FSN E-Commerce Ventures Limited (NYKAA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of FSN E-Commerce Ventures Nykaa Limited hosted by Morgan Stanley India Company Pvt. Ltd. [Operator Instructions] There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Shah, India Country Head at Morgan Stanley. Thank you, and over to you, sir.

Thank you, Stephen. Greetings, and thank you, everyone, for joining this call. As Stephen said, my name is Sanjay Shah, and it's an absolute, absolute privilege to be hosting the FSN E-Commerce, that is Nykaa management. We have with us today Ms. Falguni Nayar, Executive Chairperson, Managing Director and CEO; Adwaita Nayar, Co-Founder and CEO for Fashion; Anchit Nayar, CEO for the Beauty E-commerce; and Arvind Agarwal, Chief Financial Officer. Before we start the call, we have this housekeeping message, so please bear with me. Please note that this meeting and your questions will be recorded and may, in certain circumstances, be distributed to clients and/or made publicly available. And by participating in this event, you consent to such recording, distribution and publication. For any important or pertinent disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. This call will be for 60 minutes, and we will have time for Q&A. And before I pass it on to the management, I must absolutely again congratulate the management for building up certain incredible lifestyle-focused technology business. The passion, dedication and commitment they've displayed has been incredible. And in less than 10 years, they've built up [ prominent ] scale $550 million of GMV last year and already up 100% in the first half on year-on-year basis, annualizing more than $850 million. All these done with a net capital raised prior to the IPO of less than $100 million. Incredible effort and the success of the listing last week, of course, is a testimony to that. But Falguni, you would, given your experience, know that the journey has just begun and there is so much more to be done just given the headroom. So let me, with that, just hand it over to you for your opening remarks. And after that, perhaps we could take questions and answers.

