FSN E-Commerce Ventures Limited analyst Q&A

Thank you, Mr. Ganesh. We will now begin the question-and-answer session. If you would like to ask a video question, please click on the ask a question tab and separately you can also type in your questions in the textbox mentioned below the video player. Before asking the question to the management, please introduce yourself, providing your name and your organization. If possible, you may switch on your video as well. Please limit yourself to a maximum of two questions, so that we can accommodate as many as possible. Ladies and gentlemen, we will wait for a moment while the question queue assembles.

So, Michelle, are you seeing any questions.

Yes, ma'am. T he first question is from Sachin Dixit. Please accept the prompt and introduce yourself and proceed with your questions sir.

Great. So Falguni and team congrats on a decent set of results. I think we are on track to a bunch of things that we did highlight in the investor day that we conducted in June. Just one thing that I wanted to understand, particularly on Fashion side. I do understand that this was a really tough quarter for fashion businesses as such, especially online businesses in particular. But the 20% odd growth that we have achieved compared to the ambition that we guided just like 20 days back before we published the quarterly update. Those numbers are quite off, right? If you look at the 2x to 3x NSV growth in 3 years implies close to 30%, 35% odd growth, while we deliver 20%.

So I think I had pointed out at that time also, and I would like to point out that very often, the growth also happens in step function rather than it's still early days of the business and the growth sometimes happens in step function. So you are aware th at we've announced a Foot Locker Association, where we are going to represent all the Foot Locker's e -commerce demand in the country, and that launch is going to happen in October of this year. So at this early stage of business, we had cautioned that there is seasonality to the business. And also, there is a step function improvement in business that happens due to initiatives that are being taken periodically. So I mean I had caution that this business is not mature enough to assume that, that is what it will translate to as heavy quarter growth.

Yes, I think just to add one statement I think this quarter, even last year, we have noticed a lower growth, basically Indian wear like it is a big category. So there was an expectation that this quarter might be a little lower, but the other quarters as I ndian wear picks up, even last year, as you'll go back to the last 4 quarters, had good growth.

My second question is quickly on Nykaa Man. I do understand that we have merged the pieces of it within Fashion and Beauty . Is it really gaining any traction? Are we seeing sustainable business being achieved there?

Sorry, can you repeat your question?

On Nykaa Man, because we have a separate platform , can you talk about what traction we are getting there? I mean, we haven't heard anything happening in particular on that piece.

So we are happy with the progress on Nykaa Man. We always wanted to grow it in the right manner in terms of, we do believe that if platforms are patient about the growth, you get the right customer acquisition and continue to grow. But yes, we've seen good traction in the Nykaa Man growth.

The next question is from Kapil. Please accept the prompt, introduce yourself and proceed with the questions.

This is Kapil from Nomura. I was just noticing the trend of margins, and we are seeing good improvement in margins across verticals like Fashion and also the Superstore segment. And the Beauty segment has been operating more in a range. So how should we th ink about it going forward? Will it be that Beauty will operate more in a range with modest improvements and bulk of the margin improvement has to come from Fashion and other segments starting to turn around? Is that the way to think about it? What will be the drivers for Beauty business margins? These are the questions.

I think because it's a new way of reporting , I think one of the expectations everybody had was on EBITDA and we can't gave a lot of segments in the EBITDA reporting. So I think it's a new way of reporting, so let it settle down and rather than read too much into what the margin improvement is. I would just like to caution that, yes, Fashion gross profit margin looked very good, but there are quarter-on-quarter differences. And I would say that some of it is definitely noncore. So I won't read too much into it. Similarly, on the Beauty side also, it's been at a good level. And I think in the presentation, you saw that in Nykaa D, I think they are consciously trying to improve the gross profit margin based on selection of the right brands and right choices being made with a clear conscious to improve the net retention margin. So I wouldn't read too much into it. I think margins are not a problem, but I won't also read into a huge amount of improvement. But yes, there's some improvement in Fashion margins were this improvement reflects both some core and some noncore. I mean, ma rgins are not noncore, but the comparison is noncore because there could be some adversity in the base also.

Sure. So can you talk about what can be the margin drivers for particularly Beauty business from here?

