FSN E-Commerce Ventures Limited analyst Q&A

Thank you very much, Ganesh. The first question is from Sachin Dixit from JM Financial. Please accept the prompt, unmute yourself and proceed with your question.

Congrats on a great set of results again. My first question was on Fashion. So, on Fashion side, basically, when we were doing Investor Day, it was tough to envisage such a recovery in terms of top line as well as improvement in the losses that we are delivering on. So, congratulations, first of all. Secondly, the question being, first is how sustainable is this trajectory, both on bottom line and top line? And on the same piece, how much of the delivery that we have seen in H1, will you give credit to Nykaa specific or Nykaa Fashion-specific initiatives that the company has taken? Or if there is any improvement in market environment as well that is helping?

Thanks for the question. On the first part, like I said, I think we look at the intrinsics of the business from our side and try to keep improving the underlying intrinsics which determine the success of the business or not. And for a marketplace business, I think the core is the assortment that we have and the user funnel that we have. Are we able to add the right assortment? Are we able to work with brand partners to deliver growth both for them as well as for us? And then are we able to attract the right quality of customers and provide them an experience with which they decide to come back to the platform. So, on both aspects, I think the intrinsics give us confidence that structurally, we are on the right path as far as the future also goes. I hope that answers the first part of the question. On the second one, it is indeed true that there seems to be in the broader market also more positive signs compared to last year in the first half of this year. And that obviously plays a role in how our business is also performing. But I feel confident that we have delivered faster than or rather significantly faster than market growth in the first half of the year. And with significantly better and continuously better intrinsics, I think that should continue to be the case going forward also. So, I don't think it's a first half phenomenon alone. With the right intrinsics, we are optimistic about what is to come as well.

Sounds good, Abhijeet. My second question is for Anchit. On Nykaa Now basically, right , so the plan earlier used to be that we'll focus more on personal care side while also looking to deliver in 30 minutes to 2 hours. Over the call today, I think it was mentioned that luxury SKUs are also being distributed and the fastest delivery was in 7 minutes. So just to understand, is there any change in the strategy there? Are we thinking of becoming faster or trying to do more than what was earlier planned? Thank you.

Yes. So, thanks, Sachin, for the question. No, I think just to clarify doubts, we believe that Nykaa Now will allow Nykaa to have a bigger share of the pie within personal care, which has historically been a lot more fragmented amongst ourselves as well as the other horizontal platforms and quick commerce players, whereas Beauty was always an area where we had very dominant market share. So Nykaa Now was one of the aftereffects of Nykaa Now was that we would build share in personal care as well, which is happening. We are seeing customer penetration of certain products, which are personal care products like shampoos and conditioners and body wash increasing on our platform and growing very healthily, which means that people are now looking at Nykaa not only as a beauty destination, but also as a personal care destination. But that was not the only objective. The other objective was also to allow customers to have access to the beauty assortment with quicker delivery. And that's really what Nykaa Now has enabled. I think one thing we did not foresee in the early days was that we would have the ability to even sell luxury products by enabling our retail stores to become hyperlocal delivery hubs for luxury. But if we realize that we can do it and we can do it in a cost -effective manner, so why should we not allow customers to also get access to the best luxury products with quick delivery speeds. So, both are working well. We're seeing Nykaa Now working well for both our expansion of market share and our customer penetration in personal care categories as well as the ability to deliver in the top 7 cities with 1 or 2-hour delivery speeds, even beauty products all the way from mass to luxury.

A quick follow-up on this. This 7 minutes, I think, seems like a pick and drop delivery properly. So, are you getting into a pure -play pick and drop model as well? Or all the plan is to stick to what we planned earlier?

I'm not sure what you mean by, our quick commerce is very much , we have 53 Rapid stores across 7 cities. So if you live within a certain vicinity of one of our Rapid stores, the order is dispatched quite with speed. And so, 7 minutes is an example of how quickly we are able to do it. But I think most of the Nykaa Now orders are being processed and being delivered anywhere from 30 minutes to 70 or 75 minutes.

