FSN E-Commerce Ventures Limited analyst Q&A

Thank you, sir. We will now begin the question and answer session. The first question is from Sachin Dixit.

My both questions that I had were on beauty business only. So the first one was basically on the AOV versus customer acquisition, right? So what we have seen so far is that there has been even sharper customer acquisition that we saw in this quarter, while AOV still continues to be healthy rather it keeps on improving, right? And while a lot of us actually believe that while we ramp up customer acquisition as a user base on Nykaa expense because slightly poorer quality customer might also start factoring in, these AOVs might dip, right? So I just wanted to understand what is it that we are seeing or doing, which is proving the street wrong consistently?

Maybe I can kick that off. So, I think firstly, we've always said that new customer AOVs tend to be lower than repeat customer AOV. And that doesn't really have to do with the quality of the customer. That's just how the customer , the more they engage with the platform, the more comfort they get shopping on the platform. And the more they get educated by us about what types of products they should be using, that's when their basket starts to expand. And that's the magic of what we do best, which is using content and education to drive certain purchase and consumer behavior . So repeat customers have always had better AOVs than new customers. But we are fairly confident in our ability to move that new customer along their consumption journey within the category. And as you know, a majority of our revenue, despite such healthy new customer acquisition, a majority of our revenue still comes from repeat customers because of the frequency of purchase that they have as well as you rightly mentioned, AOVs tend to be higher as well. In terms of the new customers that we are acquiring, we are not seeing the AOVs for them dipping meaningfully. So I think it tells us that, a, that there is still lots of, I would say, still lots of opportunities, still a lot of customers out there who are coming into the beauty funnel for the first time for whom affordability is not an issue. So I think that's quite promising in our opinion.

So just to clarify, like the new customers that you would have acquired, let's say, last year versus what we are acquiring today, there is no major AOV drop that we are seeing?

Yes. The number is a pure new customer AOV. So yes.

Got it. My second question is on BPC business again. Sorry, Falguni, you were saying something?

No, no, no. Just that.

Yes, sure. So second question was on BPC, again, very sharp margin improvement we are seeing for the quarter. And if you are doing some triangulation, looks like ad income has also improved versus what we have seen in the last few quarters. If that is so, how much is the seasonality impact, if you can break out how much sustainable this margin that we are dropping this quarter is likely to be? Any color on those things, if that can provide that will be great?

We always say that the beauty vertical reporting, the gross profit margin here is a weighted average of, as you know, three or four very different businesses, right? So you've got beauty.com, Beauty Retail, own ed brands as well as B2B. So the gross profit margin improvement is really an outcome of generally improvements across all four of those businesses that is ultimately resulting in a consolidated improvement. In terms of ad income, as again, we don't break it out separately. But generally, what I can tell you is that things are better on that front. Yes, some of it is, of course, seasonal also. As you know, we do our Pink Friday sale during the O ND quarter, and that is when we do get a lot of traffic. We do spend a lot of money on driving awareness for the sales. So there is a lot of demand in terms of brands wanting to participate in the sale. And so, ad dollars are collected against that. So there is some amount of seasonality. But generally, also, there has been, I think we've spoken about it in the past, but we have really focused on improving what kind of capabilities we offer to brands in terms of their ability to advertise on our platform. So historically, it used to be all top -of-funnel advertising opportunities, but we've built out the technology and what we call as the MarTech stack to enable brands to do advertising across the funnel, mid-funnel, lower funnel advertising opportunities of f-platform through Nykaa, ability to do events, experiences, collaborate with influencers. So we've just created a much larger bouquet of offerings for brands, which we're able to monetize and so that's more structural in nature. But some amount, as you rightly said, is also seasonal. But overall, there is other generally general improvements across the other businesses like B2B and House of Nykaa Brands also that is helping the overall margin profile.

Thank you. The next question is from Vijit Jain. Please accept the prompt on your screen. Introduce yourself and proceed with your question. Mr. Jain I can see your audio is not connected sir right now. Mr. Jain I would request you to kindly rejoin the queue. We'll move on to the next question, which is from Nikhil Choudhary. Please accept the prompt on your screen. Introduce yourself and proceed with your question

My first question is on Nykaa Now. Given we have now reached a decent scale and we are talking about pushing for marketing. Any early color in terms of how much scale we have already achieved in terms of, let's say, number of orders, percentage mix? And ho w is profitability in Nykaa Now versus Nykaa Platform?

