Nayar, who was adjudged ‘CEO of the Year’ at the 2022 Economic Times Startup Awards, had raised tiny outside capital and made profits in a typically cash-intensive e-commerce industry before participating in an initial public offering awesome.
He spoke to ET’s Samidha Sharma about the company’s journey to a market share, the massive shift from euphoria to caution for new-age tech stocks, and Nykaa’s focus on its fashion and B2B businesses.
From a private company to a listed public body, how was the last year for Nykaa? You, as CEO, have seen the stock swing from buoyancy to rout now, especially for tech companies…
Markets have changed in the last year since our IPO and investors are calling for more accountability on short-term numbers, but we have always been focused on our unit economy and path to profitability.
So, for us to explain what is happening is not difficult. Investors tell us that Nykaa has been exceptional in transparency and the insights we share on unit economics, gross merchandise value (GMV), and EBITDA levels for beauty, fashion, and our new upcoming businesses.
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The last four quarters have been spent explaining how we’re investing in the future.
What did these investors tell you?
They’re very satisfied with our unit economy in terms of gross margins and manufacturing and marketing costs are very much under control. But they want all of that to bottom out, which it hasn’t as we’re investing in a post-Covid-19 environment that showed the results this quarter.
You told us last year that Nykaa was created to be a public company. Do you feel the same one year after the listing?
We had a large non-promoter base, over 45%, so we had to sell to a private equity player or go public. And doing an IPO was always better.
However, if you can build a company without raising much capital with 100% ownership, there are obviously benefits to that… Going public puts you through quarterly pressure. It’s like running a marathon in the long run with a sprint every quarter; makes it very difficult.
Was it stressful?
We need to step back in terms of delivering the right performance, explaining and convincingly communicating what we are doing to investors…
Read also | Nykaa was built to have a life in the stock markets: Falguni Nayar
What do you think of the share price, which has dropped significantly since listing?
I think the listing price is not what we should focus on. I get this advice from experienced promoters and even investors.
They always say that Rs 2,200 was not your doing, and if it goes to Rs 850 (pre-bonus) it won’t be your fault either. So all we can do as a company is continue to perform and build for the long term.
Note: FSN E-Commerce, which runs Nykaa, saw its shares fall 3.9% on Wednesday to close at Rs 184.50. The stock is currently trading 1.6% below its adjusted IPO price, while it has plunged nearly 45% from its adjusted listing price of Rs 333.50. Nykaa’s shares, which sold at Rs 1,125 apiece last year, were quoted at Rs 2,001 on 10 November 2021.
Last week the company issued five bonus shares for every share it owns
How do you view the overall technology package that was listed during last year’s bull market? What was your learning?
Other tech companies that went public also had investments from funds that wanted cash, so it made sense. I admire many of these experienced, professional CEOs who run large companies; everyone says adversity is the best time to build.
In the early months of Covid-19, Nykaa posted a monthly loss of Rs 40 crore; till then we had never lost more than Rs 25 crore in a whole year. We only had a balance of Rs 100 crore as we never raised much outside capital. May (2020) was slightly better, but we were sitting on inventory.
This is when we decided to take on more inventory and do our two sales events, which was a bold decision. So, companies can’t get too scared.
Are you seeing a slowdown in consumption?
Whether it’s fashion or beauty, discretionary spending is currently strong. But due to the adverse macro environment, even if the CEO is optimistic, they acknowledge that while this season has been good, growth will not continue at the same pace.
Luckily, we made gains due to the holiday and wedding season, so we didn’t see any drop in demand.
What was the thought process behind Nykaa Superstore, which is challenging the distribution and supply chain for brands?
The secret sauce of the FMCG companies was their distribution weight, which is kept in-house. Nykaa realized that there was a proliferation of beauty brands, so we started this whole third party distribution platform. This is an advantage for resellers and Nykaa.
We’re building a self-service distribution channel, (has) insight into what’s most popular in the reseller area, and help launch new brands on our platform. We already have a thousand small retailers and family run shops such as pharmacies, specialty beauty shops registered with us.
The analysis on Nykaa Fashion is that you entered the market to expand your total addressable market (TAM), since beauty alone would not give you that kind of rich valuation…
It was never to justify Nykaa’s assessment. We knew that fashion was five times the TAM of beauty and the customer is the same and we know how they shop. These shoppers know that Nykaa is a trendy brand, so we saw that they were ready to engage with us about fashion, which is why we got into that business.
I think it went very well. We’ve dominated beauty with over 30% of the online beauty market, but we don’t get there in fashion. Right now, we have a 2% market share and (if) we get to 5%, that’s going to be a big deal. We are not targeting the mass market.
But competition is tough in fashion…
There are two players – Myntra and Reliance Ajio – on the market. The space had opened five years ago and everyone closed, so when Nykaa started in the beauty space, everyone said it wasn’t right; now everyone thinks it’s a big deal. There is magic in a multi-brand cart that is what works for beauty.
Have you launched private labels, closed multiple acquisitions since your IPO? What is the strategy for inorganic growth considering there is a palpable slowdown in the direct-to-consumer (D2C) market?
Private labels will play a significant role in fashion. We have 11 of those – 20 suits which we acquired before the IPO, then launched the lingerie brand Nykd, both of which are now running Rs 100 crore in annual GMV revenue rate.
As far as acquisitions go, investment bankers keep talking to us about deals, but we always carefully weigh build versus buy decisions.