FSN E-Commerce Ventures Limited analyst Q&A

The first question is from Sachin Salgaonkar from Bank of America.

Hi, thankyou for the opportunity. I have 2 questions, one on the BPC business, one on fashion. On BPC business, the question is, how should one think about steady-state margins? For the last couple of years, the margins are hovering in the range of 8.7% to 8.9% and would love to understand some of the levers in this direction? And separately, I also wanted to understand how is the traction for the fast delivery what Nykaa has introduced in terms of 10-minute to our same-day, next-day delivery? And is there an intent of expanding that into other cities? And second question is on fashion. Again, similar question, what could be the steady-state growth one could think about from a fashion industry perspective? The industry was clearly going through a slowdown last year. Are we out of that slowdown? And should we start the growth accelerating? And any changes to your EBITDA breakeven guidance out here?

Maybe I can kick off with the beauty questions, then we'll come to fashion. So I think, Sachin, on your first question around the margin outlook for the beauty vertical, I would, again, just encourage you to remember that the beauty vertical consists of 3 different businesses with very different margin profiles. So of course, you've got the beauty multi-brand retail business, then you've got the own brands business and you've now got eB2B as well. And as we've shared in the past, all 3 have considerably different margin profile. So I think each business individually, especially on eB2B as well as own brands, definitely has shown improvement in their margins and we will continue to do so. The beauty multi -brand retail business, I would say, is in a very, very healthy place in terms of its margin profile, and we are focused on continuing to reinvest in customer acquisition on that front. So the outlook for the margin profile for the entire vertical is, in a way, also an outcome of the way that the mix evolves. Some of -- in a way, the mix is really at play here. Its own brands and eB2B, which currently have a lower margin profile than the multi-brand retail business. If they continue to grow faster than the retail business, tha t could put some downward pressure on margins at the consolidated beauty level. But as I mentioned, and I'll emphasize again, all 3 businesses individually are improving their margins. Just -- there's probably just a bit less scope to do so on the more est ablished mature beauty retail -- multi-brand retail omnichannel business. So that's the answer to the first question. Regarding our Nykaa Now, which is our rapid delivery that we've rolled out. Today, that is live in multiple cities, majorly the metros. And we have seen relatively good traction. And a good percentage of our orders are now being fulfilled in those metros which are being serviced through Nykaa Now through this rapid delivery framework, which is ensuring delivery within 60 minutes. So that is now very, very convenient for the consumer. So that is live and it's now well beyond the test stage in a few key metros. There is a plan to expand it to several other metros in the coming months. But again, we will probably update you more in detail on Ny kaa Now at the Annual Day, which we will do later in the year -- in the coming months, actually. But we are seeing very promising traction on that front. One thing I'll mention there is the key differentiator for us is we will have -- we have the largest assortment of beauty products available through our rapid delivery network. We've made a lot of our assortment available for Nykaa Now, and that's really been a big differentiator to the consumer to have that power of choice, which is still, I would say, n ot as well developed on some of the other rapid delivery platforms that are out there. I'll pause there, see if there's anything FN would like to add. Otherwise, Abhijeet can go ahead on the fashion piece.

Falguni, just a quick follow-up out here. When we talk about steady-state margins, any number in mind? I do understand the margins are improving and the mix matters a lot.

It's difficult to guide towards that. But the reality is that every -- I mean, the way to improve margins would be higher own brand mix, higher service income, including marketing and better quality brands that give us -- they value what Nykaa brings to the table and hence, are ready to give better margins. We see that even in eB2B business and also in Beauty business and in fashion business. So I think there are just so many drivers that it's hard to distinct. But I think Nykaa likes to work on all of that to try to improve margins over a period of time.