Yes. So what I will say is, there is a significant percentage of orders in cities where Nykaa Now is live that are being serviced through Nykaa Now. Exact numbers, maybe we can get back to you if that is being shared. But what I can say is that in cities and in pin codes where it is now live, the majority of the order , I mean, a large percent of the orders is now being fulfilled by Nykaa Now. And we are, as I said, going to also expand the number of operational hours for which Nykaa Now is applicable. So, there's a few changes which we are able to do quite quickly that should increase the share of orders that are being serviced through Nykaa Now quite quickly. And then there is some amount of our hyperlocal delivery through our retail stores across the other 90-95 cities where we have stores also that is leading to faster delivery in Tier 2 and Tier 3 terms as well. In terms of the profitability of the margin per order, I mean, it's not very different at this point in time. Is there a chance that the average order values for Nykaa Now orders can be lower than mainline platform orders? Yes, that is possible. And in fact, it's something which we're not entirely against. W e're more focused on seeing that if the frequency of purchase increases because of Nykaa Now, then that benefit is more than an offset to the potential dilution of average order values through Nykaa Now. And ultimately, if there is a positive outcome on annual consumption value, which is just a multiplication of FOP and AOV, then that's a good outcome for us, both from top line as well as from bottom line. So this is not a very dilutive. This is not dilutive currently nor do we envisage this to be dilutive to overall profitability in a meaningful way.

Got it. Second, on House of Nykaa, we have seen very strong growth, but especially the growth from third-party channel was much meaningfully higher than Nykaa Platform. I mean Nykaa Platform, Nykaa Store grew 45% versus third-party platform Y-o-Y growth of more than 100%. So just wanted to understand any color where we are growing and what is leading to such acceleration versus the core platform?

Adwaita, will you take it.

Yes, I'll take that. No, I think, no, there's good growth kind of across all the channels. There are definitely some new third-party channels that were added in the last year. So it's more a reflection of just new channels being opened up rather than a slowdown in a particular channel versus not.

Sure. Make sense.

We did many channels underlying that is like 10-12 different channels, both online and offline.

Got it. Last one, Falguni, for you. For the last 2 years, we have been consistently delivering strong growth, close to 25% despite of consumption slowdown. Now finally, most of the consumption-focused companies are talking about growth revival, even you gu ys are talking about very strong KPI across the metrics. Can we say that growth can accelerate? And are you seeing some early indicator in terms of further acceleration in BPC growth, especially?

I think the category growth has been strong and category growth is also increasing in terms of category growth through e-commerce is increasing because a lot of offline sales through GT/MT are moving to e-commerce through the quick commerce model. So e-commerce is growing. So I think we do believe that the e-commerce component of beauty business is growing strongly. And secondly, we also do feel that with the introduction of AI, the cost of marketing as well as I mean, not really cost of marketing, but efficiencies, digital marketing and ability to do a lot of personalized journeys that can improve conversion makes us believe that one can hope for a little better outcomes going forward. But I mean, I'm not guiding towards that, but I think it remains a market opportunity. But against the market opportunity, there could be obviously need to stay on top of AI and how the discovery happens and lots of changes happening, but I think some of the partners that the Indian companies have like Google and Meta and others are also doi ng very interesting things. So the whole landscape is changing, very difficult to guide, but we remain prepared and hungry to continue to grow.

Got it, Falguni. Thanks a lot again for giving me opportunity and good luck for coming period. Thank you.

Thank you. The next question is from Kapil Singh.

Just one question. You talked about the partnership with Nike. Is it a different kind of revenue model? Is it similar to what we are doing? What will be the revenue streams? Just some color on that? And do you think this is something that you could replica te across some other brands as well? And some color as to why Nike chose you to do it this way?

