On november 10, small-time retail investor Natasha Aggarwal opened a bottle of bubbly at around 11 am. Though a bit early in the day, the occasion called for a celebration. Nykaa, the advertising professional’s go-to e-commerce site for all beauty needs, had made a blockbuster debut on the stock exchange. The stock soared 89 per cent to Rs 2,129. Aggarwal, who had been allotted “a decent number of shares” at the IPO price of Rs 1,125, was celebrating her monetary gains.
She raised a toast to Falguni Nayar, the 58-year-old Founder and CEO of Nykaa, who made it possible for many like her to reap the benefits as both a customer and an investor in the company. As Nykaa’s valuation soared to nearly $13 billion, Nayar became India’s wealthiest self-made woman entrepreneur with a net worth of nearly $7.4 billion. “She is an inspiration,” cheered Aggarwal. But it took some chutzpah.
Nayar turned entrepreneur in 2012, when she was touching 50—roughly double the age of the average entrepreneur today who has little to lose. Nayar, on the other hand, had just resigned as MD of Kotak Mahindra Capital, her last post in an 18-year investment banking career at Kotak Mahindra Bank.
But she had done her research and went about her new venture post haste. “I left Kotak on March 31 and on April 1, I was in the process of incorporating the company,” says Nayar. “A lot of people said that since I had quit work after so long, I should take a break. But I just wanted to go ahead.” A month later, she and three employees started working out of her father’s old office in Mumbai’s Lower Parel. Nykaa’s website went live that October and became fully operational the following January.
Nayar had seen an opportunity in India’s fragmented beauty and cosmetics retail market that was dominated by mom-and-pop stores. “I had been thinking about it and what appealed to me was being a multi-brand retailer in beauty and also using digital and technology,” says Nayar. There was also a clear focus on how to do business. “At that time, the debate used to be on the art of retailing and own brands. But most importantly, the decision to not do discounting of products unless incentives came from the brands; that is different,” says her husband Sanjay Nayar.
Nayar had picked a winning sector, with plenty of room to grow. India’s beauty and personal care market is worth $16 billion, but still about a fifth of China’s, according to research firm RedSeer Consulting. The aspirational spending on beauty products has shot up, it says, due to lifestyle changes, the influence of social media and rising disposable income that is aided by increasing female workforce participation. Moreover, the online beauty and personal care market was a mere 8 per cent in 2020 (though higher than the 2 per cent in 2016). The potential meant that other online beauty retailers such as NewU, MyGlamm and Purplle have cropped up in the past few years. But Nayar is no stranger to standing out.
The Indian Institute of Management, Ahmedabad (IIMA), alumnus was one of just nine women in a batch of 150 that included her future husband. Sanjay went on to work for Citigroup in London and New York, and as its CEO for India and South Asia before joining PE group KKR in Mumbai in 2009. Nayar helped set up Kotak’s overseas subsidiaries in London and New York as she moved with her husband. All the while also raising twins, Adwaita and Anchit, who are now 31 and hold senior positions at Nykaa. Nayar calls Nykaa her third baby and, indeed, the family still owns 52 per cent of the company.
The family savings funded Nykaa until they turned to investors in 2014 for funds to improve the customer experience. “In beauty, there are a lot of counterfeit products, so I knew that the beauty sector needed to be inventory-led. But for that, we needed domestic capital,” says Nayar. The early investors were high net worth families from India, which restricts foreign investment in multibrand retail companies.
One of the earliest investors was Rishabh Mariwala of Sharrp Ventures. “Most important to our decision [to invest in 2015] was Falguni herself. She had stepped aside from a very successful corporate career to pursue an entrepreneurial dream. She had extremely high stakes in making it a success. Her determination was evident, which is what we decided to back, followed by a stellar team which did not come with the baggage of the personal care industry, and were fresh and unbiased in their thinking and approach,” says Mariwala, who owned 1.19 per cent of pre-offer paid-up equity in the business.
Other investors in Nykaa include actors Katrina Kaif and Alia Bhatt who have, reportedly, invested Rs 2.04 crore and Rs 4.95 crore, respectively. Kaif, in fact, went on to partner with Nykaa to launch her cosmetics brand, Kay Beauty, in 2019. "We had seen how celebrity brands did very well in the West, and were looking for a celebrity brand," says Nayar. And Kaif's passion impressed her. "She wasn't just giving her name to the product. She was also sharing her sensibilities and her point of view with us and, with that, we could build a brand and offer something different.”
Indeed, with Nykaa, Nayar has created a brand that resonates with the young women of India, says Alpana Parida, Nayar’s classmate at IIMA and FounderCEO of designer helmets maker Tiivra Ventures. “If there is one brand that is the voice of the younger women of India, it is Nykaa,” says Parida.
She has a starring role in Nykaa’s history. It was she who selected the name Nykaa, which means heroine in Sanskrit. “The best names are the ones that need one explanation and then they stay with you forever. You will never confuse it with anything else. Those are the names that create a hook in consumer hearts and minds,” smiles Parida. But she is quick to point out that Nykaa’s growth was not down to the name. “It’s not just Falguni and the talent she has built around her, it is just the mindset of the company: ‘how do we consistently improve?’ Growth is a way of life for Nykaa.”