Yes. So I'll quickly also answer the 2 questions on fashion. So Sachin, your first question was, are we now finally coming out of the rather stagnant period of growth for the industry as a whole. So look, I think long term, the view on fashion as an online business still remains that we are -- as a country, we are just very underpenetrated still on online penetration in terms of the overall fashion category, which still remains true, particularly coming out of COVID for a few years. During COVID, many online businesses grew very fast, only then to be corrected a l ittle bit because many shoppers who bought online were maybe pre-COVID more accustomed to buying online and offline. Some of those who are purely buying online during COVID may have gone back to buying offline again. And hence, some correction in the indus try numbers was due to happen in the years coming out after COVID. As far as our business goes, like we mentioned before, it's a business which is very fashion first, which is very trend first, and we anchor on working with key brands, with marquee brands -- as a challenge, actually, most brands are also facing, brands today are also moving -- trying to move to a world where online selling for them can also move away from discounts and more towards fashion-based selling, storytelling, things like that. And in that sense, a platform like Nykaa becomes a natural choice for most brands of any salience. And we are seeing a lot of traction in being able to partner with brands on those fronts. So irrespective of how soon the industry overall recovers, I have conf idence that we will continue to build on the momentum we have hit in Q4 and continue to build from there because directionally, we are headed in the right direction. We are playing to our strengths. So fairly confident that numbers will continue to look up. On the second question that you asked, which is any guidance on margins, again, same point that Anchit made. We'll talk more about this and for longer duration during the upcoming Investor Day. But structurally, even during this year, we have made struc tural improvements towards profitability. The 200 basis points I spoke about are not one-off improvements. These are structural improvements, which even as scale comes back, they will stay because we are trying to address challenges to profitability with a long-term nature in mind, things like leakages, which sooner or later, we have to solve. So improvements which are coming in because we have chanced upon solutions which help us reduce or control leakages, those are structural in nature. Similarly, being selective about which brands we work with and keeping our unit economics healthy from the get-go are structural ways of building the business, right? So I think structurally, we are making improvements. Actual guidance, maybe this is -- the Investor Day will be a better time to talk about it.

Got it. But you guys are reiterating your guidance of breakeven of fashion by FY '26, right?

We'll share more in the -- during the Investor Day, which is just in a few weeks from now.

The next question is from Kapil Singh from Nomura.

Hi Goodevening, Congratulations on a good performance for the quarter. My question is on the fashion business. Just wanted to understand whether you feel that looking at what's be en happening in the Beauty business on offline retail, do you think this is a business which requires a stronger presence in the offline given the category might require more touch and feel from the consumers, so just some thoughts around that? And secondly, are there any new categories, for example, things like wellness, et cetera, which could be relevant for...

Yes. I'll answer both. So I think on physical retail, we must remember that most physical retail, multi-brand retail stores have at best 60 to 80 brands and what sells online is so many number of brands. And as a result, the role that the physical retail has in a large geographically diverse market like India is meaningful but limited and both will have to go hand in hand. So -- and Nykaa is definitely going for representation in top 100 cities of what we call as destination stores in top cities. And also, we are trying to do more through kiosks for Nykaa's own brands. So I think there's a fair amount of physical retail representation. But I think India will have a very reasonably large importance of e-commerce because of the number of brands and the reach that they can provide to cities beyond top 100. So I think the structure of Indian economy and consumption is such that e-commerce will remain very, very relevant. But Nykaa is doing a lot of investment in physical retail, and we think we are far ahead of anybody else on this kind of network rollout. On your question about the wellness, yes, that remains an interesting category, whic h has in the past overall not taken a consumer fancy. But I think globally and also in India, we do believe that increasingly wellness and wellness, both through products and also sometimes through services will be something that the beauty consumers also will embrace. And clearly, Nykaa would -- Nykaa is watching and would have a meaningful role. We already retail wellness on our platform, and it's growing rapidly, and we will continue to grow that rapidly. We have a social media and a focus on wellness, and we support a number of brands, and there will be further increase in that. But yes, not -- I don't mean health, but wellness, which is more like long-term sustainable beauty is what remains interesting area for Nykaa. Like you can see Wellness Week here that we have done.

We'll take the next question from Sachin Dixit from JM Financial.

Congrats on a great set of results. My first question is with regards to Beauty business largely. So considering we have now decently broad base of offline distribution in beauty, right? Is there any color that you're able to share on the customer overlap or consumer behavior between online and offline that you have seen so far?

