The September quarter (Q2FY25) results of FSN E-commerce Ventures Ltd, the parent of Nykaa, showcased robust growth in the beauty business, while fashion was sluggish—mirroring a trend seen in the previous few quarters.
Revenues increased 24% year-on-year to ₹1,875 crore, and the Ebitda margin at 5.5% was slightly below estimates. Beauty gross merchandise value (GMV) growth was stellar at 29% with Hot Pink Sale attracting 23 million unique visitors over 10 days, pushing order volumes up 24%. Average order value (AOV) was up 2%. The beauty segment-owned brands’ GMV growth was striking at 48%, led by strong growth in Dot & Key and Kay Beauty. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
Still, higher marketing and sales expenses meant that the beauty contribution margin as a percentage of net sales value fell 110 basis points (bps) on-year to 22%. Kotak Institutional Equities flagged concerns over sustained high spending. It warned of risks from quick commerce companies expanding their product portfolios and adding brands, which may eventually put pressure on Nykaa’s fulfilment costs.
Margin pressure
Kotak has trimmed its FY25-27 Ebitda estimates by 6-9% as it assumes lower profitability in the beauty business on account of higher marketing spends, sales and distribution expenses, and a slightly higher loss run-rate for the eB2B business.
In Q2, Nykaa’s eB2B superstore saw 862bps improvement in contribution margin to -11%. Meanwhile, fashion segment GMV growth was relatively much slower at about 10% perhaps owing to subdued demand from a delayed festive season. Fashion AOV was up 10%, but the number of orders was down 4%. Fashion contribution margin was up 440bps to 9.4% due to higher marketing and service-related income. The onboarding sneaker giant Foot Locker signals an intent to revitalize the segment, although the runway to profitability could be long for fashion.
Given muted demand conditions, Nykaa’s stock is down 26% from its 52-week high of ₹229.80 apiece, seen on 23 August. The company is optimistic about demand prospects in the second half of FY25 (H2FY25), backed by the festive and wedding seasons. But can the festive season be a turning point for Nykaa in H2FY25 remains to be seen.
“Nykaa may see strong tailwinds in H2FY25 owing to festivities and weddings, but elevated retailer-funded discounting from horizontal platforms continues to be a near-term challenge,” said a Nomura report.
Investors will watch if Nykaa’s beauty segment retains its edge amid rising competition.
