NYKAA — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good evening and welcome to the FSN E-Commerce Ventures Limited Q3 FY24 Earnings Call hosted by Morgan Stanley.

This event is not for members of the press.

If you are a member of the press, please disconnect and reach out separately.

For more important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures.

Please note that this call and your questions will be recorded and may, in certain circumstances, be distributed to clients and/or made publicly available.

By participating in this event, you consent to such recording, distribution and publication.

All participant lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

I'll now hand the conference over to Ms. Sheela Rathi with Morgan Stanley.

Sheela Rathi Thank you very much.

Good evening, everyone.

This is Sheela Rathi from Morgan Stanley Research.

Welcome to the FSN E-Commerce Ventures Limited Q3 FY24 Earnings call.

From the management of Nykaa, we have

Mrs. Falguni Nayar

Executive Chairperson, MD and CEO

Mr. Anchit Nayar

Executive Director and CEO of Beauty E-Commerce

Mrs. Adwaita Nayar

Executive Director and Co-founder, CEO, Nykaa Fashion and

Mr. P. Ganesh

Chief Financial Officer.

Before we start, we would like to point out that some of the statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been included in the presentation.

Kindly note that the call is meant for investors and analysts only.

With that, over to you Falguni for your opening remarks.

Falguni Nayar Thank you very much, Sheela.

It's a pleasure to be here amongst all of the investors.

Thank you for giving us this opportunity.

I will begin with the presentation.

We'll begin with performance highlights.

So, I think we saw that Quarter 3 of financial year 2024 Nykaa continues to drive profitable growth.

Our gross merchandise value at Rs 36,194 million is about 29% year-on-year growth.

The net sales value (and I'll talk the numbers in million) at Rs 17,866 million is about 24% year- on-year growth and revenue from operations at Rs 17,888 million is about 22% year-on-year growth.

On the gross profit basis, our gross profit came out at Rs 7,607 million, which is about 20% year-on-year growth.

The gross margins are at 42.5%, which is albeit about 86 basis lower on a year-on-year basis.

There are more details on each of those in later numbers and hence, I won't elaborate on these here.

On the EBITDA basis, our EBITDA came out at Rs 988 million, a 26% year-on-year growth.

The EBITDA margins are at 5.5%, which is about 18 basis point improvement.

Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

Moderator · Conference Operator

We will now begin the question answer session.

If you would like to ask a question, please press the raise hand button found on Zoom or if you've joined us on the phone, please press star followed by one.

Before asking your question, please introduce yourself providing your name and your organization name.

Please limit yourself to a maximum of two questions, so we can accommodate as many people as possible.

Ladies and gentlemen, we will wait for just a moment while the question queue assembles.

We will take our first question from Zoom.

The first question comes from Sachin Dixit.

So, please introduce yourself and your company name.

Please go ahead.

Please do ensure that you are unmuted locally.

Unfortunately, we are not getting any response.

So, we will move on to the next question.

If you would like to ask your question, please do re-raise your hand.

The next question comes from the line of Vijit Jain.

Your line is open.

Vijit Jain Hi.

Thanks for opportunity.

My question is on the BPC segment.

The presentation shows and suggests that the premium segment within BPC grew ahead of your overall BPC GMV growth.

While you did note pressure in masstige segment in your opening remarks and in the press release and trading update as well, I’m just wondering on why the BPC gross margins look a tad weak given the premium segment did so well?

And a related question to that, the discounting in your owned brand go up further in 3Q verses 2Q.

Additionally, did retailer margins in your partner brand see any kind of a change QoQ as the brand partner’s kind of combated the weak environment in India?

Thank you.

That's my first question.

Falguni Nayar So I'll just answer about the private label brand discounting and then I'll pass it on to Anchit.

So yes, I have to say that our private label brand discounting did go up, like every other brand in the environment, especially the masstige brands.

To that extent, that is built into that.

Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

The next question today comes from the line of Vivek M.

Vivek Maheswari Hi, good evening.

This is Vivek Maheswari from Jefferies.

Continuing with the questions on BPC, Anchit just to get it right [inaudible], the gross profit margin quarter-on-quarter or year- on-year, which are down about 60 basis points.

That is essential because of owned labels.

It’s not because of [inaudible] Anchit Nayar Sorry, Vivek but I think we’re losing you.

If you don't mind just restating the question, if you don't mind.

I think you're cutting in and out.

Vivek Maheswari I’m sorry.

Am I audible now?

Falguni Nayar Yes.

Vivek Maheswari Sorry about that.

So, Anchit, my question is this 60-basis points quarter-on-quarter or year- on-year decline in gross margin [inaudible] that’s only because of your own brands and this has nothing to do with the 3P brands on the platform?

Is that understanding, correct?

Anchit Nayar So, I didn't catch the entire question, but I understood that it's refers to the roughly 60 basis point decline in the gross margin for the BPC business.

What I would say is that, as I mentioned in my answer to the previous question, some of that is coming from large mass and masstige brands moving some of their advertising spend away from advertising and into the promo bucket because generally consumer companies tend to have one large A&P budget and the use of the proceeds, the use of the cash, is fungible between either advertising or promo spend.

As I mentioned, given the other pressures they're facing in other parts of their business and markets, there has been a slightly higher emphasis on promo spend than on advertising in this past quarter.

Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

The next question today comes from the line off Nihal Jham.

