Why Nykaa Share Price is Falling

Editor's note: After having a weak start in 2023, Nykaa shares have underperformed this week as well, touching their 52-week low on 25 April 2023.

The downfall was amid concerns over back-to-back exits of top-level employees and other management changes.

Nykaa, on 24 April 2023, announced the addition of several new senior leaders to its management team to drive the company's next phase of growth.

The company appointed Nihir Parikh as Chief Business Officer (CBO), Rajesh Uppalapati as Chief Technology Officer (CTO), and P Ganesh as chief financial officer (CFO), to strengthen its position in the Indian e-commerce market.

This move was made after the company witnessed the exit of five senior executives last month after a slew of exits throughout 2022.

These continuous changes in the management has escalated the negative sentiment in the market about the company's ability to retain talent as well as its future prospects, triggering a selloff in the stock.

A similar downward movement in this new-age tech stock was seen in January 2023. We discussed the probable causes behind the fall. Much has changed since then.

Read on to know more....

Why Nykaa Share Price is Under Pressure

Succeeding in the beauty and personal care (BPC) market is not easy.

This is because of the varying needs and preferences of consumers. They can be discount-driven or value sensitive and have different preferences and personal requirements.

Having said that, Nykaa is incessantly focused on the premium BPC and fashion market, and it keeps working towards a diverse product portfolio.

Despite this, the share price is plummeting since it got listed in 2021. This beauty e-commerce giant continues to witness pressure in 2023 after falling over 60% in 2022.

In 2023 so far, the stock has fallen 16%. Let's explore the reasons why the stock is under pressure...

Block deal in the market and sudden resignation

On 12 January 2023, an undisclosed player sold shares at Rs 148.9 apiece valued at US$ 26 million (Rs 2.1 billion) via a block deal.

Following this, Nykaa share price took a huge hit and fell on the bourses. As the session progressed, the company went on to touch its 52-week low of Rs 123.3 on 18 January 2023.

This is just one of the several aftermaths of the end of the lock-in period.

After the lock-in period expired on 9 November 2022, Nykaa offered bonus shares in the ratio of 5:1 to encourage investors to stay put.

However, it was not persuasive for several pre-IPO investors including Lighthouse India Fund, Kravis Investment Partners and TPG Capital.

This decision of the company raised questions over the timing and alleged that it would deny them a fair exit. It convinced investors that it was a ploy to stop them from selling their holdings due to the taxation structure.

The sudden resignation of the company's CFO Arvind Agarwal also dampened sentiment in some way.

Quarterly results

It is safe to say that the future share price performance of a company will depend on how it performs on the earnings front. Nykaa is yet to announce its results for the December 2022 quarter.

The September 2022 quarter results showed a 39% YoY increase in its revenue, from Rs 8.9 billion (bn) to Rs 12.4 bn.

Profits on the other hand, saw over threefold-rise from Rs 11.7 million (m) to Rs 41.1 m on a year-on-year basis.

This was on the back of increased demand for premium beauty, personal care and wellness. Post Covid, accelerated investments in new store rollouts and store upgradation resulted in improved footfalls and higher same-store sales.

Other reasons why Nykaa share price may be under pressure...

As we mentioned before, Nykaa share price witnessed a steep correction in 2022. In October 2022, we wrote a detailed editorial explaining why the stock was facing pressure back then.

It appears, the situation is more or less the same at present and the same reasons are dragging Nykaa lower even today.

Reasons like rising interest rates, high inflation, and its diversification strategy.

You can check out the entire editorial here: Why Nykaa Share Price is Falling.

Nykaa: Should you avoid, hold, or sell?

Recently, we also covered a detailed editorial explaining what to do with the stock of Nykaa if you are a shareholder or looking to invest in it.

Here's an excerpt:

• Nykaa does seem to have a competitive advantage (i.e. moat). Its brand is synonymous with women's beauty, wellness, and fashion.
  
  Also, the sheer scale of products it offers, across many price points, has made it a compelling, and highly convenient, online marketplace for women. Its premium retail store strategy also seems to be moving in the right direction.
  
  This is a company that does have a viable brand that its customers keep coming back to. This should provide it with at least some pricing power in the long term.
  
  Unfortunately, none of this matters right now due to the stock's valuations. Its PE of nearly 200 offers zero margin of safety. This is a stock in which the PB of 50 would be preferable if it was the PE. That's how expensive it is.
  
  Now that doesn't mean the stock can't go up...but if it does, then the PE will increase even further.
  
  Equitymaster's co-head of research, Tanushree Banerjee, did a video on the stock - Is Nykaa a Falling Knife?
  
  So what is to be done with Nykaa?
  
  If you don't have the stock in your portfolio, you need to seriously ask yourself if you're comfortable buying without a margin of safety. This is the kind of stock that can fall even if the fundamentals improve just because its valuations are too high.
  
  Ask yourself what the highest PE is that you are willing to pay for this stock and how much the stock needs to fall for the PE will get to that level.
  
  If you have the stock in your portfolio, we believe you will need to take a good, hard re-look at the reasons why you bought it.
  
  We understand that selling at a loss is painful...but you will have to take a call on holding without a margin of safety. In that case, you are essentially hoping for a massive rise in the company's net profit which would justify the high PE.

You can check out the entire editorial here: Zomato, Paytm, and Nykaa: Buy, Avoid, Hold, or Sell?

How Nykaa shares have performed lately

Nykaa shares have declined more than 20.6% in the last one month and more than 61.7% in the year gone by.

The company touched its 52-week high of Rs 344.7 on 20 January 2022 and its 52-week low of Rs 123.3 on 18 January 2023.

At the current price, Nykaa trades at a PE multiple of 435.8 and a price to book value multiple of 23.1.

As of September 2022, promoters owned 52.4% of the company, while FIIs owned 6.5%.

About Nykaa

Nykaa is India's largest online beauty and cosmetics retailer.

Falguni Nayar founded the company in 2012. The company has a portfolio of beauty, personal care, and fashion products, including its owned brand products and international products.

It retails over 2,000 brands and 200,000 products across its platforms.

It launched physical stores in 2014. In 2020, it became the first Indian unicorn startup headed by a woman.

To learn more about the company check out, Nykaa's financial factsheet and quarterly results.

You can also look at Nykaa 2021-22 annual report analysis.

For more details about the company, you can have a look at these articles:

Nykaa vs Zomato

Nykaa vs Pace ecommerce

Nykaa vs Indiamart Intermesh

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...