Sure. Thank you very much, Sanjay. And it's an absolute pleasure to be with all of you as part of our very first earnings call that Nykaa is doing in its journey. I'll try to be very brief and concise in what I say on the call so that the understanding is there, but all of you will have to read it in conjunction with the presentation, which is on our website, and I'm sure all of you have access to it. So I'll start with very few summary messages that if you can -- as you can see, Nykaa's consolidated GMV grew by 63% year-on-year for this quarter ended quarter 2 financial year '22. And even on a sequential basis, it has grown at 10%. So it has grown at 10% over quarter 1 financial year '22. Within this, the Beauty and Personal Care GMV grew at 38% year-on-year, and the Fashion GMV grew at 215% year-on-year. Fashion GMV now contributes almost 27% of our consolidated business, up from 40 -- 14% a year ago. What we are really happy about is that our average monthly unique visitors has gone up to 21 million for the Beauty business, which is up 62% year-on-year. And for the Fashion business, it has gone up to 16 million monthly unique visitors, which is up 328% year-on-year. And also -- so obviously, they've been doing more work on the upper funnel, tapping the customers in the upper funnel through wider marketing efforts because we believe that COVID is in recession and this is the time to take advantage of returning consumer interest and demand because this was for year ended September, and as you are all aware, that October to December is one of the strongest quarter for lifestyle industry, retail industry and particularly even for beauty and fashion for us. On the annual unique transacting customers also, we are happy to report that Nykaa has now reached 7.2 million annual unique transacting customers on the Beauty and Personal Care business and 1.3 million for the Fashion business. That means about 40% year-on-year increase for Beauty and 417% year-on-year increase for Fashion. I will now go on to highlight some of the other key -- what I call as the key KRAs or KPIs that we have in our document, and I will call out the page numbers. So if we first go to Page #8, and I won't spend too much time because everything is self-explanatory. But you can see that in the quarter 1, of course, we had a huge growth in BPC at 239% year-on-year and 63% year-on-year growth in quarter 2. However, we are not suggesting that, that is likely to be the trend for the full year because, as you are all aware, the quarter 1 of financial year '21 was affected by COVID. However, it is a very strong growth momentum that we're experiencing in the Beauty business. We'll move on to the -- to another important element of the Beauty business, which is on Page 10, which is the AOV. And I particularly point this out because many of you asked us this question in our presentation. All of you said that in quarter 1 and quarter 2, during COVID-impacted times, our AOV went up from INR 1,450 pre COVID to almost INR 2,100 to INR 2,168 levels. And many people are asking the question whether it will sustain. So of course, we had very strict shipping policy during the COVID times because of constraints on supply chain. However, even post that when now there are no constraints and they've eased their shipping policy, both on COD and on minimum shipping levels, but even in spite of that, our AOVs have maintained at the level of INR 1,913. In fact, it's up over the last 3 quarters from INR 1,763 to INR 1,913. So we are happy about being able to maintain our AOV. As you know, the right unit economic metrics emerges from good AOVs. On the annual unique transacting customers, also I want to point out, which is on Page 11, we have now reached 7.2 million. And I think many of you were disappointed about the number of 5.6 million versus 5.3 million just a year ahead. We do feel that some of it, there was a COVID impact. We did grow at 35% in spite of the COVID. But at the margin, COVID did take away some amount of our growth. And as we come out of COVID, we do believe that we are experiencing stronger growth. And that is evident in our annual unique transacting customers, which grew quickly. We are also spending more on marketing to achieve that. As you move to the Fashion business, and I'll take you to Page #14, I just want to point out that, as you are all aware, the Fashion is in a sequential growth phase. And we have seen a huge number of increase in annual unique transacting customers, which in the quarter 2 stands at 1.3 million against just 0.2 million a year ago. So that's the massive growth in transacting consumer on our Fashion platform. And the GMV growth also continues to be strong with an extremely strong growth experienced between quarter 4 of financial year '21 and quarter 1 of financial '22. You saw our GMV go up from INR 268.6 crores, this is on Page 14, to 3,008 -- sorry, INR 384.8 crores over just 1 quarter. And even on such a strong quarter, we are now seeing 14% sequential growth. We move on to the next part of the presentation, which is the financial highlights. Sorry, just before that, I'll also point out that on the Fashion side, too, our order value has been strong and it is at INR 3,257 for this quarter. Now I'll come to the consolidated financial highlights. So revenue from operations grew at 47% year-on-year and 8% on a sequential basis. Marketing income in Beauty business continued to be strong and came out at 68% year-on-year. And income from marketplace services, which is entirely driven by Fashion, grew by 326% year-on-year. This led to gross profit of INR 378 crores, which was a 59% growth year-on-year. And the gross profit margin -- and all of this is on Page 17. Gross profit margin came out at 42.7% against 40.6% in the previous quarter. It was an improvement of 213 basis points primarily led by increase in share of GMV from owned brands as well as increase in share of Fashion GMV. EBITDA has come out at INR 28.8 crores, INR 288 million, with a flat EBITDA margin of 3.3% compared to the first quarter. Marketing and advertising expense as a percentage of revenue from operations is at 13.7% higher as compared to 11.1% in quarter 1 of '22. So marketing costs have gone up from 11.1% in the first quarter to 13.7%. And this is hugely higher than what we had experienced in the first half of last year, causing little bit of concern amongst market participants who don't probably understand that we are in a very conscious manner increasing our marketing spend because they were artificially depressed in the first half of last year due to COVID impact as well as fear of COVID and the period up to which COVID can last and impact our business. So with that fear, we had been very limited on the marketing cost. In fact, in later tables you can see that our first half marketing cost last year was just around 4.2%. And even the second quarter marketing cost was only 5.6% of net revenue. That will change where we do believe that going forward we will spend somewhere around higher levels, definitely higher levels, and somewhere around this with slightly lower levels in marketing. But all of that will be value accretive is our promise. On the profit side, that has resulted in INR 1.2 crores or INR 12 million of profit in quarter 2, and that is profit after tax. And that compares with INR 4.7 crores, which was achieved a year ago. However, if you look at the half year comparison, our profit -- we have suffered a loss of INR 25.1 crores in the year ended first half of financial year '21, INR 251 million, if I may say so, was the -- INR 251 million was the loss during the first half of financial year '21. And that has now come out at INR 47 million profit for the first half of this year. So I think this is on Page 17, if I can clarify. So in our mind, if we look at it from a strategic perspective, we are balancing between growth and profitability. And our intention is to deliver strong growth because we think these are very fortunate times for e-commerce companies to try and tap into consumer who is more accepting of e-commerce, and of course, being disciplined about trying to maintain unit economics that makes sense not just for Beauty business but also for Fashion business. However, Fashion business is at an early stage of growth. And as a result, while the -- if you were to look at the EBITDA of 2 businesses separately, which is something which we have not shared, but the 2 businesses, if you were to look at it separately, clearly, Fashion business is at a stage where we are continuing to spend more than our revenue in the sense that even if you cover all direct costs of marketing and fulfillment, I don't think we are covering our overheads on Fashion business. But we believe that as we continue to grow this business, we will be able to show similar discipline on unit cost economics the way we have displayed for Beauty. With that, I'll go on to the next page, which is Page #19, where I think some of these costs that I talked about, there is a graph called gross profit margin and key operating expenses, where you can see the quarterly trend first -- sorry, you can see the first 3 financial year trends, financial year '19, financial year '20 and '21, followed by quarter 1 and quarter 2. And you can clearly see that the gross margin has gone up. Both fulfillment and employee benefit costs are under control from a long-term trend perspective. However, marketing cost is slightly edged up. And -- but against that, there is enough to show in terms of be it with these unique visitors or be it transacting customers for orders in GMV. With that, I'll highlight a couple of other business developments. And of course, there are items of P&L and balance sheet that I can take, but I thought I could take it as part of the -- I'll take it as part of the question and answer rather than right at the beginning. So with that, I'll talk about the 5 important business developments, one being that all of you must be aware of the Dot & Key acquisition that we did. We believe it's a fantastic company. And this is part of our presentation on Page 6, where we acquired Dot & Key 51% stake. It's a brand, which is in skin care, personal care and nutraceutical. And we do believe it's a fantastic brand with a lot of promise going ahead. The amount of money that was paid for acquisition is all known in the prospectus, so I won't repeat it. The second important initiative has been the SuperStore by Nykaa, which is our eB2B business, which we launched during the quarter 2, and it is having good initial success. And it plans -- so SuperStore by Nykaa aims to support and empower retailers across India with a view to offer them the best of beauty and personal care products, which they can then onward sell to their customers. In Fashion, we also launched a label called Gajra Gang, which is our ethnic wear label. It is meant for a woman who refuses to be labeled and it offers ready-to-wear collection of modern occasion wear and balancing between focus on craftsmanship, tradition and wearability. It is focused on empowering women's choices. And as a result, it's a brand totally on point with what Nykaa customer wants. We continued to grow our store expansion with the rollout of 8 physical stores in this quarter. And we are reaching cities like Gwalior, Kochi, Mysore and Ranchi. And with this, our total operational stores has gone up to 84. Nykaa also continues to ensure that there is access and timely delivery for all customers across length and breadth of India. And for that, the warehouse storage capacity has been growing with 0.37 lakh square feet of capacity added during quarter 2, which has resulted in our total warehouse capacity going up to 6.65 lakh square feet. With that, I think I can take a break and open it up to questions. And there are certain aspects of the balance sheet and P&L, which I have not addressed in this presentation, but I can take it as part of the question and answer. Sanjay, is that okay? Should we open the question and answer?

