Did not enter fashion business to justify our valuation: Nykaa CEO Falguni Nayar

A year after taking her company public, Falguni Nayar, the founder and CEO of omnichannel beauty retailer Nykaa, says the next big focus is to hit profitability in its fashion and business-to-business (B2B) units with reasonable growth rates, even as the Mumbai-based company’s shares have undergone a correction amid a broader rout in technology stocks, both globally and in India. Nayar,
who has been adjudged ‘CEO of the year’ at the Economic Times Startup Awards 2022, had raised minuscule external capital and turned in profits in a typically cash-guzzling ecommerce sector before going in for a bumper Initial Public Offering. She spoke to ET’s Samidha Sharma about the company’s journey towards a market listing, the massive swing from euphoria to caution for new-age tech stocks and Nykaa’s focus on its fashion and B2B businesses. Edited excerpts:

From being a privately held firm to a listed public entity, how has the past year been for Nykaa? You, as CEO, have seen shares swing from buoyancy to a rout now, especially for tech firms…


Markets have changed in the last one year after our IPO, and investors are asking for more accountability on near-term numbers, but we have always focussed on our unit economics and path to profitability. So, for us to explain what’s going on is not difficult. Investors tell us that Nykaa has been great about transparency and for information we share on unit economics, gross merchandise value (GMV), and Ebitda levels for beauty, fashion, and our new upcoming businesses. The last four quarters have been spent on explaining how we are investing in the future.

What is it that these investors have been telling you?


They are broadly happy with our unit economics in terms of gross margins, and costs on fulfilment and marketing are very much under control. But they want all of that to go to the bottom line which has not happened as we are investing in a post-Covid-19 environment
which showed in this quarter’s results.

You had told us last year that Nykaa was built to be a public company. Do you feel the same one year after listing?


We had a large non-promoter base – above 45% — so we had to either sell to a private equity player or list. And
going for an IPO was always better. However, if you can build a company without raising much capital with 100% ownership, obviously there are advantages to that… Being public does put you under quarterly pressures. It is like running a marathon in the long run with a sprint every quarter; makes it very hard.

Has it been stressful?


We have to go backwards in terms of delivering the right performance, explain and communicate cogently what we are doing to investors…

Also Read | Nykaa was built to have a life in the stock markets: Falguni Nayar


What do you make of the stock price, which has fallen significantly since the listing?


I think that the listing price is not what we should focus on. I get that advice from seasoned promoters and even investors. They always say that Rs 2,200 was not your doing, and if it goes to Rs 850 (pre-bonus) also it won’t be because of you. So, all we can do as a company is to keep delivering performance and build for the long run.

Note: FSN E-Commerce, which runs Nykaa, saw its shares decline 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 shares which were sold at Rs 1,125 apiece last year, were listed at Rs 2,001 on November 10, 2021.
Last week the company issued five bonus shares for every one share held
.

How do you look at the overall tech pack which was listed last year amid the bull market? What has been your learning?


Other tech companies which also went public had investments from funds that wanted liquidity, so it made sense. I look up to a lot of these professional, seasoned CEOs running large companies; they all say that adversity is the best time to build. In the
early months of Covid-19, Nykaa clocked a monthly loss of Rs 40 crore; till then we had never lost more than Rs 25 crore in a full year. We had only Rs 100 crore balance, as we never raised a lot of external capital. May (2020) was slightly better, but we were sitting on inventory. This is when we decided we will take on more inventory and do our two sale events, which was a bold decision. So, companies can’t get too scared.

Are you looking at a consumption slowdown?


Whether it is fashion or beauty, discretionary spending is actually currently strong. But due to the adverse macro environment, even if the CEO is optimistic, they recognize that while this season has been good, growth will not continue at the same pace. Fortunately,
we have gained on the back of festive and wedding season, so we have not seen 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 FMCG companies was their distribution heft, which is kept in-house. Nykaa realised that there was a proliferation of beauty brands, so we began this whole third-party distribution platform. This is a win-win for retailers and Nykaa. We are building a distribution channel which is self-serving, (has) intelligence on what is more popular in the retailer’s area, and helps new brands launch on our platform. We already have one lakh small retailers and mom-and-pop stores like pharmacies, specialised beauty stores, signed up 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 have given you that kind of rich valuation…


It was
never to justify Nykaa’s valuation. We knew that fashion was five times the TAM than beauty and the customer is the same and we know how they shop. These shoppers know that Nykaa is an on-trend brand, so we saw that they were ready to engage with us on fashion, which is why we entered that business. I think it has gone very well. We dominated beauty with 30% plus of the online beauty market, but we don’t get there in fashion. Right now, we are at 2% market share, and (if) we get to 5%, it will be a big business. We are not going for the mass market.

But competition is tough in fashion…


There are two players — Myntra and Reliance Ajio – in the market. The space had opened up five years ago and they all shut down, so when Nykaa started in the beauty space, everyone said it is not right; now everyone thinks it is a great business. There is magic in a multi-brand cart which is what works for beauty.

You have launched private labels, closed multiple acquisitions post 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 these – 20 Dresses which we acquired pre-IPO, then
we launched lingerie brand Nykd, both of which are now clocking Rs 100 crore in GMV annual revenue run rate. As for acquisitions, investment bankers keep telling us about deals but we are always carefully evaluating build versus buy decisions.