Will Nykaa shares follow Zomato stock trajectory? Here are rerating drivers

Post a phenomenal stock market listing, FSN E-Commerce (Nykaa) shares delivered a muted performance due to increasing competitive intensity with the entry of Tira, Tata Cliq Palette and Myntra’s beauty app, moderation in cash flows and higher debt, said Nuvama Institutional Equities.  Limited margin improvement despite scalability in BPC and lower fashion losses also weighed on the stock.

That said, the brokerage believe Nykaa shares may follow the Zomato trajectory soon. It said the competitive intensity is moderating and working capital is stabilising at a higher level and that a key driver for Nykaa will be margin delivery. The domestic brokerage is building in  in 400 basis points Ebitda margin expansion over FY24–26E, akin to how it played out for Zomato.

Key levers are revival in advertising income, moderation in marketing spends and operating leverage, it said while suggesting a 'buy' on the Nykaa stock with a target price of Rs 192 from Rs 189 earlier.

Nuvama said Zomato is a related but different business model as it is purely a platform versus Nykaa, which is an omni retailer. That said, the business is similar in terms of online transacting users being the key TAM while unit economics have similar drivers.

"We notice Zomato posted a significant improvement in unit economics/margins, which drove upgrades and the consequent stock performance. In our opinion, a similar trajectory for Nykaa, where margins record a significant improvement, can drive the next leg of performance for the stock," it said.

In the case of margin expansion, the brokerage is expecting an improvement in advertising income for BPC driving marginally higher contribution margin: 130 basis points. It sees operating leverage benefits of 180 bps and moderation in sales and marketing to the tune of 60 bps.

"Of these, the operating leverage aspect has higher certainty while the other two are dependent on competitive intensity and consumer sentiments normalising," Nuvama said.

Nuvama sees 75 per cent of the value driven by BPC and the remaining driven by the fashion business. At present, it is not building any value from the EB2B business in the Nykaa target price.