[Operator Instructions] The first question is from the line of Percy Panthaki from IIFL.

My first question is on the market size for BPC, which in the prospectus you've mentioned around 1.2 lakh crore, 1.3 lakh crore. However, a very large part of this market is actually mass market brands like, let's say, Lux or likewise soap or Colgate toothpaste, et cetera. So if you are going into these kind of products maybe sometime in the future, I mean, I'm sure you have all this on your website, but what I'm trying to say is if there's a material contribution coming from such products in the future, how does that affect your gross margins because the trade channel margins on these products would be much lower than the margins that you're getting on your current portfolio.

I think I'll just come in and say that as far as our prospectus was concerned, we have declared that 70% of our business is from the 3 categories, which is makeup, skin care and hair care. Hair care within that is also is included there. But besides that, at least 30% of our business is in other categories, which, of course, includes appliances, it includes fragrances and it also includes personal care. So personal care, which actually includes some amount of hair care and skin care, is already a reasonably decent sized business in our firm. And we don't look at margins only from the perspective of the margin you receive as a retailer. First of all, because we play a role of a retailer and a distributor and we buy directly from the brand partner. And also many of the brands also see us as a place where they can actually build customer awareness and access for their brands and acceptance of their brands. So for that, they also share with us -- they buy our various marketing assets and they share with us additional margins through these margins in the sense the additional money through this marketing role, where we play a role as a marketeer for them. So with that, we don't think there is any adversity across segments. Yes, within that, there could be absolutely some categories like toothpaste which may not be the best place to buy those on our sites. But I think there is a fair amount of business in Personal Care that we do and that includes hair care, personal care, bath and body and a number of other products, which are like personal or like beard care or shaving or personal -- or feminine hygiene. So there is a whole lot of categories we see big potential in our platform to reach the customers. And in general, we believe that there's a trend towards premiumization in all categories. But I believe that we don't sell nonpremium. Like, say, if I take example of sanitary napkins, we sell enough of the base sanitary napkin like Whisper and others. But we also sell all cotton sanitary napkins and the share of many of those is growing, and those are definitely premium products. Same thing with body washes, we sell all the basic body washes from ITC or NIVEA and other. But we also equally sell premium body washes from Bath & Body Works and The Body Shop and Nykaa's own brand, Wanderlust, and others.

