Macquarie's 27% Downside Prediction For Nykaa Raises Concerns Over Profitability

Macquarie initiated coverage on beauty ecommerce giant Nykaa on Monday, March 6, with a target price of INR 115, implying a 27.2% downside to the stock’s close on Friday, March 3. The brokerage flagged profitability concerns due to the need for investments to sustain growth, as Nykaa faces the risk of margin decline in its beauty segment as growth moves to smaller towns/offline and competition threats loom. The entry of big players like Tata Cliq and Reliance Retail in the beauty vertical can exacerbate the problems for the startup. Reliance Retail recently forayed into the beauty ecommerce category with a platform named Tira.

Nykaa’s shares witnessed a dip of up to 2.8% to INR 145.55 on the BSE during intraday trading on Monday, but they eventually closed the day at INR 149.55. Apart from Nykaa's beauty and personal care (BPC) segment, Macquarie expressed concerns over the fashion vertical and questioned the company’s ability to grow profitably in that segment. According to the brokerage, Nykaa's success in the fashion vertical is yet to be established as the company offers a curated marketplace of third-party/newly developed own apparel brands. Moreover, the analysis of offline retailers indicates that players who follow a curation-led approach with third-party brands have seen limited success.