Nykaa Ipo: Why the Nykaa IPO is a big deal

By now, it’s all over the news that Falguni Nayar’s fashion retail company Nykaa saw an impressive gain of 96% on debut. Such a gain is doubly impressive when the company is in the e-commerce business and is not yet 10 years old. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r Nayar’s story of how she founded Nykaa when she was 50, bootstrapping the venture with her own funds, and how she is today part of the exclusive billionaire’s club, is now well known. Here are some Nykaa facts that not everyone seems to know.First, what exactly is Nykaa’s business?It’s an e-commerce platform for beauty products, featuring diverse brands from Estee Lauder to Khadi. It’s also a cosmetics company with its own range of beauty products. And it’s a fashion retailer, selling everything from Adidas to Van Heusen on its site. That's not all – it has its own line of lingerie as well. And finally, there’s Nykaa TV, a YouTube channel that offers beauty tips to its 1.2 million subscribers.The online beauty industry has not had a great run in India; more beauty-only retailers have shut shop than survived in the past decade. There’s also stiff competition from the likes of Amazon and Myntra, which have deeper pockets and established procurement and distribution channels. That’s probably one of the reasons why, about five years ago, Nykaa began expanding into brick-and-mortar stores, wanting to tap mall traffic.Why is the Nykaa initial public offering (IPO) such a big deal? There are many reasons. Most important is the fact that Nykaa is one of the few profitable startups to hit the market. Zomato, which debuted recently, is a loss-making company albeit one that’s valued highly. Paytm, being touted as India’s biggest IPO, is also loss-making. Nykaa, however, has declared a consolidated net profit of approximately Rs 62 crore for FY21 after a Rs 16 crore loss in FY20. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r Unlike most startups, Nykaa has not gone in for huge funding rounds; it has, so far, raised five rounds of funding, of which only three were from institutional investors. After the IPO, Nayar and the family (as individual members and through family trusts) have a little over 50% stake in the company. That’s very different from both Zomato and Paytm, where the founders have tiny stakes; it also means that Nayar has far greater control of the company going forward.Then there’s the non-financial reason. In a space dominated by young “tech bros”, Nykaa was founded by Nayar when she was 50. Recent reports say that only five out of 136 unicorn founders are women. medium87650231Some people are saying that Nykaa’s high P/E ratio is bad.In general, a high P/E is bad for investors because you pay more for every rupee of earnings. Equally, a high P/E is a sign that investors expect the company’s earnings to grow faster in future. What’s important is to understand that a P/E ratio on its own isn’t a useful metric; it’s when you look at a P/E relative to the P/E of other companies in the industry that you have an idea of whether a company is undervalued or overvalued. Since Nykaa doesn’t really have a peer set, here’s a look at how it compares with the biggies. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r For those in the market for quick gains or just listing gains, buying Nykaa makes sense. But for long-term value investors, this may be too expensive. (There’s also the fact that value investors do not often invest in IPOs.) As Nikhil Kamath, founder of popular trading platform Zerodha, says: “Best thing for a value stock investor might be to go on a really long holiday right about now.”Nyka lists at 1600 times price to earnings.They sell cosmetics online, paytm next, best thing for a value stock i… https://t.co/dTAP9LFoai— Nikhil Kamath (@nikhilkamathcio) 1636520484000But don’t write off Nykaa as being overvalued. It’s also important to look at the company’s growth prospects. In its red herring prospectus, Nykaa says: “We have a large market opportunity aggregating ₹10.6 trillion (US$152 billion) in the growing beauty, personal care and fashion industry by the calendar year 2025 in India. The Indian beauty and personal care market is estimated to grow to approximately ₹2.0 trillion (US$28 billion) by the calendar year 2025 from ₹1.1 trillion (US$16 billion) in the calendar year 2020.” medium87650273Untitled Carousel 87642426