Fair enough. Thank you and all the best.

Thank you. The next question is from Kapil Singh from Nomura. Please go ahead. Please accept the prompt, unmute yourself and proceed.

So, thanks for the opportunity and congratulations on a very good performance for the quarter. This quarter had a couple of disruptions or I would say, on account of GST, firstly, we saw there were certain changes. So, I would like you to just call out the impact across businesses that you see on account of the GST changes, if at all. Second is that the festive season came in a bit earlier. So just your thoughts if that had any significant impact on the performance for the quarter. And then secondly, just on the operating leverage for your beauty business, we see that fulfilment costs, marketing costs, etcetera, have been ballpark, I would say, in the same range, but not see much operating leverage. So how to think about the operatin g leverage in both the businesses going ahead?

Sorry, I think there will be confusion in such a mixed question. So, I think I'll take some parts of it. I think from the operating leverage perspective, you are seeing a fair amount of operating leverage come in on both beauty as well as fashion vertical. I think on Beauty, clearly, there are, beauty vertical is a mix of combination of omnichannel beauty business along with our owned beauty brands, which are now contributing a reasonable amount and eB2B business. So, there is also a mix impact. But overall trend that each of the businesses are increasing their EBITDA margins and working on a path to improve the EBITDA margin and then the final numbers here reflect a combination of those. Within that, I think in fashion, own brands, clearly, there was a little bit of a drag over the last couple of quarters. And as said, it was not very heavy this quarter, but in some of the earlier quarters, but even this quarter is deprived of growth of fashion owned brands as well as their profitability. So, there are improvements clearly visible on the fashion journey, both on fashion.com as well as fashion owned brands. And on Beauty, also, like we do believe that a little bit of improvement can come through leverage.

Maybe I can add, if helpful. But I think, again, let's remember the beauty vertical is a combination of 3 or 4 very different businesses. And sometimes what you're saying in terms of the margins, I think in each of the individual businesses that make up the beauty vertical, you are seeing, you are seeing some operating leverage. You are seeing an improvement in margins. But again, because some of the younger businesses like eB2B continue to grow faster than the core retailer business that we have, they start to account for a larger percent of the overall mix. So, I think some of it is mix. But also, as we said in our opening remarks, we are investing. We continue to believe in the opportunity to drive further penetration of beauty in India given it's globally some of the lowest penetration rates in the world. So that journey continues, and we continue to invest behind growth. We continue to invest behind customer acquisition. So even the efficiencies we are able to derive from fulfilment and marketing, we are reinvesting that. So, I think a quarter in which we have taken on a new brand ambassador, which is Deepika Padukone and we have spent behind brand building and we have spent behind marketing in terms of customer acquisition. And we have also invested behind rapid stores and quicker delivery to keep fulfilment and marketing in the similar ballpark, I think, still is a very positive outcome. So that's the question on operating leverage. And I think fashion has definitely seen meaningful operating leverage, as you can see from the improvement in EBITDA margin. In terms of GST, what I'll say is the GST impact, I think the GST changes were more around personal care products than beauty. There wasn't too much impact on beauty categories and beauty SKUs. So , Personal Care did see some relief on GST, and that has translated in some better Personal Care sales. But otherwise, I would say that it hasn't really affected the core of our business, which is beauty.

Just to add to what Anchit said, when we look at the overall business, the impact on GMV is less than 1%. And because taxes are netted off by the time you get to NSV, there is no impact beyond that. And there is no impact again on profitability because it is pass-through.

Yes. No, I understand that. I mean my question was more also on the growth.

I think you're asking about deflationary impact of GST. It is small in our business. But yes, on eB2B business, there was some amount of deflationary impact on their ASP and AOV but because in our beauty.com business, a lot more weightage for premium products and a lot more weightage for beauty products, I don't think it was very significant. And in fashion, some adversity at high end, but some benefit at the low end on demand pickup.

Plus as well as minus. And as Vishal mentioned, in superstore, yes, about 40% to 50% of the volumes were impacted. Because Superstore is a relatively small portion of the business, when you look at a one Nykaa, the volumes which are impacted was about 8%.