Yes. Maybe would you like me to comment.

Yes, Anchit.

Yes. So I think as we have mentioned earlier, the Beauty business now from a vertical reporting perspective consists of four different types of businesses. One is beauty.com, the second is beauty retail. The third is Nykaa's B2B superstore business and the fourth is owned brands, right. So each business has its own respective drivers for improvement in margins. If I look at the beauty.com business, which is at least in terms of share of revenue mix to this vertical is the most significant. That business, as we've said in the past, is already in a very, very healthy place from a margin profile perspective, both at the gross margin level but even all the way down to contribution margin and EBITDA margin. So that business is in a very healthy place. That what are some potential levers to improve the margin profile on that side is as we've said in the past, if our own ed brands continue to do well and if they grow faster than the growth of the platform and they take a larger share of total business, then that should have a positive impact on the gross margin profile. Secondly, we've been working on a lot of ad formats for our ad platform. As you know, we collect services income, and we're working on multiple new ad format initiatives. So there is a potential for them also to improve the services income and therefore the gross margin. Finally, there is operating leverage that will kick in because a lot of the costs, especially on employees is fixed, and also, we feel our marketing expenses are in a good place. So I think depends on the business within the vertical. So beauty.com I spoke about. If I look at own ed brands, of course, that business is a strong business from a gross margin perspective. So it just needs to keep growing and growing faster than the overall platform. And finally, the biggest lever, of course, will be now Nykaa has Superstore business like, Nykaa D which now sits within the beauty vertical. And that's where we see the potential for the largest improvement in margins, which Vishal covered in his presentation. Yes, so the most meaningful improvement in margins is most likely to come from the youngest business, which is still in growth phase, which is the B2B business. However, since currently, it's a small percentage of total revenue to the beauty vertical, the most outsized impact on the beauty vertical in terms of margin will continue to come from the beauty.com and beauty retail businesses.

The next question is from Vijit Jain. Please accept the prompt on your screen, introduce yourself and proceed with your questions.

My first question is just for comparison, so just wondering in the Beauty business, what the contribution margins would have been like in the earlier reporting. I mean, there's a 20-bps odd Y-o-Y decline in EBITDA margins and contribution margins also down 150, I imagine most of it has to do with B2B, right, because B2B is obviously growing faster than B2C. That's my first question. Just for comparison's sake, what would it have been?

No, I think we gave all of the past comparison, and I think we can't keep giving this , but you should also know that we have consciously improved the marketing expenses for Beauty business as evident in the new customer acquisition and growth. And yes, there are some elements like fulfillment expenses going up is partly due to B2B, but because see, it's already in the base, right? So even the quarter 1 FY24 is restated. So, it's the weightage that is going up. So, the weightage of B2B business is not that significant yet. But also, we talked about express delivery that we are now focusing on a same -day, next-day delivery. It doesn't increase the cost massively, but yes, some choices are being made about how we send our parcels in a way that the delivery is faster. So I think I would say it's a mix. I wouldn't read too much into it. But overall everything individually is improving.

Vijit, if you just look at our core results from last quarter, I mean, that will tell you what the contribution margin was for the Beauty business, excluding the B2B business. So what I can tell you directionally is that it hasn't changed. The contribution margin for the vertical, excluding the B2B business hasn't changed meaningfully since last quarter at all. So what you're seeing here is because of what we've now added to this vertical.

Also, I'd like to add that we have shared the comparative numbers as per the new definition for the last 4 quarters in the investor deck in the annexure. So when you look at that, that will give you a good idea.

And my next question is just looking at the house of brands slide, right, on both beauty and fashion. So beauty is obviously growing very well on the house of brands side, 47% Y -o-Y, whereas fashion is down a little bit. So, a, my question is, is fashion down mainly because of the Indian wear the point you mentioned earlier on and the innerwear is doing relatively better. So we should read into it in that context. And within the beauty, the 47% Y -o-Y and the channel mix overall for the BPC business, just looking at the Y-o-Y chart looks a little interesting. So if you could explain what is happening there? I mean, I can see the Nykaa stores, for example, is down meaningfully in terms of channel mix for owned brands. and others is meaningfully up. So, I'm just trying to get a sense of really what is happening there for the owned brand part.

