Down 60% from 52-week high! ICICI Securities upgrades Nykaa stock to 'Add' from 'Hold'; here's why

Shares of Nykaa have corrected over 62 per cent from its 52-week high of Rs 344.68, hit on January 20, 2022. The stock has been on a bumpy ride for quite a while now. It ended 1.36 per cent lower than the previous day's close at Rs 127.25 on January 20, 2023. Market cap of the firm fell to Rs 36,258.26 crore on BSE.

According to the experts, the recent correction in Nykaa stock was due to the global tech sell-off on rising yields and the recent lock-in expiry on November 10, 2022. Nykaa stock also went ex-bonus in a 5:1 ratio on November 10.

ICICI Securities, in its recent report, upgraded Nykaa's rating from 'Hold' to 'Add'. However, the brokerage firm has reduced the target price of the stock to Rs 145 from Rs 175 earlier.

We had always liked Nykaa's business model. That said, post its listing on the Indian bourses, we've been staying on the sidelines due to valuations beyond our ability to comprehend (at peak stock price, revenue CAGR requirement over the next 20 years was 23 per cent), it said.

However, the brokerage firm noted that chasing growth at elevated levels can dilute gross margin and success in the fashion business can be challenging given the higher competition in the category.

It believes that Nykaa continues to present a combination of the largest beauty and
personal care (BPC) business in a growth market (India), good profitability metrics and prudent capital allocation, and omnichannel in the ‘true sense’ (going online to offline). That said, competition may intensify from both vertical and horizontal peers.

While ICICI Securities expects BPC revenue to grow, it believes Nykaa’s journey could be different – it will have to go more mainstream to drive this growth. Growth trajectory in fashion will be keenly watched out for.

Notably, the shares of new-age internet companies have corrected significantly amid intense selling pressure and global headwinds. In 2022, the shares of Paytm, Nykaa, Zomato, PB Fintech and Delhivery have eroded a combined Rs 2 lakh crore in market capitalisation to Rs 1.71 lakh crore from Rs 3.76 lakh crore as on December 31, 2021.

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