Yes. No, what I was trying to understand is, is there a longer -term impact of this on the growth of particularly any of these businesses or not really, particularly fashion business, for example, do you see any impact?

We don't see a major long-term impact. Some minor benefits, some minor near-term adversity. So that's what it was.

And on the early festive, if there was anything to call out there in terms of , is it significant? Do you think or -- because usually, our second half is stronger, particularly the third quarter. Can we expect the same trajectory this time as well?

Definitely for Beauty, we think our third quarter will be strong because of Nykaa, Pink Friday sale and also Nykaaland that’s happening now. I think on fashion, we did see some benefit of Diwali because Diwali is more of a fashion purchase. So, we did see that benefit. But we think the momentum will continue this quarter, hopefully.

Thank you, so much and best wishes.

Thank you. The next question is from Aditya Soman from CLSA. Please accept the prompt on your screen and proceed with your question.

So, two questions. Firstly, you indicated that Kay Beauty has done well overseas in London, you indicated that. So, can you explain a little bit more about the opportunity for Nykaa owned brands overseas and how you're looking to expand that? And second question on the sort of arrangement with H&M, will this also include sort of sales in physical stores or it's purely a sort of online arrangement? And how , if there will be a difference in pricing between what's available in their stores and what's available online and a difference in assortment?

Alright. So, I'll comment first on the U.K. opportunity. So, we're definitely going to double down on the U.K. and within that the Space NK partnership. And I feel that every geography requires a lot of attention and focus and bringing the right level of passion and energy to build that brand in that region. So, I think while the response has shown us that there is a lot of potential internationally for Kay and possibly even for a couple of our other brands, we'll sort of be doing it in a measured manner and picking geographies one by one and picking the right retailer partners within it , rather than going for a very wide distribution.

This is just for the brands. It has nothing to do with the platform.

Understand. And then maybe one more follow -up on this. In terms of the salience, what proportion of the owned brand products is now coming from outside of the platform?

So, at a consolidated level across the beauty brands, about 44% is coming from outside of the Nykaa ecosystem.

But I think this includes GT, MT also. It's not all just offline. It's not just third-party e-com. It's a combination of GT, MT distribution. It's a combination of other stores, if at all, and then also other platforms.

Yes. And a large part of that 44% is actually GT, MT.

Clear. Thanks.

So, I'll take the second question on H&M. So, it is an online partnership across their fashion portfolio and the recently launched H&M Beauty portfolio. It will not be retailing in our offline stores, if that was the question, Aditya. I'm not sure if that was the question. So the scope is online. Was that your question? Hope I got that right.

Yes, yes. That was the question. And the other bit was just in terms of pricing and assortment, if that differs from what they have in their stores.

Yes. So, the assortment will be the entire assortment that H&M has for India across categories, across fashion, beauty, kids, home, the entire assortment. Generally, for brands of that size, we work very closely with brands to ensure that not just availability, pr icing is also on parity with whatever it is on their own D2C platforms or offline. So, we'll be working very closely with H&M on that piece. So, pricing will also be by and large on parity.

Thank you. That’s very clear. Thanks.

Thank you. The next question is from Vijit Jain from Citi. Please accept the prompt on your screen and proceed with your question.

Thank you for the opportunity. I have just one question. Could you give a broad sense of what is fragrance now in your overall mix? And I see that you've added 19 stores in 2Q. This is in the beauty side faster than you've done in the last few quarters and 8 new cities as well. So, I'm just wondering, specifically on the fragrance side, is that sizable enough of a category in its own right for you, especially also on the store expansion plan side? Yes, that's my question.

