Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities and corporate credit rating of FSN E-Commerce Ventures Limited (FSN) to ‘Positive’ from ‘Stable’, while reaffirming the long-term rating at ‘CRISIL A-’. The rating on the short-term bank facility is reaffirmed at ‘CRISIL A2+’.

 

The outlook revision reflects expected improvement in group’s business risk profile with sustained increase in revenues and steadily improving operating profitability. The Group’s revenues have grown to Rs.5146 crores in fiscal 2023 from Rs 3776 crores in fiscal 2022 and revenues are expected to be more than Rs. 6000 crores for fiscal 2024. This is on account of healthy demand, regular addition and acquisition of new brands, extensive promotional activities and expansion of stores and business segments. Operating margin has improved steadily in the past two fiscals and is expected to be above 5% for fiscal 2024, and steadily improve over the medium term, backed by reduction in losses from fashion business and better operating efficiencies for other businesses.Sustenance of operating margin and gradual improvement over the medium term while maintain growth will remain key monitorable over the medium term.

 

Financial risk profile of the group continues to remain strong with moderate debt levels, stronger networth and adequate debt protection metrices. Despite continuous addition of stores CRISIL Rating estimates total outside liabilities to adjusted networth (TOLANW) to be less than 1.5 times in medium term. Liquidity profile is adequate with high cash and bank balances, moderate bank limit utilization and strong cash accruals with negligible repayment obligations.

 

The rating reflects FSN’s strong business risk profile, backed by its established market position in the e-commerce beauty products segment, diverse product range across categories, long relationships with reputed principals, omni-channel presence, and prudent risk management policies. The ratings also factor FSN’s strong financial risk profile marked by comfortable capital structure and adequate debt protection metrics. These strengths are partially offset by its exposure to intensifying competition, working capital intensity, and yet to stabilize distribution and fashion e-commerce businesses.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of FSN and its subsidiaries, which are strategically important to, and have a significant degree of operational integration with FSN. These companies are - FSN Brands Marketing Private Limited (FSN Brands), FSN Distribution Private Limited (FSN Distribution), Nykaa E-Retail Private Limited (Nykaa E-Retail), Nykaa Fashion Private Limited (Nykaa Fashion), Nykaa-KK Beauty Private Limited (Nykaa-KK), Dot & Key Wellness Pvt. Ltd, FSN International Pvt. Ltd Iluminar Media Pvt. Ltd and Nudge Wellness Pvt. Ltd.CRISIL Ratings considers these entities as being strategic to FSN in view of their strong integration with FSN’s operations. FSN has also provided corporate guarantee for the bank facilities of these subsidiaries.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in e-commerce space and omni-channel presence: FSN has a strong market position in the e-commerce beauty products segment, backed by strong position for the ‘Nykaa’ brand. It has been able to establish and retain a large customer base, leading to repeat orders from majority of the retail customers.  The established position in the e-commerce space, helped it to launch its own brand of products and diversify into fashion and apparels segment as well as offline retail model. It has presence across through more than 165 stores across India, which also helps in acquisition of new clients and ensuring timely delivery of products for the e-commerce segment. Increasing presence in the growing e-commerce segment has helped increase revenues steadily to Rs 5,146 crores in fiscal 2023 from Rs.574 crores in fiscal 2018. The group has reported revenues of Rs. 2,229 crores for first half of fiscal 2024.

 

• Long relationship with reputed principals and wide product portfolio: FSN has longstanding relationship with the principals with which it has been associated for more than a decade. It has tie-ups with more than 6250 brands and has over time consolidated its position as one of the leading distributors for some of these brands. Direct purchases from brands ensures quality and genuineness of the products being sold. FSN has a diversified product profile with more than 740,000 stock keeping units (SKUs) across various price categories in the categories of make-up, skin, personal care, hair, wellness, fragrance, among others. Hence, there is no dependence on any single principal, brand, or product.