Understood, understood. Secondly, I just wanted to touch upon the margins and especially the marketing cost, which has gone up. If you can give some flavor as to what part of this increase is because the Fashion business is in ramp-up mode? And what part of the increase is because the BPC itself needs a higher spend given that the base comparator is very low.

Yes. So I think while we don't have a very good guidance on that for you right now, I think, going forward, we'll work towards giving that very specific guidance going forward. But you absolutely are right that when a business is at an initial phase of scale-up, like Fashion business has been, where it's growing very rapidly and you're acquiring a lot of customers to the platform, your mix of new customer versus repeat customer is such that the overall cost of marketing is high because you are bringing a lot of new customers to the platform. And that settles in at a more optimum level once you have a better mix of new versus repeat customers for the platform. So Fashion is now 2.5- to 3-year-old platform. And as a result, we do see marketing costs coming down, but yes, they will be at a substantially higher level than Beauty. So I wouldn't say that marketing costs have gone -- so let me put it this way because I don't want to say anything that's untrue. But if you see the first half of last year, which is for the September '21 ended first half, the marketing environment was very benign because things were -- nobody believed -- I mean, you could -- first 3 months, you could only do essentials-only business. And by nobody was marketing much because everyone was scared and they were conserving capital because they have had huge losses in first 3, 4 months. So I think there was no major marketing competition. And as a result, our marketing costs in the first half of last year were unduly low because there was nobody who was marketing. We also were conserving capital. We didn't do marketing enough. All that has changed now, and everybody is picking up on marketing. Having said that, so there was unusually low cost of customer acquisition during first half of last year. That doesn't -- is not there. But if you look at it overall, we are back to the long-term cost of customer acquisition, which also varies by category. So I think we do believe that things are coming back to the long-term cost of customer acquisition levels both for Beauty, and of course, Fashion is a new business for us, so it's not like we have a long-term benchmark. But from our perspective, we do believe that we would like to do this business in such a way that we keep in mind the LTV, the long-term value, of the customer versus the cost of customer acquisition. And that's why one needs to be measured in terms of the quality of customer one acquires and all the effort that goes in converting the customer through the funnel so that overall cost of customer acquisition versus long-term value coming from that customer is a healthy mix.

Understood. If I might just push the envelope a little bit more on the margins. See, you had about 6.5% margins for FY '21, both the segments put together at a consolidated level. How many years or quarters do you think before we will cross that benchmark for the consolidated company?

The EBITDA margin?

Yes.

So I think by now, I mean I would like to share with most of the investors that for e-commerce companies, profitability and -- near-term profitability is the balance between customer acquisition -- mix of customer acquisition versus -- pace of customer -- new customer acquisition. And as a result, it's something that can be optimized for because 90 -- 85% to 90% of our marketing tends to be what we call as performance marketing, which is optimized to a certain efficiency vis-a-vis the sales. So of course, our marketing cost are higher, like I told you, in the new verticals and we are building them. But once those verticals settle down, then again, the marketing cost comes down. So I think for us, I don't want to predict into the future, but it is something that we believe that nothing has changed in terms of how we will look at the balance between profitability and growth. And yes, last year, comparisons are difficult because it was a different year. And I think from a perspective of -- I think investors -- I would urge investors to look at marketing costs in conjunction with the new customer acquisition and customer engagement in terms of monthly customer engagement as well as the trailing 12-month customer engagement and stuff like that.

The next question is from the line of Arnab Mitra from Credit Suisse.

So my first question was, if you look at year-on-year, a lot of the BPC growth is driven by orders. In fact, more than the full growth is driven by orders, and your visits are also up quite a lot. But when you look sequentially last couple of quarters, it seems that AOV-driven order growth is relatively low. Is this something that is of concern to you and -- or should we broadly look at the GMV because the customers may be bunching up orders in different periods of time? And also, if you could just help us understand a bit on the seasonality in BPC because you look at these e-commerce companies sequentially, but is there a significant seasonality that we should be aware of?

