At 58, when most professionals are in the twilight of their career, Nykaa founder, Falguni Nayar, has scripted a new success story — the company’s stellar IPO has made her one of the richest Indians with a net worth of $7.48 billion. At a market cap of $13.99 billion, Nykaa is valued higher than legacy firms such as Coal India, Godrej group and even Bharat Petroleum.

India’s online beauty and personal care penetration being as low as 8%, Nykaa, the market leader, has a vast opportunity to grow. But analysts and industry observers consider its fashion business the greatest distraction. Having entered the business in 2018, Nykaa is clearly a late comer. It will have to battle it out with the likes of Myntra and Ajio, which have already made considerable inroads. It will also need to create a USP in fashion. Many customers, according to analysts, say they are not aware that Nykaa has fashion offerings, or that there is anything different that the unicorn offers in fashion that others don’t. Reliance’s Ajio, for instance, has leading global fashion brands as well as Indian designer brands such as Tarun Tahiliani and Ritu Kumar in its kitty. It is tying up with premium brands to add to its margins. Moreover, unlike premium beauty, mass fashion is a low-margin business and that could put pressure on Nykaa’s profitability.

The other dampener, if not managed well, could be the 73 physical stores. They are capital and cost guzzlers and their proliferation will have an impact on Nykaa’s margins. Analysts are also unsure whether the company’s brick-and-mortar strategy would yield returns in the long run. In fact, Nykaa’s competitor Purplle.com’s physical store strategy backfired and the company had to exit the space.

Fashion: The Stumbling Block

“Nykaa barely has a 1% share of GMV (gross merchandise value) —payments made to merchants through a platform — in fashion and it will have to invest in brand tie-ups to grow,” says Karan Taurani, senior vice president, Elara Capital. He, however, doesn’t think that growth will be a challenge. “Scaling up the fashion segment will be,” adds Taurani. “Nykaa’s current Ebitda is around 6.5%. Since beauty and personal care is very strong in terms of profit, Nykaa has high margins there. Mass fashion would be a concern since margins are small and Nykaa has a commission-based market-place model. It may lead to higher cash burn, as discounting is rampant in that segment. Also, while beauty and personal care has recurrence in buying (a person using a particular brand of shampoo or soap tends to buy again and again), in case of mass fashion, the customer always wants to try new products, and that could be tricky.”

“The challenge for Nykaa would be to remain interesting to shoppers. If they don’t provide an amazing experience, consumers will be disappointed, and that will hurt the brand equity,” points out Kannan Sitaram, venture partner, Fireside Venture.

At the IPO opening, Nayar talked about focusing on ESG [environmental, social and governance] norms across various businesses. But, Arun Kejriwal, founder, Kejriwal Research and Investment Services, is not sure if she would be able to walk the ESG talk in the fashion business. “How can one guarantee that the third-party vendor from whom one is buying is using organic dye or cotton,” questions Kejriwal.

He is also sceptical about Nykaa’s claim of not doing end-of-season sales. “How will they get rid of their inventory if they don’t do end-of-season sales? Fashion is going to be a high-risk business for Nykaa,” he adds.

The overwhelming presence of private brands may pose a problem as well. Over a third of Nykaa’s beauty and personal care revenue comes from private brands. But a similar strategy may not work for the company in fashion as well. “They can’t scale up private brands beyond a point since they would end up competing with smaller brands, and the latter would oppose if they have a larger share of private brands,” says Elara Capital’s Tarauni.

Is The Valuation Real?

“Though the Nykaa IPO has been a huge hit with the investor community, there is underlying skepticism about whether the beauty and fashion retailer would continue to give them desired returns in the long-term,” says Kejriwal. “While they have done sleek marketing in terms of selling the issue, one can’t ignore the fact that it was sold on the basis of a platform, but now they are talking of brick-and-mortar stores. This means they believe the e-commerce model is not sustainable for an infinite period of time, and that is why they want to change the core model of the business.”

“Investors will keep a close eye on where the profit is going. Nykaa’s profit margins today are at 6.5-7% of Ebitda. In beauty and personal care these margins can go up to 8-10%. But not only is discounting in fashion high, the return order rate is high as well. This will make reverse logistics costs extremely high, which will put its balance sheet under stress,” adds Taurani.

Nykaa debuted in the stock market at ₹2,200, which according to experts, will make it extremely difficult for competitors with IPO ambitions to match Street expectations.

No wonder, Manish Taneja, founder of Purplle.com, says he has no IPO plans in the short-term. “We will continue to be private for a reasonable period of time,” he said in a recent interview with Fortune India.

“Investors would be looking at a price of ₹2,300-2,400 to exit. The Nykaa IPO is a combination of euphoria and good marketing. If they manage to make people happy the story will move forward,” adds Kejriwal.

But not everyone agrees. “I admire and respect Falguni for her strategic, focused and disciplined approach,” says Anjali Bansal, founder, Avaana Capital, and an early investor in the company. “The business expansion will continue, they may acquire brands and platforms, but I am sure they will be strategic and thoughtful about what they do. Every segment the company entered, it has done it analytically with financial discipline and without burning too much capital.” Since its launch in 2020, Nayar has done only five rounds of funding, of which three involved institutional investors.

Her dream of building a profitable Sephora of India has definitely come true with 65% of her clientele coming from smaller towns. “Shopping on Nykaa is far more immersive than shopping on Amazon or Flipkart, which are transactional. Their content, imagery and conversations on the platform have driven consumers to get into the world of beauty,” says Sitaram of Fireside Ventures.

Nayar has proved it’s never too late to startup, and Nykaa has already broken into the club of India’s top 100 most valuable companies, thanks to its stellar listing. It now remains to be seen whether she is able to live up to the the euphoria surrounding the company.

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