FSN E-Commerce Ventures coming with an IPO to raise upto Rs 5347 crore

FSN E-Commerce Ventures

• FSN E-Commerce Ventures (Nykaa) is coming out with a 100% book building; initial public offering (IPO) of 4,75,31,876 shares of Rs 1 each in a price band Rs 1085-1125 per equity share.
  
• At least 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
  
• The issue will open for subscription on October 28, 2021 and will close on November 2, 2021.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 1 and is priced 1085 times of its face value on the lower side and 1125 times on the higher side.
  
• Book running lead managers to the issue are Kotak Mahindra Capital Company, Morgan Stanley India Company, BofA Securities India, Citigroup Global Markets India, ICICI Securities and JM Financial
  
• Compliance Officer for the issue is Rajendra Punde.
  

Profile of the company

The company is a digitally native consumer technology platform, delivering a content-led, lifestyle retail experience to consumers. Since its incorporation in 2012, it has invested both capital and creative energy towards designing a differentiated journey of brand discovery for its consumers. It has a diverse portfolio of beauty, personal care and fashion products, including its owned brand products manufactured by it. As a result, it has established itself not only as a lifestyle retail platform, but also as a consumer brand. It also offer consumers an Omnichannel experience with an endeavor to cater to the consumers’ preferences and convenience. 

The company’s lifestyle portfolio spans across beauty, personal care and fashion products. Consumers have different journeys for different lifestyle needs, and this has led it to build business vertical-specific mobile applications, websites and physical stores. These independent channels allow it to tailor its content and curation optimally for the convenience of consumers and to cater to the different consumer journeys that exist in these business verticals.

• Nykaa: Beauty and personal care
• Nykaa Fashion: Apparel and accessories
  

Proceed is being used for:

• Investment in certain of subsidiaries, namely, FSN Brands and / or Nykaa Fashion for funding the set-up of new retail stores.
  
• Capital expenditure to be incurred by the company and investment in certain of its subsidiaries, namely, Nykaa E-Retail, Nykaa Fashion and FSN Brands for funding the set-up of new warehouses;
  
• Repayment or prepayment, in full or in part, of certain borrowings availed by the company and one of its subsidiaries, namely, Nykaa E-Retail.
  
• Expenditure to acquire and retain customers by enhancing the visibility and awareness of company’s brands.
  
• General corporate purposes.
  

Industry overview

Accounting for 51% of the Private Final Consumption Expenditure, India’s retail market was sized at Rs 55 trillion in 2020, reflecting a CAGR of 5% over the last 4 years. This growth was enabled by the rising middle class, soaring income levels, increasing demand from Tier 3-4 cities and Rural markets, rise in youth spending, improvement in infrastructure and the entry of new Indian and global brands across the product categories. India’s retail sector was impacted by the first wave of COVID-19 in 2020, as both the supply and demand of most consumer goods were adversely affected. Even after the commencement of the lockdown re-opening phase, consumers were apprehensive about stepping out of their homes and going out for shopping. This led to a 14% decline in the retail market size in 2020. The impact of the second wave in 2021 is projected to be relatively limited, due to the localized nature of lockdowns and little disruption on the supply side. Hence, as the pandemic eases out, the retail market is expected to bounce back in the coming years to grow at a CAGR of 11% to reach approximately Rs 91 trillion by 2025.

The Beauty and Personal Care Market in India was sized at Rs 1,267 billion in 2019, growing at a CAGR of 13% in the last 3 years. Though the market fell down to Rs 1,120 billion in 2020 as a result of reduced spending during the first COVID-19 wave, it is projected to grow at a CAGR of 12% to reach Rs 1,981 billion in 2025 implying a CAGR of 7.7% from the pre-COVID-19 market in 2019. Similar to the overall retail space, India BPC is heavily dominated by the unorganized channel, which primarily includes local grocery shops and departmental stores. With Indian consumers becoming more evolved in their BPC shopping habits, share of unorganized BPC market had reduced to 72% in 2020 from 77% in 2016.