Yes. Absolutely. That's a very important question, and thank you for that. So yes, there is definitely seasonality in our retail business in lifestyle business, and October to December is seasonally the strongest quarter. And post that -- and October to December quarter is very strong because of 3, 4 reasons: so one being the fact that Diwali falls in that; secondly, the marriage season starts then; and thirdly, of course, the year-end, the entire festivity of the year-end buying also comes in there. So I think with that, it's a very -- seasonally very strong quarter. Jan, Feb, March is not as disappointing as it was last year because what happened was that for year ended March '21 -- sorry, for year ended March '20, the Jan, Feb, March quarter, certainly the COVID came. And around third week of March and the stores started shutting down, and then a lot of e-commerce parcels were also not delivered. So I think you are now getting a good sense of seasonality there. But I do believe that as the Jan, Feb, March quarter will never match up to October, November, December, which is quarter 3, but it can be a reasonable quarter. And then what we find is that the first half is definitely seasonally weak and particularly also the second quarter, which is quite weak because of a [ Shradh ] period normally falling in that quarter as well as quarter quite affected by monsoon through length and breadth of the country. So there is some amount of challenges in that quarter. Last year, again, the second quarter was a little different and that's why year-on-year comparisons are suffering because last year's second quarter saw some amount of revenge buying because first quarter was entirely shut for nonessential category. So the second quarter was strong. So I think this year, it is very difficult to understand. But yes, believe me, there is seasonality. Second half is stronger. And it does take a fair amount of effort in the first and second quarter to continue to grow the customer base so that you get the effect of that customer base that you brought into your net through the customer's repeat behavior because, on an average, our customer buys 4 times in a year. So -- and so waiting for the fourth quarter, we need to sell to them. We keep acquiring customers throughout the year and then potentially many of them come back and buy with a much stronger [ store ] during the season, which is the second half. So it's a pattern we've seen. And as you observe us over the years, you will find similar patterns.

Sure. And my second question was on AOVs. So what we've seen in some other industries, though they may be very different, like food delivery, is that as the customer growth happens, the AOVs tends to fall very rapidly as we go down the income curve. In your case, at least last year, there was still an explanation that it was COVID and people may have been bunching up and putting lesser orders. But would you expect the AOV to drop as you grow and you go down the cost strata or income strata? Or is there some way in which it will be mitigated with some other deals?

Yes. So our past experience has been that we've had a similar AOV across Tier 1, Tier 2 and 3 cities. So basically, now only 60% of our business is from Tier 2 and 3 cities in Beauty. In fact, at consolidated level also similar. And it is definitely not showing any kind of thing different from an AOV perspective. That is also because of the fact that we are basically giving access to less distributed premium products through our platform, which customers through length and breadth of the country are buying through us. And unlike -- I don't know about other businesses, but Nykaa is a very pure B2C business because from the very beginning, we do not allow retailer orders and we actually cancel retail orders. So in many ways, most of our business is a consumer-facing business. And as a result, we find that consumers are -- because of the geographical way in which India grew, there are a lot of different industries in different part of the remote parts of the country. So somewhere there will be a tea industry or there are plants in certain far-off areas from where the demand comes. So we don't find very different -- too much difference in the AOV of the customers.

The next question is from the line of Garima Mishra from Kotak Securities.

A couple of questions. One, can you please highlight the contribution of the off-line channel in your overall revenues? And second, could you also comment a little bit on the Fashion business AOV? For the last, let us say, 3 or 4 quarters, AOV has really scaled up, so you would attribute that more to premiumization or this would be more a function of customers buying more clothes per order?

Yes. Very interesting question, Garima. So I'll tell you a couple of things. So first, in terms of -- I'll first address the fashion AOV. So fashion AOV looks like it went up from INR 600 all the way to INR 3,500. But I think it is because of the assortment kept growing. So initially, we had a very limited assortment mainly started with easier categories of accessories and stuff like that. And as the assortments have been growing, and again, a lot of brands find our platform where they can sell premium products, new launches and everything, which they tend to sell at full prices. So because of all of that and as customers are also getting more comfortable with our platform and developing trust in our platform, the value that they are buying is going up. So we are clearly seeing an increase in AOV, which is driven both by assortment and also by consumer trust. You are aware that in Beauty customers buy almost 5 items in the cart, whereas in Fashion, when it began, it was only 1, 1.3. And that's also going up now a little bit to 1.6 items in a cart. So there is some amount of benefit of that. I think on the first question that you asked about BPC, Beauty and Personal Care, if I got it right, I think it was about -- sorry, can you just repeat what exactly you wanted to know there?

