Why JM Financial’s Sachin Dixit Finds Nykaa's Valuation 'Attractive'

JM Financial Institutional Securities' lead internet research analyst Sachin Dixit is bullish about Nykaa's potential gains going forward. While acknowledging Nykaa parent FSN E-Commerce's muted performance in the last few quarters, he told NDTV Profit that its valuations look attractive. 

The Ebitda margins of FSN E-Commerce rose 18 basis points on a year-on-year basis to 5.5% in the quarter ended Sept. 30.

“Nykaa, while the stock has been slightly muted in the recent past, (it) should be a good bet going forward because the valuations look attractive,” he said.

The ace analyst explained the reason why Nykaa stocks could be a good pick for investors. “I think the company's strategy, particularly in terms of beauty, makes a lot of sense,” he said.

Elaborating, Dixit said that the company’s strategy to acquire more customers, especially in its beauty business segment, “is going to drive a lot of operating leverage at the bottom line.”

“As an analyst, I think that that's a better way to go at this point of time because the company was onboarding roughly 1.6–2 million odd consumers on a net consumer basis in beauty per year earlier. Now they are ramping it up. And for the last three quarters, we have seen the company adding close to 2.6–2.7 million customers a quarter,” he said.

“Rather than trying to ramp up their profitability very sharply, what they are doing is, they are trying to onboard more and more customer base,” he said, highlighting the company's approach to growth.

The analyst explained why investors have not seen sharp returns in the Nykaa stock as compared to its listing price in 2021. He said that it had more to do with what the company was doing “outside of beauty”, for example in the fashion space.

“Once you do that sort of math, you see that this beauty business for Nykaa has done quite well since its IPO. The company has consistently grown roughly in mid-twenties when you think of beauty GMV (gross merchandise value). What is more important is their Ebitda margins have also continued to rise, over a constant period,” he said.

Nykaa shares have fallen 2.24% year-to-date. On Thursday, the stock closed at Rs 168 apiece, down 1.36%, on the NSE, while benchmark Nifty 50 ended 0.72% lower at 23,349.9.