Yes. I think I'll come in and then maybe Abhijeet can add and Adwaita also can add. But I think, yes, I think the way the deal is structured, it is finally from a unit economic perspective for Nykaa boil down to very similar to e -commerce revenues and marg ins where there is some inventory, there is margins like an e-commerce company and then there are costs for marketing and everything. But everything is well-structured and covered. So we think this is a very good outcome for us. Secondly, I think from why we were chosen is because we have a tech stack that can be made ready to offer their website in the country. And then we are also going to support it through digital marketing and fulfilment and customer experience. So pretty much full-fledged services Nykaa is able to offer not just on nykaa.com platforms or nykaafashion.com platform, but beyond that to even a third-party platform like Nike. And yes, it's a way of operating and a service that we may offer to other st rategic large partners. And to that, to a certain extent, it has started with Foot Locker and Nike and also in Beauty, we have just offered it to kiehl's.com. With that, if Adwaita or Abhijeet, do you want to comment on.

Yes. I will just add on to that. So it's a different nature of partnership versus a typical marketplace kind of partnership that we do to onboard brands onto the marketplace platform because in this one, the arrangement is that we will run the full stack operation for Nike's D2C digital commerce platforms in the country, which is Nike.in and the two apps, the two Commerce Apps across iOS and Android. So it's a different nature of partnership. Why Nike chose Nykaa, I think it's best for Nike to answer, so we'll not go into that, but what it does for Nykaa Fashion is that it positions us as a player who, on one side, of course, we have the fashion market place on which we continue to work with all brands across different categories, but it also showcases that for the right brands where there is a match between their ambition and between us seeing strategic value in the relationship. We have a much wider set of capabilities, which spans across creating a platform to do digital commerce in the country, deep expertise of the consumer and the ecosystem in India, how to run fulfilment at scale, how to provide the kind of premium experience that brands such as Nike look for when they want to reach out to customers in India. So to that extent, it does position us as a platform, which has capabilities which go far beyond just being a marketplace, which we continue to do, but this is a different kind of model compared to that.

Yes. And just trying to understand if the profitability of this would be much better for us since we are doing a lot more and can you give some color on the revenue streams here?

We can’t guide on that now. Sorry.

No, I would not want to go into the commercial construct of the arrangement. Operations-wise, like I explained, it's a different kind of construct compared to typical marketplace. But unfortunately, we'll not be able to go into details of commercials or any such.

Yes. All we can say is it will be a win-win for both partners. We will see value and we will also see value add if done right.

Okay. Thank you so much and congratulations on the great performance for the quarter. Best wishes.

Yes. So I just wanted to understand the gross margin expansion for the Beauty business. What is driving that? I know that you don't give the numbers separately for the B2B and the B2C portion of Beauty. And I don't want the numbers as such, but any kind of directional guidance as to, is it mainly the B2B losses, which is driving the gross margin higher or even the B2C portion of the Beauty business is seeing a gross margin expansion? And if it is the latter, what is really driving that?

Yes. Anchit, go ahead, otherwise I can take it.

Okay. I'll just say quickly that, as I mentioned in my earlier comments, there are several things that are playing out that are leading to this margin accretion on gross margin. One of the big drivers, of course, is that we keep saying that the House of Beauty or House of Brands business of ours, like Nykaa House of Brands continues to accelerate its growth. It is getting a lot of consumer traction across multiple brands, whether it be Dot & Key, Kay Beauty, Nykaa Cosmetics. So, there is a lot of consumer love there that is resulting in a higher GMV contribution, higher revenue mix contribution to this segment. So that is obviously having some benefit. Vishal spoke about the improvements he's driving in the unit economics of the B2B business that has resulted in a 500 basis point plus improvement at EBITDA level. So of course, there is improvement on the gross margin for the B2B business as well. And when it comes to beauty.com, as I also mentioned earlier, for several reasons, the gross margin has also improved in that business because of the ad income and certain category mix evolution as well as it being a festive quarter. So there are several reasons behind this margin accretion that you're seeing. And the good news is that each of the business, respectively, are moving in the right direction.

Anchit, most of these reasons are sort of present in the past couple of quarters as well, whereas the kind of expansion that we have seen this quarter is materially larger. So just wanted to understand if this quarter, there's anything specific like lower amount of discounting or any kind of GST-led sort of benefits or anything of that sort?

No, no, there are no one -offs. I think there's improvement in ad income for the core business. Overall, B2B net retention margins are much lower than gross profit margin of the beauty business. But in the base, there was certain gross retention margin and that has improved to a certain extent. And also owned brands have also had a role to play and improving profitability of owned brands also have a role to play. So we have worked on improving the gross margin of our owned brands over last 3 to 4, 5 quarters and some of that impact also gets further accelerated as the sales pick up.