So, on Nykaa is a complex company now, and you can't read so much into it because, honestly, like there's a lot of weightage of Dot & Key, which doesn't have a larger presentation in our stores. We are just starting to roll out Dot & Key in our store in a meaningful way. So some of the mix is affected by that. I think on the Beauty consciously, like Dot & Key also sold on other platforms and some weightage of other platform comes through that. GT/MT clearly is a conscious strategy to continue to grow it because we believe that once brand reaches a certain size and scale, they need to grow beyond Nykaa's own platform. And we now have three brands that have reached a certain size and scale. So say Kay Beauty is now increasingly going into GT/MT. So I think it's a mix of many things. So I think reading the relative importance of channels from the slide is not what can tell you what exactly is going on and because there are quite a few brands. Talking about the fashion brand, definitely, you're right, the lingerie brand is doing well on most of the channels. But besides Indian wear, I mean, ethnic wear brands, I think the western wear brand in Fashion has had a tough quarter, but we do believe that it will be revised, and it will grow from there. And the quarter was tough due to two elements, mainly on third-party platform where it has been listed on Myntra few other platforms. We didn't perform as well. But on Nykaa platform, it did well.

And just I wanted to add, sorry, on the Beauty brand side is we have to just sort of keep in mind that this is a mix and it's not indicative that any particular channel is degrowing, right? So let's make sure we understand that all the beauty on brands are growing across all the channels. It just might happen to be that, for example, others, it's coming off of a smaller base, right? So maybe the growth is higher relative to the growth for our own ed brands on Nykaa's own platform where their share is already high. So it's also a factor of coming off of a small base, and therefore, showing a much higher growth relative to some of the more established channels. But all the channels are growing for the owned brands.

It's difficult to give the details here, but I think maybe you can contact our team.

Thanks, Falguni. Those were my questions.

The next question is from the line of Latika Chopra. Please accept the prompt on your screen, introduce yourself and proceed with the questions.

I'm Latika from JP Morgan. Two questions from my side. The first one was on your initiative to cut down the delivery time and around the express delivery. I wanted to understand what is driving this push? Are you sensing any changes in the Beauty retail landscape, which is motivating you to go for faster delivery ? And the second part is, is there any considerable cost that is going to be associated with the same? The second question was on your eB2B business. If you could give us some colour on what are the top product categories that are selling under this business. And there was also a packaging cost reduction that you mentioned on one of the slides. What is exactly driving that?

Yes, you want to go Anchit.

Maybe I'll kick it off. If you bought the previous slide on O2D, so I think Latika, the reality is that when we build a business in the e-commerce space, there are only three things that matter. One is at least in our mind, that's curation, its convenience, and its content, and a big part of convenience is the speed with which we can deliver to our consumers. So it's always been a priority to us. And as you know, we've spoken many times over the past 2 years that we took this up as a bigger project coming out of the pandemic because, of course, there was an accelerated adoption of e -commerce during COVID, and c oming out of that, we wanted to capitalize on that demand. And so we realized that it was very important to be very competitive from a speed, and therefore, convenience point of view. And that's the investment which we've now made over the past 3 years. So it's not a new investment. It's not something which we're picking up now. We're kind of sharing with you the culmination of the past 3 years of work, which you've done in terms of expanding our warehouse capabilities and capacity, but also equally importantly improving our supply chain, both from a forecasting as well as from a hygiene perspective. So I think a lot of work has been done over the past 3 years. And because we now have something which we feel is very much worth sharing. That's why we shared the results of it today, but this is not something that has happened overnight. It's been somethi ng we've worked out for many years. So to answer your question, no near-term figure. It's been something we've worked on for a long time and you're now seeing the results. I hope that answers your question.

Yes. I think you've seen, I mean, over the past 2, 3 years, you've seen the amount we've invested behind expansion of warehouse capacity, right? So that was probably a decent amount of the cost, at least from a capex point of view. Going forward, I mean, as we continue to expand on this commitment to deliver same -day and next-day within the major metros and the top 100 plus cities. I think there is some amount of cost that might come into the picture on the last -mile fulfillment, but I don't think it should be very meaningful. So I do believe a lot of the heavy lifting is now behind us.

