Absurd valuation of a predominantly trading company whose bottom line turned black only on the eve of public issue and accumulated deficit is twice the equity capital defies all logic of issue pricing.
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FSN (NYKAA) OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 5,351Cr |
| Fresh Issue | Rs 630 Cr (56 lakh equity shares) |
| Offer for Sale | 4,19,72,660 equity shares (Rs 4,721Cr) |
| Face Value | Re 1 |
| Price Band | Rs 1085 – 1125 |
| Mkt/Bid Lot | 12 Nos. |
| Implied M-Cap | Rs 53,204 cr |
| Implied Equity Cap | Rs 47.29 cr |
| Free Float | 47.44% |
| Lead Manager | Kotak Mahindra, Morgan Stanley, B of A Securities, Citigroup Global, ICICI Sec and JM Financial |
| Registrar | Link Intime |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening : 28-Oct-2021 | Closing : 01-Nov-2021 |
| Allotment : 08-Nov–2021 | Refunding : 09-Nov-2021 |
| Demat Credit : 10-Nov-2021 | Trading : 11-Nov-2021 |
The Offer
Mumbai-based FSN E-Commerce Ventures Ltd (popularly known as Nykaa), which has completed 9 years in April 2021, is going public with an equity offer valued Rs 5,351 Cr (translating into 475.73 lakh shares) at the upper price band. The offer comprises of a fresh issue of Rs 630 Cr and an offer for sale of Rs 4,721 Cr from 16 existing shareholders of the company including one promoter-shareholder. The offer is being made through the book-building route with a price band of Rs 1085-1125 for Re1 paid-up share.
Applicants for the IPO should bid for a minimum lot of 12 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on November 11, 2021. Kotak Mahindra, Morgan Stanley, BofA Securities, Citigroup Global, ICICI Securities and JM Financial are acting as managers to the offer. Link Intime has been roped in as registrar to the issue. The bidding opens on Thursday, October 28 and closes on Monday November 1, 2021.
Nykaa proposes to utilize the net proceeds from the fresh issue (Rs 630 cr) towards investment in FSN brands and setting up of new retail stores of Nykaa Fashion; setting up new warehouses of Nykaa E-retail, Nykaa Fashion and FSN Brands; repayment of loans availed by the company as well as its subsidiary Nykaa E-retail; enhancing the visibility and awareness of company’s brands; etc.
Lineage
In a booming market even fly-by-night operators can command exorbitant premiums for their IPOs. But, how long will they sustain in the secondary market? History tells us, they will not see another boom! History also reveals that ultra high valuation during the boom time is unlikely to fetch good return in the long run. On the contrary, decent valuation in an underperforming market has invariably brought handsome gains to the investing public. A classic case is Infosys. In this backdrop, let us look at Nykaa IPO.
When Infosys hit the capital market in 1993 Narayana Murthy and Nandan Nilekani were not known to investing public. On the contrary, Nykaa has got high profile promoters-Nayar couple – who are well connected in the corporate world. Falguni Nayar (58) was earlier associated with Kotak Mahindra Capital for 18 years where she also served as a managing director. She has also been on the boards many large companies, including Tata Motors and Aviva Life Insurance. Presently, she serves as an independent director on the boards of Kotak Securities, ACC and Dabur India.
Co-promoter Sanjay Nayar (61) has over 35 years of experience in banking and private equity circle. He was associated with Citibank for over 23 years, where he also served as the chief executive officer of the bank in India over six years. He was chief executive officer of KKR India Advisors from 2009 to 2020. Presently he serves as a chairman of KKR India and also serves on the board of various companies, including Indigrid Investment Managers, Max Healthcare Institute, J B Chemicals & Pharmaceuticals and Avendus Capital.
The promoters’ popularity has indeed attracted investments from many a private equity fund and well known corporate chieftains S K Munjal, H S Banga, Narotam Sekhsaria and Rishabh Mariwala among others. Though funding would have been relatively easy for the Nayars because of their high profile corporate connections, they seem to have struggled for long time on the performance front. The 2012-registered company has reported profit at the net level only in 2021 that is on the eve of the public issue! What’s more, by fiscal 2020, the company had accumulated losses to the tune of over Rs 156 Cr against a capital base of Rs 14.55 Cr. Though no profit was earned until 2020, the company could collect a whopping share premium of Rs 765 Cr. Through the present IPO it intends to pocket another Rs 629 Cr as share premium.