Yes, sure. Maybe I'll kick it off. Yes, we've always said that in India, there is nothing like an exclusively online consumer nor an exclusively offline consumer. I think especially in this millennial generation and beyond, consumers have different use cases for different -- based on the journey, right? So online lends itself very well to replenishment and convenience and things like that, whereas in-store experiences lend themselves well to education and learning more about products and how to apply them and how to incorporate beauty into your everyday routine . So there are different use cases for different channels, and we see a lot of overlap between our consumers where consumers who shop in our stores then tend to come and purchase online and vice versa. Consumers are shopping online. We also do actively se nd them into stores where they can possibly premiumize themselves in terms of the kind of products they're buying and also the ASP at which they're buying. So we see a lot of overlap. We think consumer is actually one and the same, by and large, for the mo st -- a majority of consumer is very, I would say, channel agnostic or open to experimenting and transacting in both channels. And that's why I think it's so important actually for every retail -- for most retailers to have, especially in the beauty industry to have -- give consumers the opportunity to transact in either channel and not just be e-com only or offline only. And that's something -- that's a call we took, as you know, many, many years ago, almost 10 years ago. And we have steadily continued to expand that offline footprint. So we see a lot of synergies and a lot of benefits to our business because of the fact that we are able to offer both online and offline at scale which is something that currently doesn't -- we don't see anybody doing it at the scale which we are in India.

Anything on number overlap, Anchit, like how many customers are projecting in both channels?

I don't know if we've disclosed it in the past, so I don't want to say anything right now. But what I can say is that it's a very, very significant percentage of our customer base. It's a meaningful percentage of our customer base is transacting across both online and offline.

I think -- no, no, I think the one has to understand it. So I thi nk there are -- basically, it all depends on the pin code also. So a lot of our customers are from pin codes where there is no store. So obviously, those are only e -commerce customers. So the weight of physical retail in the total customers and total customer engagement is to be seen in that light. So there are many brands also on a similar basis. But yes, for the brands that do omnichannel, both channels are very important.

Yes. I think that's a very, very important caveat, which is for the PIN codes and for the brands where both is an option, then you see a very strong overlap. But again, as we say, e-commerce, we're able to ship to over 20,000 PIN codes in India across the length and breadth of the country, whereas our stores, even at 237 stores, we're only touching 79-80 cities. And it seems it's obviously a very large number. But if you look at it in a country like India, it's still -- there's still a lot of space that is unaddressed, and that's better addressed through e - commerce because just reminding you, we are not a local Kirana store type format. We're not a local pharmacy type format. Our stores are destination stores. They are large format -- they're large -- played large-format experiential stores, right? And that's because we believe this category is high on experience, high on aspiration. And so we have tried to maintain that positioning for our stores, as you can see from this imagery. So yes, I think as FN mentioned, I think for the relevant PIN codes and the relevant brands, it's a very meaningful mix.

I think I want to just say that having stores is an asset for a strong e-commerce player, but only store network cannot replace the e-commerce. I think global data also supports, and I think it's similar in India that the number of times the customers buy on e-commerce is far more engaging than in physical retail. So I think the 2 used together is the best way to build rather than the only reliance on physical retail will not get you to the right dominance in beauty. And I think e-commerce is the first step along with physical retail, which ends up being valuable only for the premium brands.

Fair enough. My second question is for Ganesh. On the operating cash flow side, Ganesh, obviously, we see a very, very sharp improvement Y-o-Y and looks like there was very strong control on receivables as well as improvement on payables. Can you qualify what has gone through? What have you really done to ensure that these improvements happen because there's a very remarkable improvement there.

Thanks for the question. So needless to mention, it's a greater focus, greater cross -functional alignment, which has actually resulted in we being able to manage working capital far more tightly than we have done in the past, not that it was not happening in the past. What has really changed is that there is far greater focus, which has come through and which is why you're seeing the benefit flowing through across inventory, across receivables, across payab les. It's actually tightly controlling that. That's really what's happened.

We'll take the next question from Videesha from AMBIT Capital.

So my first question -- actually, both of my questions were on the fashion business. The first one was what explains the improved GMV growth momentum in this segment because even the order growth has been ahead of the AUTC growth for the quarter. So if you could elaborate on the initiatives undertaken, which have gone right because the proposition has not really changed. Even earlier, the focus was on differentiated and premium assortment? So that would be my first question.