Yes. So, fragrance, and I think I mentioned in the past is one of our fastest -growing categories consistently every quarter. globally, you're seeing fragrance as being the category which Gen Z is really, really adopting. And you're seeing the same thing in India. So, I think fragrance is going to be a big driver of growth for beauty globally as well as in India and same applies to us. So, we are focused on it. In the past, we've spoken with you about all the initiatives we're taking around building awareness and driving education for fragrance usage amongst consumers in India, which historically fragrance has not been part of daily life for Indian consumers. So really bringing about that habit forming change is something which we're working on leveraging all of our digital and non-digital channels. Fragrance is also a big part of our retail stores because really the ability to test and smell a fragrance can only be done in physical retail. And so that fragrance is one of the three main pillars in our retail stores as well. So, fragrance is one of, if not the fastest-growing category on the platform, a big part of our retail store network, a high ASP item, very, very good for average order values and ticket sizes. So, it's a great category. We're definitely very behind it. And it continues to grow from strength to strength. And we're not talking about it in this particular analyst call, but we are about to open a fragrance-only store called Nykaa Perfumery . So, you will start to see some of those stores popping up across several key metros in the coming months.

Thanks Anchit and best of luck with that new initiative. Any broad sense on where you think fragrance could be in your overall GMV mix, right now or if you prefer where you want it to be in a few years' time?

So, the great thing about selling fragrance is that it doesn't cannibalize existing makeup and skin care sales, right? It's not either/or, it's very much additive. So, our ambition is just to continue to drive penetration of basket through fragrance, so making sure people are already shopping makeup and skin care , start buying fragrances as well. But the reality is we want each of our categories to grow as fast as they possibly can. And so how the mix shakes out in the near term, we're not really focused on it from a mix perspective because that would mean artificially trying to grow it faster than other categories. We want all the categories to grow as fast as they can. So, we'll see where it shakes out. It's more an output than an input. But I think longer term, if you look at global retailers in more developed markets, fragrance is usually anywhere from 15% to 25% of their total business. And in some markets like the Gulf, it's even more than that. So, India is still far away from the Gulf when it comes to affordability and consumer behaviour. But I think we're definitely on our way to getting closer to where it's really an equal representation in our overall revenue mix, but we're not committing to any timelines. We're not, as I said, we're not artificially solving for it. But I think the way the customers are evolving, you will see fragrance starting to become clearly a very meaningful part of the overall pie.

The next question is from Harit Kapoor from Investec.

Hi, guys. Am I audible.

So, I just had two questions, both on fashion. The first one was if you look at the new brands that you also onboarded, as well as with H&M coming in, just wanted to know whether you expect a little bit of an AOV dilution going forward. First half has seen very strong AOV growth also in the fashion business in mid-single-digit. So, the kind of brands you're onboarding, as well as with H&M coming in, do you expect a little bit of AOV dilution going forward as well on the fashion business? That's my first question. And the second one was, again on fashion. So, the first half has seen exceptionally strong growth in terms of whether monthly average unique visitors, number of visits. And this has come despite an early double-digit growth in Marketing and S&D. So just wanted to get your sense on whether it's been really driven by the significant expansion in onboarding new brand partners, which is the key driver of getting more people on site or is it just better utilization of marketing ad spend? If you could just spend some time on what's driven this despite marketing, going up?

So, on the first one, we don't see a dilution of AOV per se. It could be a little bit here or there. But generally speaking, for the same brand, which is live on Nykaa, as well as on other platforms, the AOV for the same brand is also consistently higher on Nykaa, because the day and age that we live in is one where the same consumer has access to multiple apps, but it's different kinds of use cases, which bring customers to different apps. Nykaa Fashion is positioned as a slightly more premium platform. It's a platform where customers come in to buy more high fashion product. And that has consistently been also, when we do consumer d ecrypt, it's consistent feedback that we have received. So, the positioning of Nykaa Fashion as a platform under the Nykaa umbrella is such that the use cases that bring customers to us even for the same brand are different from the use cases of the same brand, which take them to other platforms. So, for that reason, we don't see there being any meaningful dilution to AOV on the first point. And even in the first quarter and quarter four of last year and even before that, we've always onboarded different ranges of brands. But in spite of that, our AOV has remained where it has remained. So don't foresee any significant dilution. On the second part, I think, like I mentioned, intrinsically, what has led to an improvement in the new customer acquisition rate has been a revival on all of the fronts. So below under the hood, there is, of course, a very large percentage of our business , which comes from female customers, but there's also a kid’s business. There is also a men's business, which are smaller in share, but which are very fast growing. There is a smaller but very fast-growing home business. And these are interesting categories which are growing almost at the clip of close to 70%, 80% even year-on-year. So, we are seeing a very healthy customer acquisition across the board on all four of them, not just women, but women, kids, men, as well as home. And that is what is driving this new customer acquisition. And once new customer acquisition is healthy, that leads to obviously much healthier funnels in the months to come. What I will also add is that now with the addition of brands such as H&M, which have portfolios across both beauty and fashion, that also leads to a lot of cross-pollination across both platforms. Once we have brands like these, customers who may be acquired through one portfolio will also end up transacting with us within the universe of Nykaa and other portfolio. And there's more like these, which are lined up. So, overall, I think the flywheel will continue. We are hoping and we are quite optimistic that it will continue to look the same or better.