Yes. I just wanted to know what is the contribution of off-line business to your BPC revenues or overall revenues, whichever way you may want to.

Yes. So I'll tell you a couple of things, Garima. Right now, we don't want to disclose things that we haven't disclosed in the prospectus. But I totally understand that in the long run, we will share that. The reason why we did not share it was because they were -- because of COVID impacted on and off, it was like a very confusing number in the last couple of months or years, like last 1 or 2 years. But we do believe that it will come back. I mean already the retail business is back to its pre-COVID level, and we will now have a more sustained and regular increase in store growth, the number of stores that we grow. So I think there will be better pattern to it. And I think in a couple of quarters, we will make sure that we start sharing that number. But it remains small. And if I may say, I think during COVID times and during the prospectus time, it was sub-10%. Yes. But right now, there's a lot of strong momentum in physical retail. And like we always emphasize that our business is omnichannel, we treat all customers in the same bucket. So every store customer is added to our database and we start sending them all our notification, mailers, everything, so that they start buying online. And similarly, also to online customers, we are always, depending if there's a new store opening in their vicinity, we are driving them to go to our store and experience because we think that sometimes customers like to do that. So as a result, what we find is that in whichever city like we go, we actually see a strong momentum in both the businesses, online and off-line. So we believe it's truly an omnichannel business. And like you can now see they're rolling out in more and more cities.

So just a factual clarification there. When you disclose GMV and transacting customers, does off-line also form a part of it? Or is that both metrics are completely separate?

Yes. I think so. We would include everything. But yes, so we would include all of it. So it's a consolidated, all of Beauty business, all of Fashion business. In Fashion, there are no stores right now, only one store. And in Beauty, of course, we have now most of 86 of them.

Yes. I'm just confirming that retail sales or GMV is also part of the Beauty GMV and total GMV.

It is. Yes, it is part of it.

The next question is from the line of Avi Mehta from Macquarie.

You have clarified that AOVs don't vary a lot between cities. Is the understanding -- or is there a divergence between the company average and an old customer or a customer with a longer lineage with us?

Yes. If I understood your customer right -- I mean, question right, are AOVs of the customer go up with every subsequent purchase that they make, right? So the first AOV of the first purchase of the customer is always the lower in entirety. Of course, there are customers who will come in buy worth INR 50,000 also in the first order. But what I'm trying to say in entirety, the AOV of the first purchase is lower than the AOV of the repeat purchase.

And typically, what multiple does it come to any kind of numbers versus the company average for a longer -- customer with a longer transaction list with you?

We haven't disclosed it. In future, we can. But it also changes. Like the AOV of the -- all the customers who only bought 2 times or AOV of a lot of customers who bought 20 times, it all varies. And of course, on an average, we say that most of our customers who are retained -- we retain a lot of our customers. And the ones who are retained also buy about 4 times in a year as evident from total number of orders to unique customers who buy. So I think with all -- and I'm talking here about Beauty numbers. So with those kind of numbers, obviously, there are customers who have been with us for 5, 6 years now, so the number of orders are much higher. So -- and then by then, the AOVs really look very strong because by then, customers have a lot of confidence to buy a lot more categories from us and a lot of even more valuable products from us.

No, no. Fair enough. And I was just trying to understand that, but I kind of...

So yes. We don't have a [ combi ]. We'll work towards it. I think after listening to your question, if we see that everybody wants certain type of data, we'll work towards sharing those over time. It's not easy because it varies a lot across businesses and stuff like that because what happens is that also customers start buying a lot more items in the cart.

Yes. No, I mean it's just that it gives us a sense on the value of a customer once it becomes -- that is where I was coming from. But I get your point that it will vary a lot, but it will give me a sense that is why -- that is where my question was directed to. My second question was on the Fashion side. I mean I'm just trying to understand the broader positioning. Is this more towards a curated content that you want to kind of focus on versus discounting? And if yes, does not having inventory, which was a big differentiator, kind of act as a [ holder ]? That's all.