Online Beauty and Personal Care Market in India has grown at promising 60% CAGR in the last 4 years, penetrating 8% of the India Beauty and Personal Care Market in 2020. Online BPC retail platforms are effectively resolving challenges faced by both consumers and brands with the help of superior application of technology, efficient supply chain and quality control, access to a wider selection of products and brands including niche luxury brands, original content and advice from experts, door-step deliveries and wider geographic reach. Omnichannel model will be beneficial for online BPC platforms. Supplementing their online platforms with a physical retail store presence helps complete consumer experience. The touch and feel, test and try elements become crucial in certain specialized BPC categories. Offline stores play an important role in providing desired experience and help establish a stronger trust among the consumers. An Omnichannel approach helps in providing consumers with a complete shopping journey and retail experience, with consumers able to enjoy the benefits of inventory well informed by hyperlocal patterns.

Pros and strengths

One of India’s leading lifestyle focused consumer technology platform: The company is the largest Specialty Beauty and Personal Care Platform in India in terms of value of products sold in the Financial Year 2021 and the five months ended August 31, 2021, and one of the fastest growing fashion platforms in India based on growth in GMV from the Financial Year 2020 to the Financial Year 2021 and from the five months ended August 31, 2020 to the five months ended August 31, 2021. It generated Rs 40,459.8 million and Rs 14,696.1 million in GMV on its platform in the Financial Year 2021 and the three months ended June 30, 2021, respectively. Its leading position drives self-reinforcing flywheels, which further drive strong network effects. The brand affinity that it has built with its consumers, attracts them to engage on its platform, and increase in consumer traffic, increases the number of transactions on its platform. With more consumers and more transactions, it becomes imperative for more brands and more sellers to be associated with it which further increases the choice for its consumers.

Preferred destination for luxury and prestige products in India: The company has tailored specific capabilities across marketing, technology, supply chain, fulfillment, and consumer service to create a differentiated ecosystem for such brands and its consumers. It built a separate Luxe store mode within the Nykaa app for luxury and prestige products on its platform in order to present a differentiated environment to buyers of such products. Further, while its warehouses generally have segregated areas for such brands, shipments to consumers from such warehouses are also packed in premium packaging to enhance the luxury shopping experience for the consumers. In the case of certain international prestige brands, it understands that physical stores play an important role in brand building, and hence its ability to offer an integrated Omnichannel retail strategy to these brands is a key strength for it.

Proprietary technology stack: Over the years the company has invested in building its own proprietary platform, the Nykaa technology platform. It continues to evolve it keeping in mind not only today’s challenges but also factoring for future agility. Its platform architecture comprises small, maintainable, scalable building blocks following the principles of a service oriented architecture. This has enabled it to support multiple business models, execute new initiatives and make operational efficiency gains across offerings, new and existing. At the same time, the architecture retains the flexibility to customize technology requirements for individual businesses. Its data analytics capabilities powered by scalable data engineering allows it to consume a large number of data points across consumer interactions, product attributes, consumer demographics, marketing campaigns, inventory and pricing.

Founder-led company supported by a professional management team: The company’s sustainable growth in business has been achieved through its founder-led management team with relevant experience and complementary skill sets. It is led by its Founder, Executive Chairperson, Managing Director and Chief Executive Officer, Falguni Nayar, who started the business in 2012. She is driven by a desire to transform the traditional and transactional ways of lifestyle e-commerce in India. She has been the driving force in developing and growing its business. Her understanding of the consumer, intuitive entrepreneurship and involvement in key aspects of its business has helped accelerate and drive its profitable growth. Falguni is complemented by a professional management team which shares the same vision and values as hers to drive its growth.