Yes. No. What I'd like to add is that, honestly, while there were investments and costs, but I think on unit economics, the whole project is self-supporting because what gets added as a cost gets saved through last -mile delivery in certain cases, it gives savings to some other areas. So net-net, it's not expensive to do this from a unit economics perspective.

Coming to eB2B. I think your first question on packaging cost. See, we have a very, I must admit frugal mindset when it comes to costs. So , what we have been driving for last, I think, 6 - 7 quarters is that a lot of our outer packaging, we are reusing recycling materials for the brand boxes. So that really reduces our cost quite a bit.

And any flavour on what are the top products or categories for this business?

Yes. So see, we obviously play in the BPC category. And more or less, it's in line with the kind of the market which is there in the GT environment. So categories like hair, personal wash are bigger than some other categories. But equally, because of the n ature of our service categories like makeup, all the smaller in size but are bigger relative to the market size. So bigger with us relative to the market.

So, we have quite a well, fragrances also, so you have a well-distributed business.

That's right. And fragrances are one of the fastest-growing category.

Skin also. So it's pretty balanced.

The next question is from Harit Kapoor. Please accept the prompt, introduce yourself and please proceed with the questions.

I just had two questions. One was on the BPC side. Yes. So my question was on the BPC side. So, if I just do a revenue minus NSV kind of quick calculation, it seems like the advertising income seems to have picked up in BPC this quarter. I might be wrong, but that's my assumption basis that calculation. And given that from here on some of the discounting-led issues, which we were speaking about last year starts to come in the base. I was just wondering, are these two likely gross margin triggers for the online BPC piece going forward over the next few quarters?

Yes. I think you're right. Although there's more than just sorry, more than just services income that sits between NSV and revenue. But yes, I mean, as we said in the past, there was definitely some softness in services income over the past couple of quarters because of external challenges, especially the D2C brands were having a difficult time with funding, and there was a big focus on profitability. But I think all of the brands have realized that if you do not spend on advertising on a platform like Nykaa, the growth becomes very hard to come by. So that's where we're seeing a re - emergence of a lot of these D2C and younger brands who are now back to becoming more active in terms of marketing on the platform. And so that's a positive trend, which we think should strengthen as we get into the second half of the year, which tends to be where most of the festive occasions are and a lot of the seasonal, and festive shopping for this category will occur. So, I would say we're optimistic for the second half of the year on the services income piece. And that should be a driver of improvement in gross margins as well. And to your point, the discounting has been there because of the soft consumer demand across discretionary categories. So again, it's a lot of that moderation in discounting will happen if the demand does revive as people are expecting it to in the second half of the year. So, as you know, it's meant to be a busy Q3, Q4 with lots of auspicious dates and lots of festivals. And I think a lot of retailers and consumer companies are bidding on a revival in demand and so are we. And I think if that happens, you will see the discount ing should moderate, and that should, again, help reduce the buildup.

Thanks for that. I just had one more on the marketing and advertising side. So you have explained the increase in the marketing spend being driven by the intent to kind of drive new customer acquisition. Shouldn't we expect this kind of uptick to sustain on your expenses given the fact that the medium- to long-term strategy is to kind of drive revenue growth at a faster basis. Is that the right way to think about it?

You're referring to the Beauty segment marketing.

Yes, just Beauty.

Beauty marketing expense also is a combination of beauty.com as well as beauty private label brands. Marketing doesn't include anything for Nykaa D because they don't spend on marketing. So it's a combination of two thing s. We clearly do see ability to continue to grow our beauty private label brands and some more marketing investment will go there consciously not because we have to do it. We just feel it's the right thing to do. Similarly, on the e-commerce side, also, we definitely want to increase the acquisition in terms of new customer acquisition.

Yes. But I think that being said, because we're offering at such a large scale here that even if we were to meaningfully increase the ad, the marketing spend in dollar terms. It wouldn't be a commensurate increase in terms of as a percent of sales. So even this past quarter, where we had the highest customer acquisition quarter we've had in a long, maybe ever, yet you see that the increase in marketing spend is about 60 basis points. So I think you'll see it be range bound. Yes, we want to continue to acquire new customers, and we want to continue to build own ed brands. So there is some amount of marketing that will continue to be done, but I don't think you'll see it move in a very volatile fashion or by a large magnitude of it will be pretty much range bound. I think somewhere around the 8.5% to 9.0%.