We do request that each person introduce themselves and their company name.

Thank you.

Nihal Jham Hi, good evening.

Am I audible, first of all?

Falguni Nayar Yes.

Nihal Jham Thank you so much.

This is Nihal Jham from Nuvama.

My first question was on the BPC bit itself.

If I look at the contribution margin for the BPC segment, over the last couple of years, obviously the lever from fulfilment expenses come in.

Just wanted to get a sense that where do we see this contribution margin stabilizing in the longer term and what will be the future levers to achieve that?

Anchit Nayar So maybe I’ll.

Yeah, go ahead.

Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

Thank you.

The next question today comes from the line of Percy Panthaki.

So, please do introduce yourself and your company before asking you a question.

Percy Panthaki Hi, am I audible?

Falguni Nayar Yes.

Percy Panthaki Hello.

Yeah, this is Percy Panthaki from IIFL.

My first question is on the one of cost, that you mentioned, that is the GCC ramp up and the ESOP costs.

They total about 60 basis points.

So, one is - can you disaggregate the two?

Secondly, just wanted to understand how much of this will be recurring.

Is it that there's a big ESOP charge out this quarter and then from next quarter onwards, it's going to be close to zero or will it continue at the same level as what it is this quarter?

And also, the same question on the GCC investments?

What kind of percentage of total revenues do you want to sort of cap the GCC investments at so?

This is my first question.

Falguni Nayar I think, Ganesh, you want to explain the first.

Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

The next question today comes from the line of Abhisek Banerjee.

So please go ahead and introduce yourself before asking your question.

Abhisek Banerjee Hi.

This is Abhisek from I-Sec. First question goes out to Ganesh.

So, this infusion of equity into Nykaa Fashion, this is essentially a non-cash transfer, right.

So basically, whatever was given in the form of debt is being converted into equity.

Is that correct?

P Ganesh Yeah, that's right.

Your understanding is right.

While there is a Rs 150 crores equity, which goes into repayment of debt given by the parent company.

So, in a sense, it is conversion of loan into equity - we’re capitalizing the Fashion business.

Abhisek Banerjee Understood.

The slump sale, there will be some kind of transfer, right?

P Ganesh That's right.

Yeah, based on our valuation, which has been done by Grant Thornton and on that basis, that will be an actual consideration, which will get paid.

Abhisek Banerjee So overall, it is correct to think that probably the contribution margin of the Fashion business will slightly improve after these changes.

P Ganesh Yeah.

Again, when you look at the Fashion entity in terms of the fact that there will be a cash infusion, which goes into the Fashion entity, the overall profit profile of Fashion entity will improve to the extent of lower interest costs primarily.

Abhisek Banerjee Understood.

That’s very helpful.

Now, Anchit, if I may ask a question on the growth aspect that you were talking to and one of the earlier callers also alluded to.

It is with regards to where you see the growth really coming from.

Basically, just to say, say this quarter, you saw faster growth in the premium side of Beauty, right?

So, do you think that is a more sustainable trend?

Do you see the premium side growing faster?

Also, in terms of customer profiles, I believe you already have an exposure to slightly more premium customers.

So, whom do you see really buying more?

Are there more premium customers buying more or do you really see growth from the value customers that you have?

Anchit Nayar So maybe I'll start with on the prestige/premium side.

As I said, today, prestige/premium is less than 10% of overall BPC spends in India, so it's very under indexed.

This will continue to grow, and it will continue to grow at a rate faster than mass and masstige because mass and Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

The next question today comes from the line of Kapil Singh.

Kapil Singh Hi, good evening.

This is Kapil from Nomura.

Most of my questions have been answered.

Just wanted to check— what are the growth trends we are observing currently in the key segments?

Is there any improvement that you're noticing or are they fairly similar to what you saw in the last quarter?

Falguni Nayar So I think without sounding too optimistic, I'd like to point out that the global CEO of every beauty company has visited India over the last six to nine months.

So, I think Indian market has become a very promising beauty market for global companies, where from earlier ranking, maybe in top seven or eight, it is starting to rank in the top five markets, sometimes top three, from importance perspective.

So, I think also Indian customer wants best of what the world has to offer because of social media.

So, I think now the challenge lies in of course, companies like Nykaa put in place very effective supply chains, very effective network already in place, like our store where store network is only 174 stores in 64 cities, and we will take it to 100 cities that before you know it will be at more than 250 store networks.

So, I think we've created the networks that it's possible for these global brands to leverage.

That's why we keep harping on education, but I think the trick lies in more and more education.

I think Nykaaland and we do a lot of beauty bars now.

We do a lot of in store master Transcript FSN E-Commerce Ventures (Nykaa) Q3 FY24

Thank you.

That was the last question we can take today.

You may reach out to Nykaa’s investor relations team for any additional queries.

I'd now like to hand the conference over to the management team for closing remarks.

Falguni Nayar Thank you very much, Team Morgan Stanley, for, as usual, doing a brilliant job and facilitating excellent interactions.

I hope we’ve satisfied all the participants.

Thank you very much for all the participants for being on the call and pretty insightful questions.

I hope we've been able to provide answers to most of your questions but otherwise, please reach out to us separately.

Thank you.

Anchit Nayar Thank you very much.

Thank you, everyone.

On behalf of Morgan Stanley, that concludes this conference.

Thank you for joining us and you may now disconnect.