been addressed. This allows them to fill them through their own brands – many of which perform well even as independent brands. 


  1. Stagnation in shift to online –
    1. If the company fails to acquire new consumers or fails to do so in a cost-effective manner, it may not be able to maintain profitability
    2. Alternatively, if the online commerce industry in India stagnates due to macro factors, this would adversely affect the company’s long-term growth
  2. Correction in valuations –
    1. A key concern which was alluded to earlier, is the price at which one enters the Nykaa investment. If liquidity does dry up, there exists the potential for the valuation of Nykaa to correct, even if the company continues to meet its targets.
  3. Changing Regulation –
    1. Changing regulations in India could lead to new compliance requirements for e-commerce companies, leading to uncertainty 


While we haven’t discussed exact valuation numbers, the above serves as an introduction to the company and the potential factors which may deliver returns for investors in the long term. While entry valuation continues to be a key risk, especially in the macro context, the company is set to benefit from prevailing tailwinds in the industry. Further, its strong technology platform, its relationship with brands and customers ensures it is well placed to capture long term value.

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