25 highlights
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Every prominent e-commerce venture—from the grand successes to the miserable failures—bulked up on external capital, landing them in a morass of regulations around foreign investment in e-commerce. As companies with significant foreign funding, none could technically hold inventory of what they wanted to sell, from smartphones to jeans.
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Nykaa, funded in its early years purely on money from Nayar herself, who was a long-time investment banker before, and her husband Sanjay, who was one of the biggest names in private equity, having practically built KKR & Co.’s India business from the ground up.
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For one, Nykaa will be the first woman-led tech startup to get listed on the public markets. Second, Nykaa is profitable—a feature that is as rare in the tech startup ecosystem as unicorns (startups with a valuation of or more than a billion dollars) used to be. Three, Nayar has truly built a cash-generating business in the traditional sense of the word. The company has seen phenomenal growth over the years, including a pandemic year, and has virtually no serious competitor or challenger yet.
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Nykaa stands out unlike almost any other internet startup headed for the markets. But the why of it is a lot more fascinating.
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Three points to help every investor and rival understand Nykaa better.
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- More than 50% of Nykaa is owned by the Nayar family
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The older internet companies like Info Edge, which runs online portals like Naukri.com, 99acres.com and Jeevansathi.com, or local services search engine Just Dial functioned very differently. These companies neither raised billions of dollars nor were they valued as high as the likes of Zomato or Paytm. The promoters and the promoter group at Info Edge owned 67.83% of the company before it got listed; the promoters at Just Dial owned a 37.39% stake.
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In that context, Nykaa’s shareholding is more like the older internet companies. And there are good reasons for that. For one, the Nayars come from money.
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A mix of privilege and acumen then explains how Nykaa has remained with the Nayars so far. Apart from Falguni and Sanjay, their children too are a big part of the business now.
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- Nykaa’s numbers and the pandemic
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In 2020-21, Nykaa saw a 38% increase in its total income—from Rs 1,778 crore in 2019-20 to Rs 2,452 crore—despite the constant lockdowns and uncertainty.
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In the first quarter of April to June 2020, Nykaa’s average order value touched Rs 2,092; the number was at Rs 1,435 in the January to March 2020 quarter.
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For the beauty and personal care industry at large, the average order number is anywhere between Rs 700 and Rs 1,700, with Rs 900 being a stable median, according to a second venture capital investor. Nykaa’s numbers then have taken quite a few in the sector by surprise.
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In general, the pandemic has given a massive push to the beauty and personal care sector. Most of the companies in the space have seen unprecedented growth in the months following the easing of lockdown restrictions.
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But Nykaa did something additional as well in the first two quarters of the year to keep up with pandemic-related constraints and that’s what helped boost its average order value.
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During the lockdown, Nykaa had increased its minimum order threshold as well as the threshold for free shipping; consumers had to order more to a) score a delivery and b) get free shipping.
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- Fresh issue: The exit and the future
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For Nykaa, the public listing seems largely about the exit of existing investors. And that intent is reflected in the numbers.
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What further reinforces the exit intent in Nykaa’s public listing is what these fresh funds are being earmarked for. Of the Rs 525 crore, Nykaa wants to spend Rs 200 crore to “enhance visibility and awareness” of its brands. A simpler choice of words is promotional expenses. A good Rs 130 crore will go into repayment or prepayment of loans. Just about Rs 35 crore will be the investment to set up more retail stores, and the same amount will be spent on new warehouses.
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The message is clear, Nykaa doesn’t really need the money. The pace at which it has been growing, and the sudden jump in valuation (from $1 billion in 2020 to $4 billion-$4.5 billion with the IPO) is perhaps what gives Nykaa the confidence to pull this off.
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Private labels are where beauty companies can make big money because the margins are high in cosmetics and personal care.
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A similar case took place in 2019 when L’Oreal sued Nykaa for copyright infringement; the colour combination of one of the products of the latter was similar to a L’Oreal product and, eventually, Nykaa was restrained from selling the same until the matter was disposed of.
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Nykaa knows that the growth it has seen in its core business might not be sustainable; it is bound to slow down or, perhaps, get into trouble. The latter has a lot to do with third-party brands objecting to Nykaa’s private label business.
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Beauty and personal care are where Nykaa had a first-mover advantage; everything else right now is either crowded or known for terrible economics.
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If Amazon gets serious and gets the business right, it could become a formidable rival to Nykaa.