Okay. So this would sustain going ahead as well, right?

Yes, there are no one-off items, but it has a mix impact. So mix impact sometimes pulls something down, and it also has a service ad income impact.

I mean if there is a bad quarter from a service income perspective, again, it can move a bit. But inherently, it's core. Yes.

Yes. I wouldn't say there will be a bad quarter from an ad income perspective, but because of some of the structural changes we've made and that I discussed earlier on this call. But definitely, the festive quarter, the festive season, which is Q3 does ten d to be a better quarter from an ad income perspective.

The next question is from Vijit Jain.

Apologies for earlier. My first question is, Anchit, last time, I think you had mentioned that with the India-U.K. trade deal, there were going to be some moderate amount of benefits to the extent that you import from there. Now of course, India has done a lot of these free trade agreements, U.S, EU and you guys have a significant contribution of imports in your business. So just wanted to get you guys a sense on how these play into your business going forward in the next 1 to 2 years. That's my first question?

Yes. So we don't have much on the export side yet. But as some of our owned brand’s scale, Kay Beauty is there in Space and Kay in the U.K. and there's potential to take some of our other own brands outside of India. So from an export perspective, I think it's still very small, but in the future, there might be some more opportunity. On the import side, we do import brands, quite a few brands from the U.S. and not too many from the U.K., several, but more from the U.S. and Korea. So I think we'll wait and see what the exact this thing is, but there could definitely be some benefit to us if the tariffs are going to be lower within the Beauty and Cosmetics category, especially for things like registration or some of the other licenses which we have to get for the importing of some cosmetic products. So it can be a net positive, but we've not fully quantified that yet. And once there is more guidance, I think we'll be able to have those conversations with our brand partners to be able to rework some of the agreements to capture some of these changes.

Yes, just to add to what Anchit mentioned, while the details in terms of both time frame as well as how the duty structure pan out on the import front is still to come in. Directionally, it is expected to improve access to brand as far as consumers are concerned. And from that angle, it's expected to be positive.

Got it. And just to be clear, Anchit, this would be, you should benefit from the EU deal as well, right? Because they would be a key source of import for you as well?

Yes, of course. Yes. That's right.

And lastly, just sticking to this question, if you could give a broad sense of what the current import contribution to your business would be, that would be helpful. And then I had a question on Perfumery. I'll just ask that upfront in the interest of time . So you've mentioned in the presentation that the AOV for Perfumery is 3x what you see in your other retail stores. So I mean, in general, is it suffice to say that, that trend would be the similar one on online as well, online sales of perfumes? And so perfumes would be a pretty substantial part of business now, right, given that high AOV and given the fact that you ha ve a comment in there in the presentation, which says you sell one fragrance for 5 seconds. I did the math, it says 6 million fragrances. I don't know if that is right for the year. It would seem to suggest that it's a pretty substantial part of the business. So if you can give more color on how perfumery is tracking as well? Those are my last two questions.

Yes, sure. So on the first point, yes, I mean, it's a good point to make around the EU deal. I think that is, given a lot of beauty brands come out of Europe, that can definitely be a big benefit, not only to us, but as an importer, but also to a lot of our brand partners who are currently importing from the EU zone. So, there is a chance that if the tariffs are lower, they could even pass some of that advantage on to the consumer in terms of bringing the price multiplier down and making the products more, I would say, equitable on price to what it is in the U.S. and European markets. And that could make it more affordable to more customers. So, I think there is probably a benefit to, not only to us, but to our international to our global brand partners in terms of the kind of additional volumes they could do with better pricing, if that's the decision they choose to make. So yes, it is definitely , we're looking forward to seeing how this plays out. In regards, to our import share of business, we don't disclose our imports portfolio in terms of what that is as a percent of total revenue. So I'm not going to comment on that. But what I can say is that we do have not just our import brands, but a lot of brands, what we call as "international brands who are manufacturing outside of India and importing into India. That is quite a substantial significant percent of our revenues. And so there can be some benefit on that front. Now with regards to fragrance, what I said is that this Nykaa Perfumery store, the average order value is 3x that of our regular retail stores for a couple of reasons. One is, yes, generally, fragrances are a higher ASP product than, say, makeup and skin care as a general rule of thumb. But also secondly, because this is a slightly more luxury retail concept, as you can see from the images. So the kind of brands we keep in the store are more of the higher-end fragrance brands. So these brands are growing really fast on the platform, but t hey are not necessarily the largest revenue contributors on the e-commerce side of the business. So this is where we do believe that over time, India's fragrance market will continue to evolve to get to a higher share of mix from luxury fragrance brands. But currently, on e-commerce, it's a bit more balanced between what we call as luxury fragrances as well as mass fragrances. And mass fragrances have less of a delta when it comes to the ASP versus other categories.

