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There was a time, not long ago, when Nykaa could do no wrong. 

The lifestyle e-tailer’s Rs 5,350 crore (~US$660 million) initial public offer (IPO) was a standout in 2021. Subscribed 82X in November that year—compared to food-delivery platform Zomato’s 38X in July—Nykaa listed at ~80% premium to its issue price, versus the foodtech’s 53%. And even as the stock market entered choppy waters in early 2022, Nykaa navigated them better than Zomato or fintech Paytm*.

But lately, nothing is as it was.

In the past three months, shares of FSN E-Commerce Ventures—which owns Nykaa—have plunged ~35%, faring much worse than those of Paytm or Zomato. Logistics company Delhivery is the only tech company that makes Nykaa look good, but only slightly.

Last week alone, Nykaa’s share price slid 13%, even as the benchmark Nifty 50 index remained flat. The company is now worth ~Rs 36,180 crore (US$4.4 billion)—less than one-third of its market capitalisation days after its listing. Since the lock-in period for Nykaa’s pre-IPO investors ended in November 2022, private-equity firms Lighthouse Advisors India and TPG Growth—which together owned 4.3%—have sold shares in multiple tranches, according to research firm Prime Database and Bombay Stock Exchange data.

Nykaa has everything going for it: a charismatic founder in Falguni Nayar, a former investment banker; one business (beauty and personal care, or BPC) that created a category online, and another (fashion) with a huge addressable market; and, most importantly, profitability, which the other listed tech companies are nowhere near.

So, why is Nykaa plumbing new lows on the bourses?

“The stock was very expensive, it had to correct. It was valued like a platform but it’s just like any other retailer, except it does its business online,” said Jay Gandhi, an analyst with domestic brokerage HDFC Securities. “Because platforms are the ultimate business model, everyone wants to be that. Nykaa was sold like that.”

Even if two-thirds of the gross merchandise value in Nykaa’s fashion business comes from its marketplace hosting third-party sellers, fashion itself accounted for under one-tenth of Nykaa’s revenue of Rs 3,775 crore (~US$466 million) in the year ended March 2022. In BPC—the company’s mainstay—Nykaa owns the inventory as any brick-and-mortar retailer does.

Despite the plunge in its share price, Nykaa is trading at nearly 424X its profits in the past 12 months. That’s significantly higher than the 116X Trent Ltd—the Tata Group retailer that runs the apparel chain Westside—is priced at.

Nykaa’s five-year-old fashion business is also contributing to investor wariness for other reasons. “Someone buying lipstick from you will not necessarily buy clothes from you as well,” said Salil Desai, head of research at Marcellus Investment Managers, which offers funds for high-net-worth individuals. “It’s a fragmented space with strong incumbents [Flipkart-owned Myntra, e-commerce giant Amazon, and Reliance-owned Ajio].

AUTHOR

Seetharaman G

Starting out as a business journalist in 2008, Seetharaman has written about energy, climate change, retail, banking, and technology. He has worked with Business Today, a fortnightly, and the Sunday edition of The Economic Times.

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