Lifestyle omnichannel retail startup Nykaa—the first Indian women-led unicorn to debut on public markets—which opened its INR 53.52 billion (USD 715 million) initial public offering (IPO) on Thursday, witnessed decent demand from investors, with its retail portion getting fully subscribed within an hour of opening.
The public issuance was subscribed 1.55 times on day one. While the retail portion was booked 3.5 times, qualified institutional buyers and non-institutional investors subscribed 1.39 and 0.60 times, respectively.
Nykaa IPO comprises fresh issuance of equity shares worth INR 6.3 billion and an offer for sale (OFS) of INR 47.2 billion by the existing shareholders. The company has fixed the price band of INR 1,085–1,125 apiece for the IPO, which will conclude on November 1. With the listing, the Mumbai-based company—which so far has raised USD 100 million in equity—is eyeing a valuation of over USD 7.1 billion.
“Nykaa IPO subscription numbers have started as expected,” said Neil Bahal, founder of Negen Capital, who manages technology and special situations at investment platform smallcase. Since the company was oversubscribed by 60x by anchor investors ahead of the IPO, sending a strong signal, it is likely to see good demand overall from retail investors, specifically HNIs, he added.
Nykaa is one of the few profitable local startups to launch an IPO. It reported a net profit of INR 619.6 million in FY21 compared to a net loss of INR 163.4 million the year before, while its consolidated revenue grew 38% to INR 24.5 billion.
Nykaa’s promoters (those involved in the formation and incorporation of the company)—the husband-wife duo, Falguni Nayar and Sanjay Nayar—through six trusts, own over 54% stake in the company. They will sell 4.8 million shares through Sanjay Nayar Family Trust. Other backers who will be selling stakes in Nykaa through an offer for sale include TPG, Lighthouse India, and JM Financials, among others. Post the IPO, Falguni Nayar, Nykaa’s founder and CEO, and her family will continue to own a majority stake—52.6%—in the company.
“We are looking at building a more sustainable organization and offering a window of opportunity to our existing shareholders to exit,” Falguni said in an interview with local media Economic Times earlier this week.
Nykaa’s strong positioning
According to a note by Motilal Oswal, an Indian research and brokerage firm, Nykaa is India’s largest beauty and personal care (BPC) platform, with almost 35% of the online BPC market, which constitutes about 8% of the country’s overall BPC market. The fact that the Indian BPC market is set to grow to USD 26 billion by 2025 from USD 15 billion last year implies that “Nykaa is well-placed to lead the online market growth with a proven business model.”
“We like Nykaa given its leadership position in the online BPC market, customer-centric approach, profitable tech platform, and capital-efficient business model,” the brokerage firm said.“Investors with a high-risk appetite can subscribe for listing gains given fancy for unique and first of its kind listing in the e-commerce space (in India).”
However, many analysts feel Nykaa’s shares are overpriced, with the company targeting an aggressive valuation.
“Nykaa has created a leadership position in fast-growing beauty and personal care e-commerce. The company is one of the rare, profitable e-commerce startups and enjoys good brand loyalty among its customers,” Abhay Agarwal, managing director at Piper Serica Advisors and a smallcase portfolio manager. “However, at over USD 7.1 billion, its valuation is aggressive and does not leave much scope for investors looking to invest in the IPO.”
According to Prateek Singh, founder and CEO of trading learning platform LearnApp and a seasoned trader, Nykaa is overvalued, considering its price to earnings (P/E) ratio—the ratio of a company’s share price to its earnings per share—which is considered a key global benchmark for valuing a company.
“Its P/E is a massive 800 plus whereas on average, it is closer to a 100 or 200. So, in my opinion, if we look at the other industry’s P/E ratios, this is overvalued by 3–4x,” he said. However, he added, Nykaa may be overvalued because of its position as the largest company in the online BPC space.