And grow it did.
Besides the website and the app, Nykaa now has 84 stores in more than 40 cities, with plans for 100 stores in the next few months and 300 in the next few years. “Physical stores are an important part of our strategy. We believe in omnichannel. Even if customers are buying online, once in a while they want to go to the store,” says Nayar. That is especially important, considering the booming demand, particularly in non-metro cities. “Around 60 per cent of our demand comes from Tier II and III cities, 40 per cent from Tier I cities. Tier II and III cities are growing faster than Tier I cities,” she adds.
Plus, Nykaa has used technology to integrate its online and offline presence, says Anchit Nayar, Nayar’s son and CEO of the beauty e-commerce vertical. “So if you buy on our app, we can also target you and let you know that there are special offers or certain products that are available in a nearby store. And the other way around. If you’re shopping in our stores, we are able to add you to our online database and ask you to replenish online, if that’s more convenient. So the two can co-exist in a very synergistic way.” There are more tech-focussed innovations to come, such as personalisation, he adds.
Nykaa is also present in Mauritius, Dubai and London, and plans to expand to other countries in the Middle East and Europe. “Dubai is our starting point for the Middle East, and London is our starting point to Europe. We have plans to take Nykaa’s in-house brands to other countries,” says Nayar. The platform, which is focussed primarily on women, also set up Nykaa Man in 2018 to cater to the personal care and grooming needs of men.
Nykaa made its first acquisition in the direct-to-consumer (D2C) segment this September when it bought a 51 per cent stake in Dot & Key for an undisclosed amount. There will be more deals, says Anchit. “But there is no real plan in terms of the number of acquisitions or the total dollar value that we want to put into inorganic growth. If something is a good strategic fit, I think you could see some potential for inorganic growth as well.”
In 2018, Nayar entered fashion retail with Nykaa Fashion, a multi-brand platform with nearly 1,500 brands. But unlike its beauty business, which is inventory-led, Nykaa Fashion is a marketplace model. “The fashion market is massive. It is five times the beauty market. So there is space for everyone,” she says. During her research, she realised a lot of companies had shut shop, but there was scope for a differentiated product. “We have a curated marketplace that does a lot of collections on behalf of the customers. The customer discovery and experience is better than trying to find things in an overcrowded marketplace.” The differentiated experience worked and Nykaa Fashion has grown rapidly over the last two years. Its gross merchandise value (GMV) surged 353 per cent to Rs 821.8 crore in the first half of FY22, from Rs 181.5 crore in the year-ago period, while the average order value rose 44 per cent to Rs 3,216.
While Nykaa’s continued success made the IPO an easy decision, Anchit says that was always the plan. “She [Falguni] is an ex-capital markets banker and has taken several companies public. She saw the value that the public markets bring to a company in terms of corporate governance, as well as long-term sustainability for the business, and importantly, the shareholders.”
While the listing was a roaring success, not all equity analysts, however, are satisfied. Despite Nykaa’s asset-light business model, the valuation is unjustifiable, says Kranthi Bathini, an equity strategist at WealthMills Securities. “As of date, it is extremely good and commendable. But the question is how Falguni Nayar is going to justify the valuation in the days to come.”
Jigar Shah, CEO, Kim Eng Securities India, concurs. “After two-three years, people will want to see profits. You cannot permanently have a high P/E [price-toearnings] ratio. There will have to be reasonable profits to justify the market valuation.”
“We are not justifying any valuation,” counters Nayar, who refers to Uday Kotak, Founder-CEO of Kotak Mahindra Bank, as her mentor. “In our industry, we are currently valuing multiples to sales rather than earnings. The valuation is based on forward numbers rather than historical numbers. For e-commerce players, the sky’s the limit. In our industry, there is no plant and machinery; all investment is in acquiring customers. Our performance is reflected in the active number of customers we have. Nykaa is doing very well on those counts.”
However, in its first financial report as a listed company, FSN E-Commerce Ventures (the parent company of Nykaa) said its net profit plunged 95 per cent to Rs 1.2 crore in the July-September quarter, from Rs 27 crore a year ago. However, Nayar isn’t very concerned. “The last quarter number is difficult to read as it was the off season. There was a shraadh period [in the Hindu calendar when auspicious activities, including shopping, are avoided]. Sales pick up only during the festive season. E-commerce makes big sales in November all over the world,” she says.
And as Nykaa grows, Sanjay has a few words of advice. “It’s very critical to have a sustainable growth profile built around an empowered team culture, solid governance and a focus on sustainability. That’s been the Nykaa culture and the idea is to embed it even deeper.”
A culture that, Anchit says, also flows outwards. “There needs to be respect for capital and to deliver a return on equity. There is respect for shareholders and investors.”
In that case, Nykaa’s customer-investors like Natasha Aggarwal will get many more opportunities to pop some champagne.
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