Nykaa: Falguni Nayar optimistic about Nykaa’s global expansion, sets sights on GCC market

“I think we have said that we will be going towards 350 stores over the next two years. But what I want to point out is that we have a very large e-commerce business and even at this level of stores and which are extremely productive, I think we still end up having only 9% of our omnichannel turnover comes through physical retail,” says Falguni Nayar, Founder & CEO, Nykaa.

While most of the Q3 operational metrics were in line, but the profits were a little sombre than what the street was expecting. So, help us and give us some sense that going ahead this 36 crores that you are pencilling in, it has come to just 26.2 crores. What is actually weighing heavy on your profits at this point in time?
Falguni Nayar: So, before we jump to the PAT, we have to remember that our EBITDA has come out at one of the strongest number at around 6.2%, which is a huge improvement from a year earlier where the consolidated EBITDA used to be at 5.5%. So, there has been a very significant improvement in the EBITDA that the company has delivered.
Beyond EBITDA, we tend to have investment in depreciation and interest, which is mainly to fund, we are rolling out a number of stores, we are at 210 stores, of which sorry 12 were during this quarter and 45 during this year.
And the strong store rollout in this year leads to some amount of increase in depreciation. We also would like to point out that between PBT and PAT, sometimes there is certain tax inefficiency. And since we are investing in international markets like GCC, which you are very aware of that Nykaa is building a speciality beauty business in GCC, which again comes out a little adverse, which sometimes some of the houses do not factor in.

So, the disappointment there comes from the model not capturing what really is happening at Nykaa, rather than really in that sense. So, at the EBITDA level, there has been a strong improvement in EBITDA from 5.5% to 6.2%.

Your offline and online expansion, how will that split be going forward? And what is the outlook then on store expansion?
Falguni Nayar: I think we have said that we will be going towards 350 stores over the next two years. But what I want to point out is that we have a very large e-commerce business and even at this level of stores and which are extremely productive, I think we still end up having only 9% of our omnichannel turnover comes through physical retail.So, yes, our stores network is extremely productive with one of the highest per square foot revenue that we enjoy.
And it is a very-very strong network that we are building. It is just a very unique, what I call as a moat in the business because we do believe that beauty, especially at the premium and at the top end.
Customers want that touch and feel to select the right products for themselves, be the foundation or the lipstick and I think what Nykaa offer is a unique dominance in both in online and offline.

You have been focusing on going global. Your international sales has been inching up and contributing as well. If you can tell us that which next destination are you planning to venture in next and will the focus remain on GCC and how do you see the contribution moving ahead?
Falguni Nayar: Taking on wanting to be a multi-brand retailer in another geography like GCC, which consists of seven countries, it is beyond UAE, includes the Kingdom of Saudi Arabia, Qatar, Kuwait, many other countries, Oman. So, it is a very big commitment. So, I do not think we are jumping into another region also. Nykaa will patiently build this network in GCC to about 70 stores over the next four-five years business at that time.

And what has been the discounting trend like across segments this quarter and has there been any reduction on a year-on-year basis?
Falguni Nayar: I would say that there has been a slight reduction in discounting, but not huge. I think over the last three-four quarters, we saw discounting, Nykaa does not do discounting from its own pocket, as you are aware, but a lot of brands have been increasing discounts that they offer to the consumer and that has been increasing over the last three-four quarters. The increase has definitely been reined in and discounts are flat to trending lower, which I think is good for the industry.

The beauty growth is picking up. A lot of international players are coming into the country. A lot of innovation is coming into the country, bringing consumers a lot of desirable products. Aspirational products that they want to consume. And the fight is not necessarily only about the discount, but also about who offers great new products.

But your margins have improved quite significantly in Q3. So, can we expect this margin growth number to grow even more going ahead? And is this margin number sustainable?
Falguni Nayar: Yes, in the sense that, because the third quarter is a festive season and it tends to be kind of a little bit of an outsized quarter compared to the rest of the quarters in the year, it is a big quarter with a lot of festive season demand as well as Nykaa also does its premium, Pink Friday sale in this season which was also part of that.
So, you can see there is some benefit of higher scale and what it does to fix costs and how they are spread across larger turnover.

