Detailed Rationale

CRISIL Ratings has upgraded its ratings on the long-term bank facility and on corporate credit rating of FSN E-Commerce Ventures Limited (FSN) to ‘CRISIL A-/Stable’ from ‘CRISIL BBB+/Positive’ and ‘CCR A-/Stable’ from ‘CCR BBB+/Positive’ respectively.

 

The upgrade reflects  improvement in FSN’s financial risk profile post its initial public offering (IPO) of Rs. 630 crores, resulting in tangible net worth increasing to approximately Rs 1,300 crore as on December 31, 2021 and is further expected to increase on March 31, 2022. With controlled debt levels and stronger networth. CRISIL Rating Estimates total outside liabilities to adjusted networth (TOLANW) to have improved to less than 1 time as on March 31, 2022. Liquidity profile has strengthened with higher cash and bank balances, moderate bank limit utilization and strong cash accruals with negligible repayment obligations.

 

Business profile continues to remain strong backed by high growth in revenues by around 50% in fiscal 2022. Although, operating margins were lower by about 2% due to increase in branding and marketing expenditure and continued losses from fashion e-commerce business, the growth in revenues led to sustenance of healthy cash accruals. Operating margins have moderated in fiscal 2022.  Sustenance of operating margin and gradual improvement over the medium term while maintain growth will remain key monitorable over the medium term.

 

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 offline retail 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 International Private Limited (FSN International), Nykaa E-Retail Private Limited (Nykaa E-Retail), Nykaa Fashion Private Limited (Nykaa Fashion) and Nykaa-KK Beauty Private Limited (Nykaa-KK). 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 100 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 from Rs.574 crores in fiscal 2018 to an CRISIL Rating estimated revenue of more than Rs.2800 crores in 9 month ended December-2021

 

• 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 2000 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 700, 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 financial risk profile is supported by strong networth of over Rs.1300 crores crore as on December 2021. Healthy accretion to reserves will continue to increase in the networth over the medium term. Low reliance on outside borrowings has kept gearing consistently low and it is expected to remain below 1 time over the medium term. Debt protection metrics continue to remain adequate with interest cover above 4.5 times and NCA/AD above 0.35 time as on December 31, 2021. CRISIL Ratings estimates, to fiurther expected to improve over the medium term   Financial risk profile will continue to remain strong with healthy accruals, which will help fund capital expenditure and incremental working capital requirements.

 

• Prudent risk management practices: Prudent risk management practices have helped the company mitigate risks inherent in the trading business. Risks include vendor concentration and product obsolescence. There are 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 stave-off competition and retain customers. Aggressive expansion by existing competitors and emergence of new large players may impinge upon the profitability and revenue of FSN.

 

• Exposure to risks associated with stabilisation of new stores and fashion business: FSN plans to add 25-30 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 recent expansion in the fashion products segment is yet to generate profits and has led to constrain on overall profitability of the group. 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.200 crores per annum in fiscal 2023 and fiscal 2024, against negligible repayment obligations around Rs.0.55 crores annually. Group’s fund-based limits of Rs.477 crores was utilized 60-65% on an average over the 12 months ended March 2022. 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 cash balances, which is close to Rs. 800 crores estimated as on December 31, 2021.

Outlook: Stable

CRISIL Ratings believes FSN will continue to benefit from its established market position and strong financial profile.

Rating Sensitivity factors

Upward factors

• Steady increase in revenue and sustenance of operating margin over 7%, leading to higher cash accrual
• Sustenance of financial profile and liquidity with controlled working capital cycle

 

Downward factors

• Decline in revenue or operating margin below 4% 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 100 retail stores across India under the Nykaa brand. It manufactures private label beauty products under various brands- majorly Nykaa and Kay Beauty.

 

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.

Key Financial Indicators

As on / for the period ended March 31		9M 2022	2021	2020
Operating income	Rs crore	2800.6	2441.2	1850.1
Reported profit after tax (PAT)	Rs crore	33.7	61.65	(23.00)
PAT margin	%	1.20	2.53	(1.24)
Adjusted debt/adjusted networth	Times	-	0.40	0.87
Interest coverage	Times	4.27	5.47	2.10

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	71	NA	CRISIL A-/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
FSN Brands Marketing Private Limited	Full	significant operational, and financial linkages
FSN E-Commerce Ventures Limited	Full	significant operational, and financial linkages
Nykaa-KK Beauty Private Limited	Full	significant operational, and financial linkages
Nykaa E- Retail Private Limited	Full	significant operational, and financial linkages
FSN International Private Limited	Full	significant operational, and financial linkages
Nykaa Fashion Private Limited	Full	significant operational, and financial linkages