Key Management
The company’s board consists of ten directors of which all the three executive positions are held by the Nayar family members. Falguni Nayar is designated as Executive Chairperson-cum-Managing Director and Chief Executive Officer. Nayar twins Adwaita and Anchit (31), who joined the board only in July this year, have been made as Executive Directors. Adwaita Nayar also serves as the chairperson and chief executive officer of Nykaa Fashion and Anchit Nayar serves as the chairman and chief executive officer of Nykaa E-Retail. Sanjay Nayar is designated as Non-Executive Director.
Stakeholders
Of the company’s present equity capital of Rs 46.73 cr, the Nayars hold 54.22%. The non-promoter stake of 45.78% is held by 186 shareholders. The major shareholders are H S Banga family ( 40,679,790 shares or 8.60% at an average cost of Rs 7.32 a share), Sunil Kant Munjal (21,189,300 shares or 4.48% at Rs 56.54 a share), Narotam Sekhsaria (17,085,150 shares or 3.61% at Rs 9.86 a share), Steadview Capital Mauritius (16,384,440 shares or 3.46%), TPG Growth IV SF (16,264,560 shares or 3.44% at Rs 117.67 each), Lighthouse India Fund III (14,533,860 shares or 3.07% at Rs 76.65 each), Mala Gaonkar (11,390,190 shares or 2.41%), Fidelity Blue Chip Growth Fund (6,140,430 shares or 1.30%), Rishabh Mariwala (5,571,810 shares or 1.18% at Rs 33.56 each), Yogesh Agencies & Investments 5,538,450 shares or 1.17% at Rs 21.67 each) and Kravis Investment Partners LLC (5,384,220 shares or 1.14%). Other non-promoter shareholders are holding less than 1% each.
In the offer for sale, promoters offload only 48 lakh shares while non-promoter shareholders offer 371.72 lakh shares. Most of the selling shareholders would continue to hold significant stake even after the offer for sale. Since their cost of acquisition is extremely low as compared to the offer price, their cost of residual holding would be negative which could make the stock vulnerable at the end of the lock-in period.
Business Model
Though Nykaa’s corporate name sounds like a holding company, its IPO Prospectus reads: “We are a digitally native consumer technology platform, delivering a content-led, lifestyle retail experience to consumers. Since our incorporation in 2012, we have invested both capital and creative energy towards designing a differentiated journey of brand discovery for our consumers. We have a diverse portfolio of beauty, personal care and fashion products, including our owned brand products manufactured by us. As a result, we have established ourselves not only as a lifestyle retail platform, but also as a consumer brand.”
The company’s online channels include mobile applications, websites and mobile sites. It claims to have the highest share of mobile application-led transactions, among the leading online retail platforms in India. Nykaa’s offline channel comprises of 80 physical stores across 40 cities in India over three different store formats. Its lifestyle portfolio spans across beauty, personal care and fashion products. The company believes that consumers have different journeys for different lifestyle needs, and this has led Nykaa to build business vertical-specific mobile applications, websites and physical stores. These independent channels allow the company to tailor its content and curation optimally for the convenience of consumers and to cater to the different consumer journeys that exist in its business verticals viz. Nykaa: Beauty and personal care and Nykaa Fashion: Apparel and accessories.
In addition to leveraging its strengths in comprehensive merchandising, brand relationships and delivery experience, the company also reportedly focuses on educating consumers via digital content, digital communities and tech-product innovations which is an integral component of the company’s business model.
Financial Track
Operationally, FSN E-commerce is predominantly a trading company. Of the company’s operating cost of 73% as much as is 60% is accounted for purchase of stock-in-trade. Material cost amounts to just 1.5% of the company’s revenue. Being a trading company, its operating margin remains in single digits, though it has steadily improved from 1.7% in FY19 to 6.5% in FY21.
The nine-year-old company’s top line is very impressive at around Rs 2500 Cr though it has turned the corner only last year. As compared to its post-IPO equity base of Rs Rs 47 Cr, the company’s bottom line is attractive at Rs 62 Cr. Nevertheless, the EPS (Rs 1.31) looks abysmally low against the offer price of Rs 1125. Moreover, the company has accumulated losses to the tune of Rs 91.46 Cr which could be wiped out next year if the company repeats its FY21 performance.