Yes, you're right. It's one every 5 seconds. I never actually counted the total number of fragrance units we sell.

It includes mass fragrance and minis also.

No. That's, as I said, it's not just luxury fragrances we're selling. We're selling mass fragrances. Also a very popular category now is body mist.

Mist.

So body mists are kind of like a deodorant, but for women. And so that's also a very popular category, especially amongst younger consumers.

Got it. Thank you so much and congratulations again to everyone. Those are my questions.

Thank you. The next question is from Nihal Mahesh Jham.

I just had one question, which was on the BPC margins. Historically, we've guided that given the investments we have been trying to make into this business that while giving a clear guidance sort of maintain that the margins will sort of remain at the 9% ballpark which we did in FY25 for the overall BPC? Given the kind of strong performance we've seen for the 9 months where we've already seen like 100 bps expansion in the gross margin and the advertising levers that Anchit mentioned about, is there a case that this can sort of structurally keep improving y ear-on-year? Just the thoughts on that?

Yes. I think each of the businesses, so again, the beauty vertical comprises 4 different businesses. So operationally, we feel confident that each of those 4 businesses can continue to improve their profitability. Now for the major contributor to this busi ness vertical, which is the beauty.com business, there could be a decision to reinvest some of the profits back into the business in terms of continuing to expand our market share and our reach and our customer acquisition. Whereas in B2B and in other businesses, there is meaningful improvement in profitability that will really make it to the bottom line. So again, it's a bit hard to say that at the consolidated level, where does this number end up. But each business individua lly, structurally in a good position to continue to improve their respective margin profile.

Got it, Anchit. Just one follow -up that when you are highlighting the mix impact on gross margin, you basically mean within categories sold on beauty.com, which are accretive to gross margin, just to clarify?

No. I mean like, again, because as B2B continues to grow, it will continue to become a larger component of the beauty vertical, right? As House of Nykaa Brands continues to grow at 60%, 70%, whatever number that is, it's going to continue to become a larger percent of the overall beauty vertical. So as they will grow, their contribution grows, their impact on the overall gross margin profile of this vertical will also continue to grow. So it's everything that's impacting both the gross profit margin as well as EBITDA margin. I apologize if I'm not doing a good job in explaining this maybe somebody else, Ganesh, you'd like to try?

I'll come in, Anchit. I think you've done a good job at explaining, but I think we're switching from gross profit margin to EBITDA is harder. So I think from EBITDA margin improvement, clearly, I think we feel that there is a scope for continuing to improv e EBITDA margins for the beauty consolidated like beauty vertical business because all the 4 businesses are going to gain from increase in scale and marketing costs, S&D costs, not so much, but definitely marketing costs as well as other expenses also will get a leverage of scale. So I think we feel more confident about EBITDA margin improving. In the past, we used to guide that we wanted to continue to spend more marketing dollar to accelerate customer acquisition growth, which we have done a lot in the last few years. And we'll continue to acquire new customers and accelerate it, but it's already very large numbers. So on a large base, we are talking about it. So I think EBITDA margin should be good. I don't want to guide towards any direction, but I think it can sustainably improve going forward. On gross profit margin, like Anchit said, it's more of a mix also that comes to play. And hence, it's difficult to give the guidance of the overall consolidated number, but each of the businesses are working, they've already improved their own gross profit margin, and they're working towards improving it further.

That is clear. Thank you. Thank you so much.

Thank you. 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 back to Falguni ma'am for closing comments. Thank you and over to you, ma'am.

Thank you very much, everyone for being with us today for this conference call. And I hope we've been able to answer each of your questions and it's been a pleasure spending this hour with all of you. Thank you and thank you to my team for facilitating this.

Thank you, members of the management. On behalf of FSN E-commerce Ventures Limited, thank you for joining us and you may exit the meeting now. Thank you.