No. I think on the Fashion side, if I understand your question right, we are focused on bringing curated assortment to our customers, which means that we are not an open platform where anyone can come and sell anything. We are actually doing some amount of preselection for our -- on our customers' behalf. We are saying this is good quality, this is sought-after brand, is it the right on-trend products that we need to show it because even from our brand partners, we don't take their full catalog. We take their more, what we call, on-trend new launches, the right popular catalog. We don't have a commitment to offer and show everything from our brand partners on the Fashion side. So I think it's a very curated catalog that we bring. And then within that, we also facilitate through discovery, as we call it, but through discovery for these facilities, customer discovering a lot of new brands, new on-trend styles and a lot of stuff like that, which allows for a better consumer experience in terms of how they experience of website and how they are satisfied with the purchase. I don't know if, Adwaita, you want to comment here?

Yes. Happy to comment. So yes, I think there are 3 pillars on which the Fashion business is being built. The first is, as Falguni mentioned, highly created merchandise. I think fashion platforms need to have a point of view. There's a lot of products out there. And one of the big pain points we heard from customers is that on other platforms, you get lost, it's very cluttered. So that is why the philosophy of merchandising is can we really curate and can we handpick the right products, the right brands and really make the customer feel that, okay, this is a platform which has a point of view and I know what they stand for, which is slightly more premium, very high on quality, very style driven and very trendy. I think the second pillar in Fashion is inspiration, and that's really what we did with Beauty as well that Indian women are looking to inspire, how to dress, how to really uplift their outfits. It's done in terms of content is being created and intertwined with the shopping experience. And then third pillar of the Fashion business, as you also insinuated, is that we're starting to build it as a marketplace because I believe that inventory risks in fashion can be higher. So we would like to build it as a marketplace, and we've built all the technology to support that. And we're scaling it well on a marketplace model, which means we're not holding inventory for the most part -- for a large part of our brands.

Well, Adwaita, what I was trying to get to is because we don't hold inventory in BPC, that is the key difference that I see. And does that -- while the positioning is the same, so I was -- that is where my question was with why do you think it would be different? But you can probably take it as said. That was where I was kind of trying to understand why do you think Fashion does not need inventory while BPC did. I understand that it has kind of worked in BPC. But in Fashion, do you think that reduces our competitive strength to some extent?

No, I actually think that...

I'll come in here, Adwaita, just one quickly and then you can add.

Yes.

It's just that we realize that in the number of SKUs that you need to offer in Fashion is very wide. And even the brand partners, very often, sometimes some brand partners are okay for you to pick up the inventory, and we may do that in future. But many of the brand partners also want to keep the inventory all in one place and sell from there because if they were to allow certain partners to pick up certain inventory and then it will be divided into so many buckets from where it can't be all accessed. So Fashion business has developed a little differently, and hence, marketplace is a way to go. But yes, there could be some brands that we do based on inventory. Adwaita, you want to comment?

Yes. I think there's one very big fundamental difference between Fashion and Beauty, and that is that Beauty is a very brand-centric, and within Brand, very hero product-centric business, which means that the same product ends up selling well for decades. And that's the nature of the Beauty category. Fashion, on the other hand, is so fragmented where things go in and out of styles so frequently and every brand is launching thousands of new drops every quarter. So given that sharp difference, like one is very brand, very product -- hero product led. And one which is very trend, very frequent drops, very high on SKU-led, I think choice between inventory and marketplace stems from that fundamental difference. Does that answer it a bit better?

Yes, yes. This is clear.

The next question is from the line of Jignesh Kamani from GMO & Co.

Congratulations for a good set of numbers. If you think about our monthly active user it grew very healthy at 62 percentage Y-o-Y and 11 percentage Q-o-Q. But in translating to GMV growth, our annual unit transaction it will slightly separate, 40% in '20 -- 38 percentage kind of. What explains slightly weak transition from the MAU to GMV?

I'm not so sure if I've understood your question fully because it's difficult to hear very clearly. But I think if you're talking about the consolidated mix and you're saying that why is the GMV growth higher than the growth...

So I'm saying our MAU growth has been close to around 62% Y-o-Y while GMV growth is around 38%, right? So I'm sorry, conversion from MAU to GMV is slightly weak this time compared to over past. So what is then the...

Yes. You're talking about difference between net revenue and GMV growth, right?

No, no. From the MAU to GMV.

Yes. So because our net revenue for Beauty is booked based on net sales of the product...

Not product revenue. I'm just saying what MAU, monthly average users.

Maybe I can take that, Falguni, if it's okay? This is Arvind.