 

• Strong financial risk profile: The group's strong financial risk profile is marked by strong networth of Rs 1208 crore and comfortable gearing and TOLANW ratios of 0.39 times and 1.13 times, respectively, as on March 31, 2023. Despite the capex plans to increase the number of stores the capital structure is expected to remain comfortable over the medium term.

 

The group’s debt protection measures have also been at comfortable level with moderate debt and profitability. The interest coverage and net cash accrual to total debt (NCATD) ratio are at 3.77 times and 0.43 times for fiscal 2023. The debt protection measures expected to be healthy in the medium term with controlled debt levels and improving operating margins.

 

• Prudent risk management practices: Prudent risk management practices have helped the company mitigate risks inherent in the trading business. Risks such as vendor concentration have been mitigated through onboarding of numerous suppliers, thus reducing dependence on any single supplier. The quick cash conversion cycle and strong relationships with vendors ensure limited inventory-related risk. A robust management information system helps keep track of inventory and expiry dates. Adherence to the risk management policies whilst growing at a rapid pace will remain a key rating sensitivity factor.

 

Weaknesses:

• Exposure to intense competition leading to pressure on profitability: Although FSN has established its market position in the online beauty products segment, it remains exposed to intense competition from unorganised players and e-commerce portals in the industry. Intense competition requires players to provide periodic discounts and attractive schemes in order to retain and acquire customers. Aggressive expansion by existing competitors and emergence of new large players may impinge upon the profitability and revenue of FSN, and hence remains monitorable.

 

• Exposure to risks associated with stabilisation of new stores and fashion business: FSN plans to add 35-40 retail stores per annum, and its future performance will be dependent on its ability to leverage on its brand image to maintain growth while sustaining margins. Moreover, FSN operates on company owned company operated (COCO) model, wherein growth is gradual and the break-even levels are reached only after the store is able to attract optimal volumes, which will depend on its ability to position itself in the locality and attract loyal clients. Further, the expansion in the fashion products and B2B distribution segments are yet to generate profits and has led to constrain on overall profitability of the group over the past few years. Higher than expected loss from these segments, may impact the overall credit profile of FSN, and will remain key monitorable.

Liquidity: Strong

FSN Group has strong liquidity driven by expected cash accruals of more than Rs.257-412 in medium term, against negligible repayment obligations around Rs.0.55 crores annually. Group’s fund-based limits was utilized 78% on an average over the 12 months ended September 2023. The group will continue to incur capex for addition of new stores and acquisition of brands to expand its owned product portfolio, which will be funded through internal accruals and cash and bank balances.

Outlook: Positive

CRISIL Ratings expects the credit profile to improve driven by increasing scale of operations with better operating margins and strong financial profile

Rating Sensitivity factors

Upward factors:

• Steady increase in revenues, leading to higher cash accrual of more than Rs.300 crores
• Sustenance of financial profile and liquidity with controlled working capital cycle

 

Downward factors:

• Decline in revenue or operating margin below 4.5% resulting in lower cash accruals
• Stretch in the working capital cycle, significant debt-funded acquisitions or capital expenditure (capex), or any change in existing risk management policies.

About the Group

FSN, incorporated in 2012 in Mumbai, is engaged in e-retailing of beauty and fashion products through three web portals: nykaa.com, nykaaman.com and nykaafashion.com. It also has 165 retail stores across India under the Nykaa brand. It manufactures private label beauty products under various brands- majorly Nykaa and Kay Beauty.

 

Further, the group is into selling beauty, hygiene and wellness products through its distribution network to the wholesalers and retailers using online and offline channels of sales through FSN Distribution Private Limited

 

FSN is promoted by Mrs. Falguni Nayar and is managed by her along with her son, Mr. Anchit Nayar and her daughter, Ms. Adwaita Nayar. They are supported by a second line of professional management.

 

The company is listed on Bombay Stock Exchange.

Any other information: Not applicable