Daybreak - Nykaa's post-listing glory days are over

Episode Date: January 30, 2023

From moment Nykaa went public on the stock exchanges in 2021, it became an investors’ favourite.Its stock had listed at an 80% premium to its issue price of Rs 2,001 per share on the BSE. Its parent company FSN e-Commerce Ventures hit a valuation of 1 lakh crore rupees. And founder Falguni Nayar’s net worth tripled and turned her into a billionaire.  But lately, things have not been going so well for the fashion e-retailer. Its shares have been on a free fall.Tune in to find out why.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. From the time it launched around 11 years ago, Nike established itself as a formidable player in the e-commerce segment quite swiftly. When a beauty and personal care or BPC giant decided to go public in 2021, it listed at an 80% premium to its issue price. It did better than

even Zumato and Ptm. Its growth story ever since you could say has been the stuff of legends. If there was one new tech stock that investors were extremely bullish about at that time, it was Nica. The company has everything going for it. It has a charismatic founder in Falguni Nair, who is a former investment banker, it runs a business that has created its own category online, it has another fashion vertical that is a massive potential market, and most important of all, it has the kind of profitability that other listed tech companies are nowhere close to.

But lately, things have not been going so well. In the last three months, the shares of FSN e-commerce ventures, which owns NICA, have plunged by 35%. A week ago, its share prices fell to an all-time low of $123.23 apiece. The company is now worth less than one-third of its market capitalization post-listing. So what came in the way of Nica's otherwise remarkable growth story? Welcome to Daybreak, a new podcast from the Ken.

I'm your host, Nick Da Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday the 30th of January. Last week when Nica announced the appointment of P. Ganesh as the new chief financial officer or CFO, he had said, and I'm quoting, I'm excited to join team Nica and become a part of the remarkable Nica growth journey as it expands its presence further by entering new markets, products and geographies.

End quote. Let me tell you a little bit about the world. this growth journey that Ganesh was referring to. Like I told you earlier, the moment Nica went public on stock exchanges, it immediately became an investor's favorite. If you go back and read the news from that time, you will see how news outlets celebrated the brand's market debut. It became a huge thing. Its parent company, FSN and e-commerce ventures, hit a valuation of one-lack crore rupees. And the founder of Falguni Nyer's net worth tripled and turned her in to a billionaire. It was the market debut of dreams. It won't be a stretch to say that Nica is a pioneer

in the online cosmetics segment. Within seven years of its launch, it became India's largest online beauty and cosmetics retailer. And it did this by bringing in a host of new beauty brands to India. And it still continues to do so. I remember it was sometime last year when Nica became the first one to bring the Toronto-based skincare brand called the Ordinary to India. If you know skincare, then you cannot not know about the ordinary. The whole experience of buying cosmetics had always been a very physical process. We've always preferred going to a store, trying on products and then making a decision. But Nica came in and changed that narrative.

It created acceptance for shopping for cosmetics online. Soon, not only did it become an investor, favorite, it was also a profitable company, and we know how rare that is in the e-commerce startup space. And this is basically how NICA became successful. It became a pioneer in the online BPC segment while staying profitable at the same time. Coming up next, we discuss why Nica's share prices dropped to an all-time low in the last few months. Nine years after its launch in 2012, when it went for its IPO, Nica's stock had listed at an 80% premium to its issue price. The issue price, by the way, was $2,001 per share on the Bombay Stock Exchange.

It became what they called the talk of the town. But in the last three months, the company's shares fell by 35% and hit a record low of $123 per share. So what happened? One of the most obvious reasons for this nose dive in NICA's share prices is the end of the lock-in period post the November 2021 listing. An IPO lock-in period is the time span after listing during which pre-IPO investors are not eligible to sell their shares. The lock-in period of NICA ended on 10th of November 22 and ever since NICA's shares have been under pressure. According to the research form Prime Database and data from the Bombay Stock Exchange,

private equity firms Lighthouse Advisors India and TPG Growth, which owned 4.3% of NICA's shares together, sold their shares in multiple trenches. But Nica tried to cushion the post-locking fall in the company's stock. The board had announced a share bonus which was five shares for every one share help. But it was an attempt to delay the inevitable, and it did not go down well with the investors. A senior executive with a large mutual fund house that is also an investor in NICA spoke to my colleague Sita Ramanji who reported this story about how this move angered shareholders. He told him, and these are his exact words, they tried to be cute.

The second reason for the fall in Nica's shares has to do with Nica's venture into fashion. It was in 2018 when it decided to take a shot at this segment. And the move made sense. After all, fashion is a close cousin of beauty and personal care in the lifestyle family tree. But for this, Nica had to adopt the marketplace model. Now, this was quite a change from the strategy for its BPC segment in which it scaled up with its inventory alone. Compared to BPC, fashion has a much larger range. of products in it. So it would have been very difficult for Naika to sell them all on its own. As of March 2022, Naika offered 4.3 million SKUs or stockkeeping units in the fashion category.

This is nearly 15 times its offerings in the BPC segment. And not just that, even in the fashion market, Naika chose to focus on the premium end of things. And it has managed to increase its average order value or AOV by 20% to a little over $3,800. But on the other hand, the AOV for its main BPC segment declined marginally to around $1,800. While this has helped NICA improve the economics of the fashion business, e-commerce is still a tough nut to crack, especially for clothes priced above $2,000. Talking about fashion, Subrata Saddhata, a former senior senior executive at apparel retailers such as Trent and Shopper Stop,

told Sita Raman, and I'm quoting, it works on touch and feel. That is why 65 to 70% of apparel sold online is priced less than $1,000. End quote. The unique monthly average visitors for fashion grew at a slow pace than that for BPC in the six months that ended in September 2020. Fashion by its very nature is a challenging proposition for Nica. Adweta Nair, the chief executive of Nica of Fashion, told the Ken, and I'm quoting,

I do believe that fashion is the ultimate discovery problem. Fashion has so many products, far more than beauty. So how do you really show the right thing to the right person at the right time? And that remains a focus for us. End quote. Apart from this, there is the seasonality aspect of fashion, which is currently supercharged thanks to the rising popularity of fast fashion retailers, such as Trent's Zodio.

So as a comparatively new player in the fashion e-commerce game, Nica has to take on Mintra, Amazon and Adju. And to do this, it has to spend a considerable amount to attract new customers. The chunk Nica spent on promoting its fashion vertical in the year that ended in March 2020 was over 50% of what it spent on its BPC vertical.

This was despite its fashion business revenue being one-tenth of its BPC business. Coming up next, I tell you how investors are looking at NICA now. Nica now wants its investors to bet on an upstart in the already cut-throat fashion category. It is important to note how this is entirely different from what Nica could have done, which is to pitch to them its desire to reinforce its already strong status in the BPC category. So what are investors making of this? According to an analyst with a domestic brokerage,

investors are wary of valuing the company on the basis of future sales and instead they are carefully valuing it on estimated profits as listed companies are. Plus, with the end of the lock-in period, the timing of the bonus issue which was five shares for every one share health meant investors would get the additional shares

only after a few days. In turn, this would delay the sell-off. Investors wanting to sell would have had to pay a higher tax on the gains from the sale of the new shares. Sri Ram Subramanian, who is the founder and MD of In-governed research, a proxy advisory firm, told the Ken, and I'm quoting, they were thinking short-term. But even the short-term benefits were questionable. It was a question of delaying the inevitable. End quote.

So for now, while Nica may be ahead of a test. tech peers in terms of profitability, its post-listing dream run has clearly come to an end. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Sniq Daj Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.