The cost of selling its IPO has eroded nearly all of Nykaa's profit

• Nykaa reported a profit after tax of ₹1.2 crore in this quarter, which is significantly lower than ₹27 crore reported in the same quarter last year.
• This was majorly a result of Nykaa’s increased marketing costs, which witnessed a four times increase in the last one year.
• Nykaa’s IPO is one of the major reasons why the company’s expenses went up, an investor says.
• The company was trading at ₹2,282 at 13:38 p.m on November 15, after witnessing a 3% decline due to its quarterly results.

Beauty and fashion ecommerce platform Nykaa — which wowed the Indian investors with its stellar debut in the stock market last week — had spent one in every ten rupees in marketing in the quarter before its initial public offer (IPO) hit the market.

It definitely worked. Nykaa — which is operated by FSN E-commerce Ventures Limited — listed on the stock exchange last week, at a premium of over 77% compared to the issue price. However, after the earnings hit the bourses, the stock declined by as much as 5.5%.

The Falguni Nayyar-led company reported a profit after tax of ₹1.2 crore in this quarter, which is significantly lower than ₹27 crore reported in the same quarter last year.

The company’s profit has been impacted by increased expenses across the spectrum — including fulfilment costs, marketing and advertising, employee benefits and more. However, the biggest among them all was Nykaa’s expenditure on brand awareness and markets.

One out of every ten rupees spent in this quarter went into marketing, in the three months before the IPO. This is the highest Nykaa has ever spent on its marketing activities.

An investment banker, on the condition of anonymity, added that the Nykaa’s IPO is one of the major reasons why the company’s expenses went up in the July to September quarter.

Since the company was doing an IPO this year, they had to reach out to the sort of audience that would generally not consume their products.

“I may be a user of Nykaa, but my parents may be the one investing [in the stock market]. To reach them, Nykaa would have to pay 2X-3x of that cost per click to achieve that engagement. This is not a marketing strategy, it’s to ensure that their IPO gets subscribed” they added.

Shahan Sud, an investment professional at Indian Angel Network, added that the significant fall in net profits highlights the fundamental principle that direct-to-consumer (D2C) brands need continuous capital to sustain aggressive growth, ensure end-to-end customer experience and compete with the incumbent players on a neck-and-neck basis.

Ankur Bansal, founder and chief executive of investment firm Blacksoil noted that Nykaa’s “strong marketing campaigns” in both digital and mass media has resulted in accelerated customer acquisition for the ecommerce brand. The same is also evident in the unique visitor and transacting customer metrics which has grown 62% in the beauty segment and 328% in the fashion segment on an annual basis.

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