Risks and concerns

Depends on growth of online commerce industry: Online commerce is still developing in India. Although it operate also through 80 physical stores across 40 cities in India over three different store formats as of August 31, 2021, its revenues depend substantially on the receptiveness of Indian consumers, suppliers, sellers and advertisers to the internet as a way to conduct commerce, purchase goods and services, and carry out financial transactions. For the Financial Years 2019, 2020 and 2021 and the five months ended August 31, 2021, it derived 93.2%, 91.6%, 95.7%, and 96.7%, respectively, of its GMV from online sales. For online revenue base to grow, consumers, sellers and suppliers must continue to adopt new and alternative ways of conducting commerce, purchase goods and services and exchanging information, such as through the internet and mobile devices, and it must hence effectively respond to changing user behaviour on such digital platforms.

Derive significant portion of GMV from top three categories: Although contribution of the company’s top three categories in its offering decreased from 84.9% of total Gross Merchandise Value (GMV) in Financial Year 2019 to 71.3% of total GMV in Financial Year 2021, and 60.3% of total GMV for the five months ended August 31, 2021, sale of products in these categories accounted for a significant portion of its total GMV in the last three Financial Years. In case of increased competition, pricing pressures, fluctuation in the demand or supply of products within its top three categories or other factors, its revenue from these products may decline in the future. Any adverse developments with respect to the sale of products within its top three categories could adversely affect its revenue.

Reliance on social media: The company’s marketing strategies focus on creating awareness of its platform and brand and building platform loyalty and fostering word of mouth reviews. Its strategies include engaging beauty creators, influencers and celebrities, maintaining a presence on social media platforms and within the peer-to-peer multimedia community. As of August 31, 2021, it had engaged 3,055 influencers, including Generation Z trend setters, beauty, fashion and lifestyle bloggers, makeup artists and celebrities, on whom it rely upon for its marketing and endorsement. Further, any negative commentary on social media platforms by any third party, vendors, employees or anyone else, regarding it, its products or influencers who promote its brands and other third parties who are affiliated with it may also be posted on social media platforms and may be adverse to its reputation or business.

Operate in highly competitive industry: The company’s competitors include a number of online marketplaces, retailers with physical stores, and brands that take a direct-to-consumer approach, effectively removing it from the distribution and sales process. The internet and mobile networks provide new, rapidly evolving and competitive channels for the sale of all types of goods and services. Consumers who purchase goods and services through it has other alternatives, and sellers have other channels to reach consumers. If it is unable to change its offerings in ways that reflect the changing demands of offline and online sellers and marketplaces or compete effectively with and adapt to such changes, its business, financial condition, cash flows and results of operations would be adversely affected.

Outlook

Incorporated in 2012, Nykaa is a consumer technology platform, delivering a content-led, lifestyle retail experience to consumers. The company has a diverse portfolio of beauty, personal care, and fashion products, including their own brand products manufactured by them. The company operates under 2 major verticals: Nykaa: Beauty and personal care and Nykaa Fashion: Apparel and accessories. In addition to leveraging its strengths in comprehensive merchandising, brand relationships and delivery experience, it focus on educating consumers via digital content, digital communities and tech product innovations, which is an integral component of its business model. It has developed systems and processes to ensure that the products sold on its platform are authentic, and build trust among its consumers and brands. On the concern side, the company has incurred losses in the past, including during Financial Year 2019 and Financial Year 2020, and it may incur losses in the future. It has experienced interruptions in these systems in the past, including server failures that temporarily slowed down or interfered with the performance of its mobile applications and websites, and it may experience interruptions in the future.

The issue has been offered in a price band of Rs 1085-1125 per equity share. The aggregate size of the offer is around Rs 5157.20 crore to Rs 5347.33 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 37.96% to Rs 24,526.37 million for the Financial Year 2021 from Rs 17,778.50 million for the Financial Year 2020, primarily due to an increase in revenue from operations. Its restated profit for the year increased to Rs 619.45 million for the Financial Year 2021 from a restated loss of Rs 163.40 million for the Financial Year 2020. As part of the company’s continuous efforts to offer a curated assortment of brands and products to its consumer base, the company will continue to invest in entering into new brand relationships. It aims to invest further towards expansion of its physical store network to serve more consumers across the country with its Omnichannel experience. At the same time, it seek to further leverage the synergies between the offline and online channels to create a seamless journey across touchpoints.