Nykaa vs ITC memes are hilarious but it may not be the right comparison

• Nykaa's share prices have crossed the ₹2200 mark, whereas ITC is trying to cross the ₹300 mark, Twitteratis have highlighted.
• The point of contention for this meme is one — ITC's net profit is much higher than Nykaa's profit.
• Nykaa's profit fell significantly last quarter as Falguni Nayar decided that it was time to acquire new customers.

Social media is buzzing with memes asking why Nykaa, a fashion retailer with an annual profit of ₹62 crore (in FY21), is valued more (i.e. at a greater multiple) than ITC, a 111-year old giant that sells cigarettes, consumer goods and hotel rooms, earning a profit of ₹12,934.49 crore in a year.

The simple answer is, market prices in the future and not the past. But the market can be irrational before it gets the price right. Nykaa’s shares price doubled on the first day of trading, but have started to cool off today.

So let’s look at what Nykaa is planning for its future and what the analysts expect the future to look like. Founder and chief executive (CEO) Falguni Nayar is doubling down on the high-margin fashion products, compared to an ITC that wants to move away from cigarettes but the other segments yield very little margin.

*EBITDA stands for earnings before interest, tax, depreciation and amortisation

Nykaa Fashion was launched in 2018 as a curated and managed marketplace

Nykaa’s profit was down in the three months ending September because Nayar decided now is the time to acquire customers and get them hooked to the brand. It meant spending more on promotions, which would also help sell the IPO at a higher price.

Nykaa’s marketing expenses surged four-fold but it managed to get 23 million more new users to visit its platform (both fashion and beauty ecommerce verticals) between July and September 2022. The revenue grew nearly 38% compared to the same time last year.

Here’s why Nykaa spending so much building the fashion vertical

According to a report by Spark India Consumption, there are several reasons why Nykaa decided to venture into the fashion ecommerce space — including immense market opportunities and the limited competition, especially when it comes to premium clothing brands that sell online.

Fast facts about the potential of fashion retail in India

Adwaita Nayar, the chief executive of Nykaa Fashion, believes that the trends in the fashion industry change rapidly and therefore an inventory-led model may not work in favour of Nykaa. The same does not stand true for the cosmetics industry.

Apart from this, both these verticals cater to the same cohort of customers. Young Indians with “aspirations” and increasing disposable income, a report by Motilal Oswal added. The vertical is set to get a higher tailwind as more young population comes online and the spending capacity in tier-II cities increases, the financial services company added.

Nykaa has also been fast to adapt and grab the social commerce opportunity. The company has roped in 1,300 influencers, aside from content marketing, to push its products to peeps on Facebook, Instagram, Twitter and other popular platforms.

About 2% of Nykaa’s revenue comes from the fashion vertical, as per the company’s red herring prospectus filed last month before hitting the public market. There is a lot of headroom for growth both in terms of revenue and market share.

Nayar has also promised that the growth will not be driven by discounts. About 17% of Nykaa’s gross merchandise value (GMV) are sold at full price or at a discount of 10% or lower. Nykaa’s fashion and beauty verticals will move further away from discounts, Adwaita Nayar added in the pre-IPO press conference.

But it will be easier said than done. While Nykaa’s cosmetics business is facing competition from Walmart-owned Myntra, Purplle and few other players, its fashion vertical is pitted against e-commerce giants like Amazon, Flipkart, JioMart and more.

Despite lower discounts, the company’s average order value was at ₹3,257 in the September quarter across 13 lakh orders.

Is this growth exciting enough to pay more for every dollar profit from Nykaa, compared to legacy companies like ITC? It’s for the investors to decide.

Even then, the comparison should not be done with an ITC or Tata Steel, like the memes have . It has to be compared with other players in similar business. Even on that count, Nykaa’s shares may be a bit expensive, according to analysts at Bernstein who shared the following data in a report dated August 2021.

*Source: Bernstein
**The Bernstein report was published before Nykaa’s IPO.

The price-to-sales ratio is calculated by taking a company's market capitalisation ⁠— the number of outstanding shares multiplied by the share price ⁠— and divide it by the company's projected total sales for the next 12 months. The lower the ratio, the more attractive the investment.

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