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FSN (NYKAA) CONSOLIDATED FINANCIALS (Amount in Lakh) |
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| Year Ended |
Mar-21 |
% | Mar-20 | % | Mar-19 |
% |
| Operating Revenue |
244090 |
176753 |
111139 |
|||
| Stock Increase |
4602 |
18188 |
12521 |
|||
| Gross Revenue |
248692 |
100.0 | 194942 | 100.0 | 123660 |
100.0 |
| Material Cost |
3824 |
1.5 | 1734 | 0.9 | 24 |
0.0 |
| Purchase of Stock Trade |
149561 |
60.1 | 117875 | 60.5 | 78524 |
63.5 |
| Employee |
28365 |
11.4 | 19561 | 10.0 | 11730 |
9.5 |
| Operating Cost |
181749 |
73.1 | 139170 | 71.4 | 90278 |
73.0 |
| Other Expenses |
50800 |
20.4 | 47666 | 24.5 | 31331 |
25.3 |
| Total Expenses |
232549 |
93.5 | 186836 | 95.8 | 121609 |
98.3 |
| Operating Margin |
16143 |
6.5 | 8106 | 4.2 | 2051 |
1.7 |
| Other Income |
1174 |
1032 |
499 |
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| Interest |
3070 |
4429 |
2634 |
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| Depreciation |
6713 |
5951 |
3088 |
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| Pre-Tax Profit |
7534 |
-1243 |
-3172 |
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| Net Profit |
6195 |
-1634 |
-2454 |
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| Accumulated Loss |
9146 |
15686 |
14026 |
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| Equity (Implied) |
4729 |
1455 |
1424 |
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| Reserves (Implied) |
140596 |
46425 |
35657 |
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| Borrowing |
18747 |
26748 |
22558 |
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| Fixed Assets |
7060 |
7090 |
4320 |
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Valuation
Even while highly rated multinational consumer brands owners like P&G and Colgate, who have a proven track record of profitability and dividend distribution in this country for many decades, are commanding a lesser market capitalization of about Rs 47000 Cr and Rs 42500 Cr respectively, Nykaa, which is not even a decade old and yet to earn consistent profits, leave alone distributing dividends, is asking for a market cap of Rs 53200 Cr!
Whereas P&G and Colgate are currently discounted about 72 times and 41 times respectively their earnings, Nykaa is priced at a weird multiple of 858x! In terms of Price-EBIDTA, Nykaa is discounted 307 times as against P&G’s 51x and Colgate’s 28x. In Price-Revenue too, Nykaa is costly at 22x as compared to P&G (13x) and Colgate (9x).
Thus the euphoria generated around Nykaa may help the IPO sail through smoothly. But, will the stock remain attractive when the existing high net worth investors whose cost of holding will be negative after their offer for sale, turn sellers post lock-in period? Your guess is as good as mine!
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HOW NYKAA COMPARES WITH SELECT ESTABLISHED FMCG BRANDS |
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| (Amount in Cr) |
Nykaa |
Dabur | Godrej Con | Marico | P&G |
Colgate |
| Market Cap |
53204 |
104465 | 98196 | 72608 | 47036 |
42556 |
| Borrowing |
188 |
483 | 760 | 348 | 0 |
0 |
| Fixed Assets |
71 |
1959 | 1263 | 596 | 221 |
1210 |
| Revenue |
2441 |
9562 | 10936 | 8048 | 3574 |
4810 |
| Other Income |
12 |
325 | 67 | 94 | 39 |
30 |
| EBIDTA |
173 |
2327 | 2411 | 1696 | 924 |
1540 |
| Interest |
31 |
31 | 127 | 34 | 6 |
7 |
| Net Profit |
62 |
1695 | 1721 | 1199 | 650 |
1035 |
| Equity Cap |
47 |
177 | 102 | 129 | 32 |
27 |
| Reserves |
1406 |
7487 | 9337 | 3111 | 682 |
1139 |
| Accumulated Loss |
91 |
0 | 0 | 0 | 0 |
0 |
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Stock Features |
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| Current Price (Rs) |
1125 |
591 | 960 | 563 | 14491 |
1565 |
| Face Value (Rs) |
1 |
1 | 1 | 1 | 10 |
1 |
| Promoter Stake % |
52.6 |
67.4 | 63.2 | 59.6 | 70.6 |
51.0 |
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Profitability |
||||||
| OPM % |
6.6 |
20.9 | 21.4 | 19.9 | 24.7 |
31.4 |
| Net Margin % |
2.5 |
17.1 | 15.6 | 14.7 | 18.0 |
21.4 |
| Earnings Per Share |
1.31 |
9.59 | 16.83 | 9.09 | 200.26 |
38.07 |
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Discounting |
||||||
| Price/Earnings |
858.1 |
61.6 | 57.1 | 62.0 | 72.4 |
41.1 |
| Price/EBIDTA |
307.5 |
44.9 | 40.7 | 42.8 | 50.9 |
27.6 |
| Price/Revenue |
21.8 |
10.9 | 9.0 | 9.0 | 13.2 |
8.9 |
| Price/Fixed Assets |
753.6 |
53.3 | 77.7 | 121.8 | 212.5 |
35.2 |