Nykaa’s First Quarter Could Be Subdued: Fashion Business Needs Rebuild

The company expects consolidated revenue growth in Q1 at 22-23% year-on-year, largely meeting its full-year growth target of 20-25%. Here, the BPC segment, accounting for almost 85% of revenue in fiscal 2024, adds significantly to the growth. Gross Merchandise Value (GMV) growth in this segment is projected to be in the high 20s year-on-year. This is in line with Nykaa’s ambitious plan to outperform the online BPC market (19-20% CAGR) with a mid- to late 20s CAGR over fiscal 2024-28.

To achieve this, Nykaa plans to increase spend among existing customers through wider product assortment, premiumization and personalization strategies. It will also invest in acquiring new customers through BPC category growth initiatives, while expanding its physical presence to over 400 stores (187 in FY24) by FY28.

While BPC is enjoying the limelight, fashion is a sore spot. Fashion GMV growth year-on-year in the June quarter (Q1FY25) is forecasted to be in the mid-teens and revenue growth of 20%. The muted performance in fashion can be attributed to weak demand and seasonal slowdown due to lower weddings and functions in the last quarter.

Still, there is the potential for this segment to end the year on a high note with the upcoming holiday season, potentially boosting overall growth.

Overall, Nykaa’s focus on customer acquisition and brand building could impact margins in Q1 FY25 and in the near future.

Nomura Financial Advisory and Securities (India) analysts predict consolidated revenue growth of 23% year-on-year and EBITDA of 5.4% in the first quarter of fiscal 2025. This is significantly lower than the brokerage’s FY25 expectations of 29% year-on-year and EBITDA margin of 7.5%. “Our estimates are subject to downside risks if the recovery does not strengthen in H2 FY25,” the Nomura analysts wrote in a July 8 report.

Nykaa recently unveiled a break-even plan for the fashion segment, which posted an EBITDA loss of ₹101.6 crore in FY24. The company projects to achieve breakeven EBITDA by FY26 and a mid-single-digit margin in FY27, primarily driven by growth in brand mix and advertising revenues.

While Q1 may not be a blockbuster, the BPC segment’s performance and Nykaa’s long-term vision look promising. As it stands, the stock is about 10% off its 52-week highs seen in January. Two factors are worth noting. One is the sustained momentum in the BPC segment despite competition from fast-paced retail. The other is signs of improving profit metrics in the fashion segment.