So I'll take that. I think -- you're right, the proposition has not fundamentally changed, but I think it's just a function of onboarding, first of all, the right set of brands and just continuing to do deeper engagement with the brands. And we spoke a little bit about what new brands we have onboarded during the quarter. So the likes of Victoria's Secret or a Rare Rabbit or a Hopscotch, always on online platforms, our experience has been that when we add strong brands, business tend to be incremental in nature. It doesn't cannibalize existing business because we are always able to unlock new use cases from sometimes the same customers as well as acquire new customers on the back of great brands. So that's one. And secondly, this is the reason why I mentioned that this being a young business, what we have not slowed down during the year is new customer acquisition, including in this quarter. And all the new customers acquired in previous quarters in more recent quarters actually lead to the tailwinds as we head into subsequent quarters. So it's a combination of continuing to acquire new customers and just continuing to build better assortment and just strengthening the assortment, which has led to better growth during the last quarter.

Got it. And the second question was when I look at your segment-wise performance in the filing, I see that the capital employed for the fashion segment has decreased -- sorry, the asset for the fashion segment has decreased to INR320 crores. So any particular reason for the same?

Fashion business is not very asset heavy because -- yes, we are focusing on building more and more brands through marketplace than inventory-led. And the inventory-led business is mostly restricted to fashion own labels.

So that's why we've seen a decrease in capital.

The next question is from Abhisek Banerjee from ICICI Securities.

My first question is to Ganesh. Sir, on the working capital bit, right, is there any impact of mix improvement given the mix has changed from fashion to beauty in the last 1 year?

Overall, if you look at it, the change which has come about, which is not very pronounced, but a change all the same is the increased salience in the superstore business, which is within the beauty vertical. But overall, as I mentioned a while back, it's far greater and tighter control, which has resulted in reduction in working capital.

Yes. So we are currently very close to a month in terms of net working capital. So I would say from here, yes, obviously, there would be more and more improvement opportunities, but unlikely to be as steep as what you have seen in the current year.

Understood. And one more question to Anchit. So when we are asking about margin improvement in Beauty business, you are actually kind of indicating that we are at a high margin already, which I'm not denying. But given the kind of value add you give for the brand, do you not think that you are probably leaving some margin on the table now?

I think it's like an age-old debate between retailers and brands. So yes, of course, there's always scope for more. No, look, I think again, I'll just reiterate, I think each of the 3 businesses that sit within the beauty vertical have scope to improve their margin profile, right? So even if I look at the main business, which is the beauty multi-brand retailing business, there is scope to continue to improve marketing income by creating more advertising opportunities on our platform, which we have been doing over the past several quarters. And I think we might have spoken about it in the past, but we are creating a lot more advertising opportunities, middle of funnel as well as lower funnel on a platform that histori cally used to be a top -of-funnel advertising platform. So now we're creating across the funnel opportunities. We've built a campaign manager that now allows brands to bid for and manage their own ad inventory on our platform, and they are, therefore, able to take real-time decisions and invest much more frequently in advertising. So there is -- and also, we are now -- with personalization, we're also enabling for smaller brands who earlier were not able to afford to advertise on our platform to be able to now advertise on the platform. So I think there is a lot of initiatives behind our ads business that I think can have a positive impact on advertising income or services income, as we call it. That's one opportunity. Second is, as FN mentioned, if our own brands continue to outperform the way they have done over the past several quarters, that can also be margin accretive. Thirdly, there is obviously operating leverage and benefits of scale. If we continue to grow GMV at the clip at which we are, a lot of the costs like employee and G&A, that will obviously not scale at the same level. So there is room for improvement there. So even in an established business like the beauty retailing business, which is already at very healthy margins, there is scope for improvement. And then when I look at our own brands as well as our B2B, eB2B business there, as we've said in the past, we're still not where we want to be in terms of margin. And that will come as those businesses get a bit more mature and as they get to a better mix in terms of repeat versus new customers, and they continue to bring, as you can see on this slide, eB2B is continuing every year to bring its fulfillment cost down, its S&D cost down and improving its gross margin as well. So again, as I sa id, all 3 businesses will improve their margin profiles. And ultimately, how much of that is seen at the consolidated level is going to be an impact of mix, right? So that's the best I can really explain it to you. I hope that's helpful.

