Why Nykaa Share Price is Falling

Rising interest rates, geopolitical tensions, and record inflation numbers have spooked equity markets. Stocks across the globe, have corrected sharply.

New age tech companies have been hammered a lot more than other stocks. These are the same set of stocks that soared high when the market was in an upbeat mood.

Last year, the wave of tech IPOs latched on to one trend - Platform as a Service (PAAS). Nykaa, Zomato or Paytm, platform businesses, despite losses, saw huge interest from investors because of size of the opportunity.

These stocks were already trading at crazy valuations, long due for a correction. What kept them buoyant was all the optimism around them.

Investors gradually started to lose faith in India's new-generation tech firms and the listed start-ups crashed on the bourses.

Nykaa was no exception. The stock continues to fall, hitting new lows every passing day.

Apart from market volatility, what other factors are pushing down Nykaa's share price? Let's find out...

#1 Rising inflation

Whenever inflation is on the rise, a layman will tax his spending, and history is evidence of that. He will spend each rupee cautiously. His priorities will be to meet the necessities, and any expense he can postpone, will be postponed.

Companies in the consumer discretionary sector feel the heat of rising inflation. The consumer will discretion to not spend their money on the products of these companies. Nykaa is a consumer discretionary company that is feeling the heat of rising inflation.

The company recently said that the current inflationary pressures will affect consumer discretionary spends in the near term.

#2 Rising interest rates

Central banks over the world have been raising interest rates to control rising inflation. This has created a major problem for growth stocks like Nykaa.

All growth stocks like Paytm, Zomato, etc, have been under pressure because of rising interest rates.

Growth stocks have placed a high bet for the future. Their present results may not show high returns but they have big plans for the future.

Growth stocks are those spending big right now in order to get the benefits in the future. These companies may or may not be profitable now but hope to become so at some point down the line.

Hence, their future cash flows are expected to be quite huge. But as interest rates rise, these cash flows are discounted at higher rates. Resultantly, the valuations of growth stocks fall.

When valuations fall investors tend to move away from these stocks and hence share price falls.

#3 Diversification strategy taking a toll?

Nykaa is slowly spreading its wings into different sectors as it grows. From beauty care products it is moving into fashion and other sectors.

For example, in September 2022 it launched NykaaMan. It also moved from B2C to the B2B segment with the launch of Nykaa Super Store.

Any sort of changes that result in temporary losses or reduction in profits is not taken well by the markets.

For example, remember how ITC underperformed for years, basically moving nowhere for nearly years. One reason behind this underperformance was ITC management's capital allocation strategy for its investments in the low-margin FMCG and capital-intensive hotels segments.

In case of Nykaa, it appears its diversification strategy has also met the same fate.

The fashion industry is a competition-intensive industry. Hence setting up a name in fashion will be no cakewalk for Nykaa.

For the financial year ended 2022, Nykaa's fashion segment had already reported losses. On top of this, introducing NykaaMan - India's first multi-brand e-commerce store dedicated to men's grooming - might further increase the losses.

Cumulatively, all these worries have pushed investors away from Nykaa.

Recent Developments: Nykaa Approves Bonus Issue

Bonus shares do not deliver any additional value to shareholders, even though the perception is different.

As bonus shares provide investors with additional shares, this increases the issued capital of the company making it more affordable to the investors.

Nykaa recently announced its plan to issue bonus shares to shareholders on 3 October 2022. The bonus ratio is fixed at 5:1.

Investors holding one share of Nykaa will be entitled to five shares of the company during the bonus issue.

The firm has fixed Thursday, 3 November 2022, as the record date for the purpose of determining members eligible for bonus equity shares.

Shareholders received some relief as shares had rallied over 10% on the day of bonus announcement.

Investment Takeaway

Murphy's Law is quite popular. He said, "Anything that can go wrong, will go wrong".

This law perfectly explains the plight of Nykaa's share price. Currently, Nykaa is surrounded by turbulent waters.

Despite having a strong niche and big-ticket products, there are valid concerns about its growth in the current scenario.

However, the company is well-positioned to capture the opportunity generated by future growth opportunities.

In the long run, the company stands to be a big beneficiary given its established market position, and a wide product portfolio.

Since we're on the subject of Nykaa, check out the below video where chartist Brijesh discusses what the technical analysis says for stocks like Nykaa, Zomato and Paytm.

About Nykaa

Nykaa is an Indian e-commerce company, founded by Falguni Nayar in 2012 and headquartered in Mumbai. It sells beauty, wellness, and fashion products across websites, mobile apps and 100+ offline stores. In 2020, it became the first Indian unicorn startup headed by a woman.

Nykaa sells products which are manufactured in India as well as internationally. In 2015, the company expanded from online-only to an Omni channel model and began selling products apart from beauty. As of 2020, it retailed over 2,000 brands and 200,000 products across its platforms.

To know more about the company, refer to its factsheet and quarterly results.

You can also compare Nykaa with its peers:

Nykaa vs Paytm

Nykaa vs Zomato

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