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Lock-in Ends But Nykaa Sees no Selling Pressure, Thanks to Bonus Issue Masterstroke By Falguni Nayar


Despite pre-IPO shareholders’ lock-in period coming to an end, Nykaa is seeing no selling pressure in trade today (November 10), on account of the bonus issue announced by the cosmetics-to-fashion retailer. This is a masterstroke by investment banker-turned-entrepreneur Falguni Nayar to stem a potential fire sale as the lock-in shares get released into the market on November 10. During a lock-in period, promoters and investors cannot liquidate the pre-IPO securities held by them. But now almost 67 percent of the shareholding of FSN E-Commerce Ventures, owner of Nykaa, have been released from lock-in. It amounts to about 310 million shares.


Also Read: As End of Nykaa Lock-in Looms, CEO says HNIs Tend to Remain invested for Long Term

But this 310 million shares are only one-sixth the value as the management changed the record date for 1:5 bonus issue to November 11 to coincide with the release of lock-in shares. Every shareholder will get five shares of best beauty products Nykaa for every one share held. Since the shares have gone ex-bonus today, one share will be available in the demat account for trade. The five shares issued as bonus will be available only after a few days. This cuts down the available stock for sale to one-sixth. Dealers say, typically bonus shares for those in lock-in, get credited into investor accounts within a month. Often, companies also end up taking longer to issue shares which means that the lock-in-related selling also gets put off to that extent. Essentially, the additional 1550 million shares (310 million * 5) freed from lock-in will only be available for sale after a month or so. Since the share price has already adjusted to the bonus issue, now trading at Rs 175 level, the value of 310 million shares is now only one-sixth of the original value.

Eligible Sellers

The only information we have now is that Citi put out a block worth Rs 250 crore on behalf of Mala Goakar, who is an individual employee seller. This indicates no big selling for now, but when the bonus shares hit the account, there will be some shareholders who will try to exit the stock. Falguni Nayar’s family, holds 52 percent stake in the company, of which 32.4 percent stake or 145 million shares has been released from lock-in, based on SEBI’s new regulations. However, promoters are unlikely to sell. If at all they have to pare down their stake, they will choose a more opportune time and sell a chunk at a negotiated price. Also Read: Handsome gains for TPG, Fidelity, Steadview Capital and HNIs as Nykaa’s lock-in period nears end Few other early investors include Steadview Capital Mauritius, TPG Growth, Lighthouse India Fund, and some High Networth Individuals including Harindarpal Singh Banga, Narotam Sekhsaria and Sunil Kant Munjal The founder of Caravel Group Harindarpal Singh Banga, who has a 6.4 percent stake in the company, holds shares at an average cost of Rs 7.


Similarly, HNI, Narotam Sekhsaria, Founder of Ambuja Cement, has an Acquisition Price of Rs 9.9. He has a 3.1 Percent Shareholding in Nykaa.

Sunil Kant Munjal, one of the founder-promoters of Hero Group, holds a 3 percent stake with shares acquired at Rs 56.5 apiece Although, these people are sitting on huge returns, they are family and friends of promoter Falguni Nayar. When she started, she grew the company with her own capital and from these clutch of investors she had comfort with before approaching other venture capitalists and private equity funds. It is highly unlikely they will queue up to sell in the secondary market on the first day they have the opportunity. Steadview Capital and Fidelity Securities, with current shareholding at 3.5 percent and 1.3 percent, had acquired shares at Rs 202 apiece. Lighthouse India Fund’s cost of acquisition was Rs 76.7. It is possible that some of these funds could come out to sell their stakes because the general investor sentiment around tech stocks is not great at this point.


Long-Term story intact?

Nykaa is trading at market-cap of Rs 8000 crore when total addressable market for beauty and personal care in India is about Rs 1 lakh crore and the fashion opportunity is about Rs 3 lakh crore. There is no doubt that Nykaa has a good structural story going for it. By expanding its addressable market canvas to include fashion from just beauty and personal care earlier, it has offered enough fodder for analysts to justify a higher valuation for the company The tremendous success Nykaa has seen in the beauty and personal care segment is because of the huge first-mover advantage it had in the business. But when it comes to the fashion vertical, Nykaa is actually starting off on a weaker wicket because Myntra has already established its leadership in that segment. Other players like Ajio, Shein and other individual brands also have their own audience. It is therefore wrong to assume that Nykaa will be able to recreate the magic it created in the fashion business as it did in the beauty and personal care business. Last quarter, Nykaa’s revenue grew by 39 percent year-on-year and EBITDA growth stood at 33 percent, but these numbers came largely on the back strong performance in the beauty and personal care segment rather than the fashion segment. Despite a low base, the fashion segment only saw modest growth. Also Read: Nykaa Q2: Slow growth in fashion vertical blots otherwise exceptional performance; analysts upbeat HDFC has put out a target price of Rs 800 on the stock and HSBC is the most bullish on the Street with a fair value estimate of Rs 2180. Analysts at Jeffries have pegged their target price at Rs 1650 in a base case scenario, Rs 2200 in an upside scenario and Rs 800 in a downside scenario. Adjusted to bonus issue, Rs 800 corresponds to a share price of Rs 133, and Rs 2200 corresponds to a share price of Rs 366. At 10:30 am, the stock was quoting at Rs 175 on the National Stock Exchange, trading flat.

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