. We take the next question from Avi Mehta from Macquarie.

I just wanted to kind of ask on the fashion bit. We've -- for the last few quarters, we've gone on this journey to reduce losses, and that has been in the period of a weaker growth environment as well.You pointed towards expectations of a recovery or some sort of a change in that momentum. Does that in any way require us to start putting investments back in the front versus margins? How should I kind of look at that play is something that I would love to understand from you. Second bit, if I may just kind of conclude is on the gross margin side. We've seen in the beauty side, a very good improvement in the gross margin profile, and congratulations on that. Would it be possible for you to give us some qualitative understanding of how does this flow through in each of the subsegments? Is this more a mix thing? Or is that the MBO or multi-brand retail is also seeing -- or each of the segments are seeing a diverse gross margin performance? Those are the 2 questions.

So I'll take the fashion question first. So like you rightly observed, we are seeing the growth momentum coming back. I think by our estimates, industry growth is still slower or has not recovered back to the same levels as it was a year ago. It is still in the 10%, 11% range. But we know as a combination o f various initiatives, we have taken growth in our case is definitely coming back, and we are also seeing green shoots as we head -- as we are in the first few months of this new financial year. So that we think is sustainably going to be there. And if you recall the margin numbers that we shared a while ago, unit economics even for the fashion business has significantly improved over the last year. So with higher scale, I think we are looking at overall just more controlled burn. So we'll just continue to move faster towards profitability with better growth coming on board. On the gross margin side, flowing down to the contribution margin side, you've seen significant improvement. Marketing expenses also will get better because the way this works is that the more new customers we acquire today, the more within the repeat customer base, we have more recently acquired customers, which in general, tend to get activated with a lot better marketing efficiencies. So this just becomes a virtuous cycle where new customer acquisition cannot be slowed down for a new business because that feeds into the customer base that we target tomorrow and the ROI on targeting those customers is significantly better. So you will also see in the quarters to come, marketing efficiency improved significantly because we kept on investing into new customer acquisition throughout a year when acquisition or business in general was slow. So healthy unit economics, in summary, will mean that we will continue to get better on EBITDA successively for the fashion business.

Okay. Abhijeet, just a follow-up. I mean, the reason why I was asking is if I look at fourth quarter versus the last few quarters, while I do acknowledge the full year picture and it is encouraging to see, the fourth quarter versus the last few quarters, there has been a change in the profitability profile. So I was just trying to appreciate this better or how should we kind of build it going forward between growth. So is the fourth quarter having some one-off, which is why there was a loss there?

No. So I think the fourth quarter, if you look at the overall fashion vertical, like we mentioned before, the private label portfolio grew slower than the platform business overall. The largest part of the business is still the fashion platform on which structurally as well as sequentially have been -- it has been very healthy on the gross margin front. But when we include everything else, including the private label portfolio, particularly where we have chosen to go, as Adwaita mentioned in the House of Brands section, we've chosen to go much slower on certain third-party channels consciously in this year. Including that, it may seem like the margin growth is not as much as you would expect on a sequential basis.

And the other part on the Beauty side?

Sorry, would you mind repeating the question on Beauty?

Sure, Anchit. So if I look at the Beauty performance, whether it's on a fourth quarter basis or even for a full year basis, we've seen gross margins continue to perform well. Just wanted to appreciate whether this is -- how much of it would you kind of -- if you would give us some qualitative comments on whether each of the individual segments, how is this behaving and whether the competitive concerns that we had on the private side -- private -- our own brand side is now behind us?

Yes. So I think qualitatively, obviously, as I said to the previous questions around the margin profile is that each business c ontinues to improve the gross margin. They just have different degrees of improvement that are possible given the stage of the business, right? So eB2B probably has meaningful scope to improve relative to where it is today. Own brands definitely has a healthier gross margin because like any consumer brands business, the gross margin does tend to be -- can be -- is higher relatively than the retailers, but there's still room for them to improve there, and they have made some improvement. And as I mentioned in my remarks regarding the ad income, there is also opportunity for gross margin improvement in the multi-brand beauty retail business, not only through ad income, but also through mix of what we sell on the platform. So if premiumization and the sale of more prestige and luxury goods continues to play out the way it has, then that should also be a net positive.

