Rising operational issues and anticipated inflation could put pressure on Nykaa's stock

According to analysts, FSN E-Commerce Ventures, which owns Nykaa, an online cosmetics and fashion platform, faced increased operational issues in the quarter ending March.

The store reported a 14 percent drop in operational profits to Rs 38.5 crore year over year, with operating margins falling to four percent from six percent a year before. The dramatic drop in profitability was attributable to increased advertising spending and sustained investments in new enterprises.

The company's traditional beauty and personal care division had a two percent year-over-year fall in average order value, while the same for the whole financial year fell five percent, possibly reflecting consumers' constraining discretionary spending in a high-inflation climate.

After accounting for larger expenditures in new operations, brokerage firm ICICI Securities lowered its operating profit expectations by 24% for 2022-23 and 16% for 2023-24.

Higher inflation, it said, might provide a short-term challenge for consumer demand due to weaker spending on important discretionary items.

These worries have surfaced at a time when the company's valuations are still being debated. Despite a 47 percent drop from its record highs, Nykaa is costly compared to worldwide peers, trading at more than eight times estimated one-year forward sales.

Given the stock's high valuations and mounting margin pressure, Moneycontrol Pro maintains a cautious outlook.

Analysts tracking the stock were generally upbeat about the company's long-term strategy and growth prospects. "On Nykaa, we continue to be constructive. In a note, brokerage company Edelweiss Securities said, "It is a globally unique profitable and management-owned new-age organisation that presents a multi-decade growth opportunity."

Edelweiss Securities maintained its 'buy' rating on the stock and maintained its Rs 1,859 price objective.

Morgan Stanley and Goldman Sachs both maintained their bullish outlooks on the stock. Morgan Stanley claims that the company's gross merchant value has increased by more than 40% year over year, as well as its topline.

While the company's content-driven strategy in beauty and personal care "is a long-drawn journey and cannot be developed by a new entrant simply on the strength of capital," ICICI Securities believes the company's content-driven model "cannot be built by a new entrant just on the strength of capital."

"While we expect BPC revenues to grow, we believe Nykaa's journey will be different - it will need to go more popular to fuel this growth," the company stated.