The next question is from Karan Taurani. Please accept the prompt on your screen, introduce yourself and proceed with the questions.

Yes. So my question was on the margin side. You mentioned that 8.5% - 9.0% is what you should see in terms of sustenance for the BPC business. Now the major levers, right? And one is in terms of ad revenue, seeing traction. Second is in terms of going you going for lower lead times and they're probably improving in terms of cus tomer experience. And third, of course, lower losses in the B2B business side and also private label. So despite having so many levers and also discounts moderating from year on going year, as we indicated. So despite having so many levers, what makes it that you are confident of improvement in terms of margins for the BPC segment?

No. So, I don't think I guided to 8.5% - 9.0% EBITDA margins. I said that marketing expense will most likely be range bound at around 8.5% - 9.0%. In terms of EBITDA margin, I think you summarized it well. There are many opportunities for us to continue to improve the margin. But again, I just want to go back to what I said earlier, which is the Beauty segment here from a vertical reporting perspective, consists of four different businesses. The e -commerce business, yes, it does have some levers for us to improve the margins, but we already feel like it's operating in a very, very healthy EBITDA margin. And whatever improvements we do manage to get, we want to continue t o invest behind customer acquisition as well as customer retention. So that's on the beauty.com side. Obviously, on the B2B side, where there is the largest magnitude of improvement in margins possible. However, because its revenue is still very small compared to the multi -brand retail channel. Whatever improvement happens in profitability will not be able to move the needle meaningfully at the segment level. But at an individual business unit level, B2B will have meaningful improvements in profitability. And even though beauty.com has a potential to improve from here, it's just already in such a healthy place that we want to reinvest those savings into continued growth. And I think it's reflecting the fact that we're delivering 28% growth on GMV for beauty and personal care off a very large base in a discretionary category that has had a very muted quarter in the past 3 months. And I'm sure you follow results from all the various FMCG and retailer names. So it should not come as a surprise to you. So I think in a difficult environment, we delivered market meeting growth in large part because we continue to invest behind that growth. And that will continue to be the focus for the beauty.com business in the coming quarters.

Right. So the second is a follow -up on the same thing. So let's say, if the beauty.com margins are similar and you plan to invest behind customer acquisition, can growth rates accelerate beyond 25% - 28% in the BPC business?

See, I think Karan, I think most of your hunches are correct. All we saying is we don't want to guide for anything very incremental. But I think we are very sure that each of our business margins are great or they are improving. The mix obviously determines the one Nykaa numbers. And yes, the B2B business, which is a very fast -growing business with improving margin structure, but overall EBITDA margin of their business is negative, right now. But I think it's not going to usually pull it down because the bigger businesses are all turning better on EBITDA margin, including the private label beauty business. So Beauty's private label business, Beauty's dot -com business is in a good place with tendency towards improvement in margins with B2B as a mix pulling down the margin, and it will settle somewhere. And also, in terms of customer acquisition, the venue actually go for an accelerated customer acquisition, obviously, the benefit of that because all our customers buy 3.5x in a year, that's the average, right? So it does give you long -term benefits. So it gives you benefit not just in that quarter, but also in quarters ahead. So overall, I think we do feel the business is in a good place now. And a lot of correction we needed to do are behind us.

So basically, in terms of cost moderation, one could either see a margin expansion or the growth acceleration over the medium term as a part of supply chain. Is that a fair understanding?

Yes. And also the benefit of other expenses going down also comes because of scale, allowing us a little bit of more leeway to improve some other areas that we may not have done. Like we've not done any kind of large brand building activity for a long time . So we may periodically do something. I'm not guiding towards any large spend. But I'm just saying that the way things are in, it gives us ability to invest for the future.

Ladies and gentlemen, that was the last question we can take today. You may reach out to Nykaa's Investor Relations team for any additional queries. I would now like to hand the conference over to Ms. Falguni Nayar for closing comments. Over to you, ma'am.

Thank you, ma'am.