Teji Mandi Explains: The secret behind Nykaa’s billion-dollar business

Nykaa is all set to launch its IPO this year. Last month, the company filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India. The company's initial public offering (IPO) will include a fresh issuance of shares worth Rs 525 crore and the sale of 43.1 million shares by existing shareholders. Currently, the company has a monopoly over the beauty and personal care products industry.

What’s In ‘Store’?

About 70% of the beauty market in India is unorganised, meaning the beauty and personal care products are sold in stores or at the street shops. This created a huge scope for Nykaa, which is already ruling the market. Jefferies in its report explained that the value of the online segment is 5-6% of the overall market. This translates to $800 million in revenue. Nykaa, with revenue of $250 million in FY20 already, accounts for more than 30% of the online market. This makes the company the largest beauty and personal care retailer in India.

Also, the company has everything under one roof. The company has its make-up and skincare products brand called Nykaa Cosmetics. Today, the in-house categories like Nykaa Cosmetics and Nykaa Naturals contribute close to 10% of their overall revenue.

Research Findings

Nykaa’s unique business model and consistent growth have wooed the industry. Motilal Oswal recently conducted an online survey targeting a specific demographic and has presented its findings. According to the brokerage, one of Nykaa's key strengths lies in its inventory-led business model. The company factors in the products that could become outdated for the customers. Accordingly, the company ensures the availability of other products and efficient distribution. The products are purchased directly from the manufacturer and these are stored in Nykaa’s warehouses. Then they ship them directly to the customers. This model helps them keep a tight check on authenticity, quality and delivery.

The technology used by the company runs across online and offline channels allowing to efficiently manage inventory. The company’s good performance continues to comfort customers, who keep returning to Nykaa’s app and stores.

Nykaa’s Expanse

Nykaa is branded well across social media platforms. If you buy a product from their app, expect a list of products flashing on your screens as ads or a string of emails of their latest range. They want you to see their brand everywhere. Nykaa has over 1,300 influencers and 12.6 million followers across social media channels. With this massive online presence, the brand makes sure to create influencer-led education through creative and entertaining content across video and written formats.

Motilal Oswal in its report stated, ‘Nykaa creates and films the majority of its content in-house through the Nykaa Army. Furthermore, the Nykaa Affiliate Program, uses influencers on a wide scale, allowing external content creators to post content on their behalf across several digital channels. Endorsement by well-known influencers further strengthens the trust in the platform’.

IPO Details

Nykaa’s IPO remains one of the most awaited ones in the market. It is expected to go public in the third quarter of the year i.e. between October and December. As per the company’s DRHP, promoters and existing investors will be selling up to 43.1 million equity shares through the offer-for-sale (OFS) route. However, the DRHP did not mention the total size of the IPO. According to estimates in the media, the company plans to raise Rs 4,000 crore through the IPO.

Bloomberg reported that the company is aiming to increase its valuation to more than $4 billion and plans to sell more than 10% of the equity in total. Nykaa in its DRHP said it wants to use the funds raised from the IPO to make investments in its subsidiaries, to set up new retail stores, warehouses, repaying certain debts and general corporate purposes.