Okay. So across -- and competition is no longer an issue, right? The price -based competition that you had earlier alluded to, that's now no longer a concern.

I think that comes and goes. It's very difficult to understand the thinking sometimes. For us, we are -- we really think long term, we think about we need to build this category the right way for ourselves, for our brand partners and for our consumers to really engage with beauty in the right way, which means making the decisions for the right reasons, right, buying for the right reasons, which is not necessarily price. We do want to offer value and we want to offer the right price for the right product, but we think well beyond that. And I think there are some players in the market who are maybe a bit more short-term thinking in their approach to how they play this segment. And so maybe at times when other categories are weaker, they tend to try to generate some acceleration in beauty to offset that weakness in other categories. So it's difficult to give you a definitive answer whether this is behind us. It seems to be for now, but you never know. It can come up at any t ime. It's not the right way to do -- to build this category and our brand partners generally do not like it because it dilutes their equity. And hopefully, this is not going to be a big issue in the coming months and quarters, but I can't give you any guarantee on that.

The next question is from Sheela Rathi from Morgan Stanley.

My first question was actually on the eB2B business. Just wanted to get a sense on what is really driving the growth and profitability for this business? Is it expansion into new markets? Is it a result of repeat behavior? And is it the expansion of the portfolio which we are distributing? And also some sense on what is the mix of own brands in this distribution? So that was my first question.

May I just say that all of that answer is yes, but it's -- at this call, it's now towards the end of the questions. It's going to be very hard. If you can just wait for the annual meeting that we're going to have very soon, you will get answers to it all because what the way we are growing is all. It's not just expansion of geography, true Nykaa Style, it's trying to improve margins. It's trying to get more brands. It's trying to get high-quality retailers, repeat customer behavior, all of that. So I think it's better we discuss it in the Annual Day.

Any sense Falguni, if I could get on how we should think about the F '26 outlook for that business? Any broad...

We have to invest for a few more years before it gets to profitability. We've given that long-term guidance last year, and we'll update that again this year. We also do a lot of work on longer-term guidance before the annual meeting, so it's better answered then rather than off the cuff, but I just wanted you to know that it's all going in the right direction, but we share them. But nothing -- it's all -- you're building a solid business for the long term, not that long term, but it needs work. It's not -- nothing is going to change overnight. But it's still solid capability that we are building, and I already see a lot of our great -- I mean, large brand partners recognize and value this capability. But still one is path to profitability and other is margin improvement eventually in this business. It's a business that is unique and it will need work on to get to the right levels. But as Nykaa does more for the brand partners and beauty is a large business with a lot of brands, I think one can get to better margin structures so that pays for the business.

Got it. And a quick one on Nykaa Now. Are we really using any of our physical store network for the fulfillment?

No, we are not. No, that's not the model.

No, no. I think maybe I'll just caveat that. So yes, I think to FN' s point, Nykaa Now is being done in a more traditional rapid delivery quick commerce type model, which is to leverage the dark store concept or as we call it the micro fulfillment centers. But that being said, we have the capability, which we have built actually during the pandemic, during COVID, which is to service what we call as hyperlocal delivery. So using our physical stores to service e -commerce orders in that relevant pin code. So that capability exists. We do use it, and it is used predominantly f or luxury products. But as we've always said, our stores are destination stores. They are in relatively expensive real estate because we like to be a destination aspirational store. And so it's not -- it doesn't make the most fiscal sense to use them as warehouses. But yes, we do have -- the technology is built, and we do use it to dispatch certain products and certain assortment to consumers from the stores.

Understood. Hope to hear more details about Nykaa Now at the analyst meeting. Thank you.

Thank you. 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 the management for closing comments. Thank you, and over to you.

Okay. Thank you. Thank you, everybody. Thank you for being with us, and we really appreciate your time you spend with us.

Thank you. Thanks, everyone.

Thank you. Bye-bye.

Thank you, members of the management. On behalf of FSN E-Commerce Ventures Limited, we conclude the conference now. Thank you for your participation and you may exit the meeting. Thank you.