I would not say multi-year, but over the next couple of quarters we think we should be able to sustain that EBITDA and trying to improve EBITDA to the next level based on the turnover and all of the drivers of EBITDA that we put in place. One of the main drivers of EBITDA for us has been gross margin improvement and a lot of things go into gross margin improvement because we have a number of businesses, e-commerce, physical retail business, our brand business, our brands have seen some improvement in their gross margin structures and also has seen improvement in net retention margins.

So, a number of businesses are contributing to improvement in the gross margins and that has been one of the key drivers.

And some amount of saving and fulfillment costs and overheads has been the other driver. Against that, we have spent more on marketing. And in fact, our marketing costs have gone up by 100 basis points, which is due to the investment we made in new customer acquisition, which has been at its highest level over the last three-four quarters and we are really happy that in this growing market we are able to grow customers so much faster.

So, it is an orchestrated strategy to grow customers faster and marketing costs reflects that. So, marketing is considered a variable expense, so to that extent we can always control it when we want to.

The street was pencilling in a fashion GMV growth of 1%. It has coming in about 8%. What has led to these kind of robust numbers?
Falguni Nayar: In this otherwise terrible market, it looks like robust performance. We are disappointed. We would love to continue to grow fashion also at a good pace and it will come back.

We are working very hard to build assortment in the fashion category. If you see last two years, especially and again even last year we increased the number of brands and great brands were brought onto our platform. Footlocker is one example.

We brought brands like Snitch, Victoria’s Secret, and many other great brands we are continuing to bring to the platform side evolve. And I think all of that will make it a unique destination where customers come to shop. Fashion is a very wide business as you are aware. It consists of so many subcategories. Women’s Indian wear, western wear, men’s wear, accessories business, home, kids and I think we are growing in all directions.

So, we want to make our fashion platform very interesting to the consumer so that we can continue to enjoy the place of pride in the minds of our consumer, the way beauty has always done.

So, we do believe that fashion is a preferred platform, but we want to continue to make it more and more endearing to our customers. And we always say that finally, the fact that we are able to enjoy much better AOVs and appeal to the customers who are looking for quality and something which is on trend, which is Nykaa fashion is all about being on trend, getting better quality and catering to customer needs, which are very much high on fashion, and not just on not selling anything only based on a price. So that is something which is very important to Nykaa.

But how do you sense the competition rising in the online fashion segment because now that we know that Shein is making a comeback in India?
Falguni Nayar: I mean we are a multi-brand platform and to that extent, AJIO has always been there. So, it has been Myntra and AJIO and Nykaa fashion is in a way just a five-year contender. We launched this business five years ago and we are really happy.

Most of our consumer studies show that we are very high on a consideration set as a platform where consumers want to buy fashion because it is on trend and it is something distinct and unique and it is curated and brings them something that is of quality. So, we want to cherish that position and continue to build on it.

What about the beauty and personal care segment because that was expected to do very well this quarter but in turn your BPC revenue growth has actually missed the consensus estimate. What went wrong because the GMV also was slower than expected?
Falguni Nayar: I do not it has moved slower than expected, in fact in beauty we have delivered 32% GMV growth year-on-year and also the net revenue growth also has been at about 27% year-on-year and we just had our analyst meet also where we have said that this is one of the fastest. There has been acceleration in our beauty growth. So, I think you probably may have picked it up from somewhere where I do not know where the source is, but I think it is pretty much in line with analysts expectation. It is one of the strongest growth that we have delivered. I mean, it has accelerated. We have been delivering like 23% 25% and now it is accelerated to 27% growth.

Give us your thoughts on leveraging the quick commerce and the 10-minute delivery platforms, how do you see the growth picking up from these particular segments?
Falguni Nayar: I think we are quite aware that there are benefits of faster delivery to the consumers and Nykaa has gone public and said that in 110 cities 70% of the orders are delivered by same day or next day which means that if order comes in before 12, it is delivered the same day and if it comes in the afternoon, it is delivered the next day.

So, we have already improved our supply chain in such a way that we were delivering very fast in 110 cities and over last two years we have also improved our order to delivery from four-and-a-half days to 2.4 days, so we generally had a lot of improvement.

Beyond that we have also said that within this faster delivery that consumers value Nykaa is moving towards giving consumers faster delivery of maybe within an hour or two hours in certain cities and pin codes where it is possible through what we call as Nykaa Now.

So, this has been what we have been talking about and this will only get acceleration and momentum as we progress through the year.