FSN E-comm (NYKAA) IPO review (May apply)

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Review By Dilip Davda on October 25, 2021

•    FSNEV is a digitally native consumer technology platform.
•    It turned the corner in FY21 with superb results despite pandemics.
•    IPO valuations are highly stretched and making it an exorbitantly priced offer.
•    Risk seekers/cash surplus investors may consider parking of funds.

PREFACE:
We have witnessed a shift in the fancy of IPOs from loss-making companies in the recent past and the best example is that of Zomato. This company too falls in that pack of unicorns as it has an e-commerce platform for fashion and personal care products. Based on financial parameters, the valuations are highly stretched and making this an expensive offer. Well managed grey market by vested interests may lure investors for listing gains, but prevailing market conditions at the time of listing will have the bearing on this exorbitantly priced offer. Its GMP which marked fancy before the formal price band announcement nosedived, is perhaps a precursor. 

ABOUT COMPANY:
FSN E-commerce Ventures Ltd. (FSNEV) popularly known as "Nykaa" 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. FSNEV has a diverse portfolio of beauty, personal care and fashion products, including owned brand products manufactured by it. As a result, the company has been established not only as a lifestyle retail platform but also as a consumer brand. It offers consumers an Omnichannel experience with an endeavour to cater to the consumers' preferences and convenience.

FSNEV's lifestyle portfolio spans beauty, personal care and fashion products. It offers these business 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, the company focuses on educating consumers via digital content, digital communities and tech-product innovations, which is an integral component of its business model.

As of August 31, 2021, it offered approximately 3.1 million SKUs from 4,078 national and international brands to our consumers across business verticals. Compared to other mature e-commerce categories, beauty and personal care and fashion have lower online penetration. FSNEV's beauty and personal care offering is extensive with 256,149 SKUs from 2,644 brands primarily across make-up, skincare, haircare, bath and body, fragrance, grooming appliances, personal care, and health and wellness categories as of August 31, 2021.

The company manufactures owned brand beauty and personal care products through third-party manufacturers contracted by it. FSNEV has entered into manufacturing agreements with several manufacturers in India, for the manufacture of such products which are sold under its owned brands such as "Nykaa Cosmetics", "Nykaa Naturals" and "Kay Beauty". The company's owned brands are available on its online and offline channels, as well as for certain brands at third party retailers.

As of August 31, 2021, Nykaa Fashion housed 1,434 brands and 2.8 million SKUs with fashion products across four consumer divisions: women, men, kids and home. Within these consumer divisions, it merchandises across several categories including western wear, Indian wear, lingerie, footwear, bags, jewellery, accessories, athleisure, home décor, bath, bed and kitchen in order to cater to the diverse consumers' journeys across the platform. It offers a mix of brands across established national brands, international brands, luxury brands, and emerging labels and designers.

ISSUE DETAILS/CAPITAL HISTORY:
To meet its requirements of funds for investment in subsidiaries (Rs. 42.00 cr.), capital expenditure (Rs. 42.00 cr.), repayment/prepayment of certain borrowings (Rs. 156.00 cr.), brand visibility and awareness (Rs. 234.00 cr.) and general corporate purpose, FSNEV is coming out with a maiden IPO for fresh equity issue worth Rs. 630.00 cr. (approx. 5600000 shares) and an offer for sale of 41972660 equity share of Re. 1 each to garner Rs. 5351.92 cr. based on its upper price band. The company has fixed a price band of Rs. 1085 to Rs. 1125 per share and the minimum application is to be made for 12 shares and in multiples thereon, thereafter. The issue opens for subscription on October 28, 2021, and will close on November 01, 2021. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 10.06% of the post issue paid-up capital of the company.  

FSNEV has reserved 250000 equity shares for its eligible employees and from the residual portion, it has allocated 75% for QIBs, 15% for HNI and 10% for the Retail category of investors. The company is offering a discount of Rs. 100 per share to eligible employees. 

Joint Book Running Lead Managers (BRLMs) to this offer are Kotak Mahindra Capital Co. Ltd., Morgan Stanley India Co. Pvt. Ltd., BofA Securities India Ltd., Citigroup Global Markets India Pvt. Ltd., ICICI Securities Ltd. and JM Financial Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.  

Having issued initial equity at par, FSNEV raised further equity in the price range of Rs. 9.74 to Rs. 605.96 between February 2020 and September 2021 (based on the face value of Re. 1 per share). It has also issued bonus shares in the ratio of 2 for 1 in July 2021. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NA, Rs. 6.31, Rs. 7.32, Rs. 8.30, Rs. 9.86, Rs. 10.95, Rs. 11.93, Rs. 15.39, Rs. 21.67, Rs. 29.70, Rs. 33.56, Rs. 56.54, Rs. 76.65 and Rs. 117.67 per share. 

Post issue, FSNEV's current paid-up equity capital of Rs.46.73 cr. will stand enhanced to Rs. 47.29 cr. post this IPO. Based on the upper price band, the company is looking for a market cap of Rs. 53204.01 cr. Thus these valuations are also stretched to a large extent. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, on a consolidated basis, FSNEV has posted revenue/ net profit (Loss) of Rs. 1116.38 cr. / Rs. - (24.54) cr. (FY19), Rs. 1777.85 cr. / Rs. - (16.34) cr. (FY20) and Rs. 2452.64 cr. / Rs. 61.95 cr. (FY21). For the first three months ended on June 30, 2021, of FY22 it has earned a net profit of Rs. 3.52 cr. on a revenue of Rs. 821.71 cr. 

For the last three fiscals, on a consolidated basis, FSNEV has posted an average EPS of Rs. 0.44 and an average RoNW of 2.82%. The issue is priced at a P/BV of 72.72 based on its NAV of Rs. 15.47 as of June 30, 2021, and at a P/BV of 40.04 based on its post-issue NAV of Rs. 28.10 per share (based on the upper cap of the price band). 

If we annualize FY22 earnings and attribute it on fully diluted post issue equity, then the asking price is at a P/E of around 377.51 making it an exorbitantly priced offer.  

DIVIDEND POLICY:
FSNEV has not declared any dividend in the last three and quarter financial year until the filing of this offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, FSNEV has claimed it has no listed peers to compare with. However, in an unlisted place, it has many competitors. 

MERCHANT BANKER'S TRACK RECORDS:
Six BRLMs associated with the offer have handled 52 public issues in the past three years, out of which 17 issues closed below the offer price on the listing date.

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