HomeOpinionNykaa shares price: Should you buy even as Q3 profit plunges 71%?...

Nykaa shares price: Should you buy even as Q3 profit plunges 71%? What brokerages recommend

FSN E-Commerce Ventures Ltd., the parent company of cosmetics-to-fashion store Nykaa, reported a 71% drop in net profit for the third quarter ending December 2022 of the current fiscal year (Q3 FY23) at Rs. 8.4 crore, compared to Rs. 29 crore in the previous quarter. Nonetheless, the company’s sales increased by 33% to Rs. 1,463 crore.

“FSN E-Commerce Ventures (Nykaa) reported a mixed bag—it met growth expectations, but margins undershot as gross margin for both BPC and Fashion felt the macro as well as down-trading impact.”Growth reviving in fashion, a concern for many quarters, is a positive,” said brokerage Nuvama Research.

While the company’s gross merchandise value (GMV) increased 37% year on year (YoY) to Rs. 2,796.5 crore, the average order value (AOV) decreased 0.5% to Rs. 1,958. Falguni Nayar, executive chairperson, MD, and CEO of Nykaa, stated that the firm is working to improve its EBITDA (operating profit) margin.

“Given the recent volatility in the stock, we again bake in a higher cost of capital assumption, which yields a target price of Rs. 195 and maintain a “buy” rating on Nykaa shares.” The confluence of both growth and profitability would be critical for valuations to improve. “Besides, the gross margin miss, an aberration as per management, must reverse itself, as any structural impact could negate benefits in marketing and fulfilment,” the note stated.

“While the contribution margin remained at 24% (Q3 FY22: 22%, Q2 FY23: 24%), gross margins fell 180 basis points year on year to 41% owing to a shift in category mix, increased brand-funded promotions over the holiday season, and consumer downgrades. “While Q3 is often the biggest quarter, Nykaa anticipates greater nuptials and sales events to boost growth in Q4FY23,” Nuvama said.

Goldman Sachs has a neutral rating on the stock with a target price of Rs. 200. According to the brokerage, earnings were lower than projected due to lower gross margins but higher than planned spending on the B2B vertical. Furthermore, the acceleration in fashion growth surprised positively while the BPC market surprised adversely.

The views and recommendations made above are those of individual analysts or broking companies, and not of Business Headline.

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