Nykaa sees Fashion growth accelerate as Beauty premiumisation lifts margins

Investment View and Recommendation

Motilal Oswal Financial Services retains a Neutral rating on FSN E-commerce Ventures (Nykaa) with a target price of Rs 370. The broker views premiumisation in Beauty and Personal Care (BPC) and accelerating growth in Nykaa Fashion as favourable earnings drivers. However, valuation remains a key deterrent, and the broker is awaiting a better risk-reward profile before becoming constructive.

1QFY27 Financial Performance

In 1QFY27, Nykaa reported consolidated GMV growth of 34 per cent year on year and NSV growth of 33 per cent, ahead of Motilal Oswal's estimates of 28.8 per cent and 28.6 per cent, respectively. Net revenue increased 29 per cent year on year to Rs 2,780 crore, compared with the broker's estimate of 27 per cent growth.

Consolidated EBITDA margin expanded 196 basis points year on year to 8.5 per cent. Adjusted PAT increased 3.25 times year on year to Rs 79.7 crore, although it was below the broker's estimate of Rs 85.8 crore. PAT margin reached 2.9 per cent.

Beauty and Personal Care: Premiumisation and Margin Expansion

BPC NSV grew 29 per cent year on year to Rs 2,370 crore, while revenue increased 27 per cent, broadly in line with expectations. BPC average unique transacting customers rose 25 per cent year on year to 20.8 million. BPC EBITDA margin was 10.3 per cent, above Motilal Oswal's estimate of 9.7 per cent.

Management said Beauty GMV increased about 28 per cent to Rs 4,105 crore, supported by the Pink Summer Sale and retail expansion. BPC EBITDA rose about 48 per cent to Rs 244 crore, aided by gross-margin gains and operating leverage.

The retail network reached 324 stores in 105 cities after the addition of 11 stores in six cities during the quarter. Retail space increased about 29 per cent year on year to 3.3 lakh square feet, and more than half of the stores are located in Tier-2 cities and beyond.

Nykaa Fashion: Material Growth Surprise

Fashion was the material growth surprise during the quarter. Fashion GMV increased about 53 per cent year on year to Rs 1,471 crore, while NSV increased 54 per cent to Rs 451 crore, compared with the broker's 31 per cent growth expectation.

Growth was driven by a richer brand assortment, customer acquisition and early traction from the Nike partnership. Fashion was EBITDA positive for the second consecutive quarter, with a 0.1 per cent margin, although this was below the broker's 0.7 per cent estimate. Contribution margin was 11.4 per cent versus the 12.1 per cent estimate.

Management highlighted a roughly 30 per cent reduction in customer-acquisition cost over two years. Unique-visitor-to-order conversion increased 70 basis points year on year to about 4.0 per cent.

Management Commentary and Operating Metrics

Management reiterated its long-term guidance of 3–3.5 times revenue growth over four to five years. It expects festive demand in FY27 to be weighted towards Q3FY27 because of shifts in festival dates.

Superstore NSV grew about 28 per cent year on year, while GMV increased about 17 per cent to Rs 336 crore. The difference was attributed to a GST-led MRP effect, which management expects to normalise from Q3FY27.

Annualised ROCE improved to about 26.8 per cent from 21.2 per cent in FY26, supported by fixed-asset turnover of about 10.7 times and working-capital days of about 29.

Earnings Outlook

Motilal Oswal expects BPC NSV to grow at a 27.9 per cent CAGR over FY26–FY30. The forecast is supported by premiumisation, a 5 per cent year-on-year increase in AOV, owned brands, customer additions and premium launches including Rare Beauty, SK-II and K18.

The broker forecasts Fashion growth of about 40 per cent CAGR over FY26–FY30 and expects Fashion EBITDA margin to increase to 10.1 per cent by FY30E from around zero currently. It also expects roughly five-fold consolidated EBITDA growth by FY30E.

Motilal Oswal raised its FY27E and FY28E adjusted PAT estimates by 14.8 per cent and 17.8 per cent, respectively, due to stronger Fashion growth and improved margin expectations in Beauty and Fashion.

Valuation and Target Price

The Rs 370 target price is based on a sum-of-the-parts valuation.

Motilal Oswal values BPC at 50 times FY28E EV/EBITDA, resulting in a value of Rs 286 per share. The valuation reflects category leadership, a competitive moat and superior margins versus horizontal platforms.

Fashion is valued at Rs 87 per share using DCF. The valuation assumes estimated 30.4 per cent GOV CAGR, a margin above 10 per cent over FY27–FY37E, approximately 11.0 per cent WACC and 5.5 per cent terminal growth. Net debt reduces the value by Rs 1 per share.

Key Thesis Sensitivities and Risks

• The ability to sustain BPC premiumisation and growth.
• Fashion's path to higher margins.
• The continuation of operating leverage.
• Valuation risk, which the broker identifies as a key deterrent.