The next question is from Prateek Pareek from ICICI Prudential. As the current participant is not answering, we move on to the next question, which is from the line of Pankil Shah from Narotam Sekhsaria. Pankil Shah Can you hear me now?

Yes. Please proceed.

Hi. Just a quick question regarding the spend by brands in terms of advertisement on quarter - on-quarter basis, are we seeing increase in that on the platform?

So, maybe I'll kick it off with beauty. So, I think the short answer is yes, there has been, I think a couple of things have happened. One is, as I've spoken to you in the past about is a lot of investments, we've made towards creating more advertising opportunities for brand partners. So now we've got ability for brands to advertise across the funnel, so not just top of funnel, but even mid and lower funnel through PLAs and in-line widgets and other in-line banners and other such opportunities for advertising. So just creating a lot more real estate. Second is we've also started to personalize, which means now brands can really be a lot more targeted about whom they target when it comes to advertising. And third, we've launched self - serve dashboards and real-time data sharing. So also gives brands the ability to manage their ad campaigns more in real time, that is a big benefit to them and makes the platform a lot more attractive. So, I think a lot of investments beyond what we call as ad tech have been made over the past several quarters. And those are resulting in a lot of interest from advertisers. Secondly, I think for any brand who is retailing beauty products or any brand that's selling beauty products, there is no platform with this size and scale of relevant shoppers in a very relevant demographic with the kind of affordability and behaviour that they see on Nykaa. So, and as we continue to invest behind customer acquisition that we do for penetration purposes, the brands get the benefit in terms of having a larger audience with which to engage. So, as we continue to invest and spend on marketing to acquire customers, we're then able to also get more ad dollars from our brand partners to advertise to a larger base of consumers and a relevant base of consumers. So, there has been good progress on that front and continues to be an area of focus for us. And also, as I mentioned in my presentation, a lot of new brand launches and brand launches are a good time for brands to overinvest in marketing and we do see that play out on the platform.

Yes. I'll just add a very short 2 cents on top of that for fashion. So, yes, we are seeing significantly higher interest from brands and marketing income as a more and more meaningful line item in the P&L. But also, the fashion business compared to where beauty is in terms of its evolution of the sophistication of our tech platform to provide opportunities to brands to invest and to see ROI on their investment is, we are in the more early stages. I think fashion is also a much younger business compared to beauty on the Nykaa side. But there is significant upside in this, because there is a lot of interest from brands to want to invest to attract and retain the right kind of customer. So, a lot more to come in the quarters to come.

The next question is from Devanshu from Quantum Advisors. Ladies and gentlemen, as the current participant is not answering, we will conclude the question-and -answer session. You may reach out to Nykaa's Investor Relations team for any additional queries. I would now like to hand the conference over to the management for closing comments. Thank you, and over to you, ma'am.

Thank you, everyone, for being on the call with us. And I hope we've answered all the questions and do get in touch with us if there are any clarifications needed. With that, have a good evening and thank you for being with us again today.

Thank you, members of the management. On behalf of FSN E -Commerce Ventures Limited, that concludes this conference. Thank you for joining us and you may now exit the meeting. Thank you.