Nykaa’s IPO: What is Nykaa doing right?

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Nykaa, a relatively late entrant into the Indian e-commerce market, has successfully monopolized the Beauty Retail segment. With over 1.5K brands, 130K products and 1.5 Mn monthly orders, this beauty retailer is all set for an IPO, a first by an online beauty marketplace in India.

Nykaa had posted annual profits since FY19 when it recorded a revenue of ~$155 million and a profit of ~$0.2 million. It achieved steep revenue growth of 60% in FY20 to ~$249 million and is estimated to hit the $334 million mark in FY21.

IPO mythbuster: Can any company do an IPO?

No, according to SEBI’s Entry Norm 1, a firm is allowed to list its shares on the stock exchanges only if it has a track record of profits for at least three preceding years.

While several other Indian Unicorns are looking at IPOs, Nykaa, who had turned profitable since FY19, seems to be the only one amongst them that meets Entry Norm 1’s eligibility criteria.

The IPO strategy

What’s interesting to see now is how Falguni, a former banker who has helped several companies price their IPOs, wins this pricing game.

A preview of her strategy can be seen in the stark increase of the proposed valuation from $3 billion to $4.5 billion over six months. A stellar 150% higher than its current valuation of $1.8 billion. As the sudden digitization has made the market lean towards e-commerce startups, one can only wonder what the value will be by the time the stock hits the Street.

Burn cash, grow revenue and pray for an exit — Indian e-commerce mantra

The Indian e-commerce industry is infamous for ginormous overheads and heavy cash burns. Despite the multiple rounds of funding, it takes painstaking efforts and countless years for the companies to turn a profit. Now the interesting question here is what exactly did Nykaa do to achieve sustainable profits not once but for 3 consecutive years since FY19.

What did Nykaa do right?

Very few have been able to achieve the balance between partner relationships and customer loyalty.

Nykaa’s policy against forceful platform discounts assures the brands that they have found a perfect strategic partner while weeding out the masses to find Nykaa’s “true customers”. Most schemes and promotions on the platform are curated to align with the brands’ strategy and are funded by the brands themselves.

Moreover, their high-cost inventory model, assures that the customers never have to suffer on quality when ordering from Nykaa and therefore it enjoys high-profit margins. Nykaa’s unique strategies and their strong unit economics have led to their gross margins doubling over the last five years, from 21% in FY15 to 41% in FY20, said the Jefferies report.

Expensive equity or cheap debt?

The one significant thing Falguni brought to the table was her knowledge of capital allocation and industry connections. With a finance wiz at the helm, Nykaa managed to build the unicorn with relatively lower equity funding but obtaining a significant line of credit from the banks and therefore operating at a high return on equity.

Moreover, while Nykaa’s customers pay it on Day 1, Nykaa pays its vendors anywhere between 30–60 days thereby making its customers fund its operations. This is the reason why Nayar and family own more than half (56%) of this unicorn even after having raised USD 342 million.

Challenges: Still a long way to go?

Despite the rosy picture and the current fortune, Nykaa still has a lot to prove.

With the sudden surge of digitization, Nykaa now faces tremendous competition from unorganized upcoming e-commerce players. Increased competition might force Nykaa to rethink its “no discount policy”, making it difficult to sustain the current margins.

Additionally, Nykaa’s plans of expanding its offline presence come with the challenge of a high CAPEX ($100K per store). Therefore, the stores break even only if they are positioned strategically to be able to attract optimal volumes of loyal customers.

The challenges posed in front of India’s largest omnichannel beauty destination are dire. But Nykaa is sure to benefit from their current market position, the team’s and shareholder’s extensive experience, their vast network of global brand partners and millions of loyal customers.

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