The journey to the top
Nykaa was founded in 2012 by Falguni, who worked as an investment banker for over 17 years with the Kotak Mahindra group. As she approached the age of 50, she took a leap of faith by quitting her high-profile job to start her entrepreneur journey. At the time, the nascent Indian startup ecosystem was just beginning to attract the attention of Silicon Valley investors and was full of youngsters setting up tech startups, which was then perceived as risky.
The company’s name is derived from the Sanskrit word ‘Nayaka,’ meaning actress or one in the spotlight. Nykaa started its journey as an online beauty marketplace and positioned itself as a platform that empowers women by giving them access to a wide variety of cosmetics and self-care products. The D2C beauty grew on the back of targeted content marketing.
Being one of the first entrants in the online beauty and personal care space, Nykaa has carved out the industry that has long been ignored by bigger horizontal players like Amazon and Flipkart, which focus more on smartphones, consumer electronics, and fashion.
In 2018, the company entered the fashion segment, selling apparel and accessories through a separate arm, Nykaa Fashion. The vertical has become one of the fastest-growing fashion platforms in India, which received 1.2 million orders in the Q2 of 2021 with a total gross merchandise value of INR 38.5 billion.
The nine-year-old startup has now become a full-fledged omnichannel lifestyle retailer with 80 physical stores across 40 cities. As of August 31, 2021, Nykaa had about 3.1 million SKU offerings from 4,078 national and international brands across its two business verticals—BPC and fashion. For the financial year ending on March 2021, its total GMV grew at 50.7% year-on-year to INR 40.5 billion, while its revenue grew at 38.1% YoY to INR 24.4 billion.
“Nykaa’s key strength lies in its inventory-led business model for BPC segment, which “allows it to offer authentication for all its products and ensures availability and efficient distribution,” according to Motilal Oswal.
Under its inventory-based business model, the company procures its products directly from the manufacturers and keeps them in its warehouses in cities like New Delhi, Mumbai, and Bangalore. These products are sold through its website and app as well as through its three offline store formats: Nykaa Luxe, Nykaa On Trend, and Nykaa Kiosks, which is how the company has been able to expand its breadth and depth across the country. Indian tier 2 and tier 3 cities collectively contribute over 60% of total GMV currently.
“It’s not just an e-commerce company but rather a brand that has learned how to strike the right chord with its target consumers,” said Sonam Srivastava, founder of Wright Research, who is also a smallcase portfolio manager. “Nykaa’s IPO has an emotional connection since it is a women-led company. Although the industry it operates in has a lot of friction in terms of competition, it is still humongous.”
At a press conference earlier this week, Falguni said Nykaa has seen robust growth this year after business slowed down in 2020 due to negative customer sentiments amidst COVID-19. For context, Nykaa’s consolidated GMV in Q2 2021 was USD 199 million, up from USD 168 million in Q1 2021. Meanwhile, for the three months ended June 30, 2021, its total sales stood at INR 8.2 billion compared to INR 2.9 billion a year ago.
Nykaa will utilize the IPO proceeds to set up new retail stores and warehouses, as well as for debt repayments and marketing. Aside from that, the company also plans to expand internationally.
“At the moment, we are very keen to go into the Middle East, where we think there’s a lot of opportunity for Indian consumption,” Falguni told media outlets. “Europe is another area of opportunity that Nykaa is going to start with and then maybe consider expansion.”
To begin with, Nykaa is likely to take its in-house brands, including Kay Beauty, Peppa Bella, 20Dresses, Dot & Key, as well as other brands that Nykaa has set up or acquired to the Middle East. Moreover, Falguni said Nykaa will also focus on the brand roll-up play, also known as the house-of-brands model—pioneered by US-based Thrasio, which acquires online private labels and scales them.
“Nykaa is potentially on a journey of 10–15 years of structural growth. Cosmetics sell easily via e-commerce and video commerce, and Nykaa is a leader here. Even Amazon has been unable to derail this company,” said Bahal.