Yes. Go ahead. I didn't hear the question clearly yes.

So I could hear that. And I think the question is, while our monthly average unique visitors have grown by 62%, the budget and the growth in TTM is lower at 30% and 40%, respectively. And the answer to that, in my view, is that while we have stepped up our marketing offers and brand building, a lot of new customers or unique customers that are coming on to Nykaa platform very clearly, that shows up in unique visitor numbers. But it takes a while for them to keep revisiting, and then it takes a while for us to convert them into transacting customers because our model is to engage with the customer on a nontransactional basis, and over time, they start transacting also. So it has paid well in past, and we believe that setting up the funnel to bring a lot more new customers and then over time convert them into buying or transacting customers will work through the content to commerce model that we have built.

The next question is from the line of Amit Sachdeva from HSBC.

So my first question is on the Fashion segment. And if I want to -- so a lot of questions have been answered already, so I will not probably go down to that detail again. But my question is what is the logic of building the Fashion business? Is it the marketplace model, which is -- brings in lots of third-party brands and build a consumer base? And then eventually, the right strategy is to actually build our own brand, which is -- the answer is marketplace, but the real value capture lies in, for example, developing 3, 4 larger brands, which are owned and which allows you higher margin, higher consumer franchise and also more profitability as well as result. So in that context, how the inventory model should evolve? Because is the owned brands right now on inventory or still marketplace like model? And how you are thinking about this as we go forward like 5 years from now? And how the business model will shape as a strategy?

Shall I take up?

Yes. You could do that, too.

All right. Okay. So I think in terms of our philosophy, we do really believe in both sides of the business. We do believe in the multi-brand, our role that we play. There are incredible strong brands in the country and both internationally, and we think that there's a real opportunity to bring all those brands to the country. So that is, first and foremost, our mission, to be a multi-brand retailer. On the owned brand side, as you know, we have about 5 brands today across Western wear, Indian wear, jewelry, lingerie, leisure and so forth. And this is also about the strategy that we feel good and confident about. We found that there were gaps in the assortment and we could plug it with our owned brand play there. And yes, the margins could be better there. But we, first and foremost, are committed to the multi-brand side of this business. And so that will always be the dominant share of the business. The owned brands that we have, yes, we do hold inventory for that side of the business.

Okay. There is no marketplace like contract with the suppliers there? You own the inventory there? I just wanted to clarify that.

We own the only inventory on the owned brand side of the Fashion business.

Okay, okay. That's very, very helpful. Just a small, another one. Could you give us a little bit of -- because I see that in Q1, we had a disclosure in DRHP for the retail part of GM and EBITDA margin. Can you share those numbers as well for Q2, the e-retail, like BPC e-retail business subsidiary, gross margin and EBITDA margin, if you can?

Yes. So I think, clearly, so while each of the subsidiaries are Nykaa e-retailers meant for Beauty and Personal Care business, but also FSN brand, the physical retail and some amount of imports business and then, of course, Nykaa Fashion, the Fashion business. And the Beauty private label business sits at the top in FSN E-Commerce. And this has all been done due to FDI rules in India, which are a bit complicated, where the holding company needs to be the manufacturing company and the e-commerce needs to be 100% -- I mean, it needs to be not 100%, but needs to be a subsidiary and things like that because you cannot have foreign ownership in the e-commerce entity if you want to do inventory led. And you need to be Indian owned and managed at the top. So it's a little bit complicated for us to be able to explain the certain segment numbers of Beauty and Fashion based on the subsidiary numbers. But yes, they broadly show the trend, and the way the trend is that the Beauty business definitely is at the level of maturity where it probably would be at the optimum level of EBITDA, I mean if it was not COVID times. It is partly a little bit affected by COVID impact here and there. But Beauty business definitely on an omnichannel basis, so -- because second quarter was adverse for physical retail. It was not adverse for e-commerce, but it was adverse for physical retail. And by then, a lot of advantages of rental waivers and all had gone away and still though many places and stores were not open. So I think it's difficult to generalize, but once COVID is over, I think you can say that the Beauty business would be at an optimum level of EBITDA, and Fashion would be at a point where we would still be investing, and hence, having negative EBITDA. But we hope to make that grow on a similar path as Beauty in a couple of years, 1 or 2 years.

Sure. That's very helpful. And the reason I was asking this question was because if I look at last year and we had the DRHP disclosure only so far on detailed numbers on subsidiary. We had FY '21 number of 8% EBITDA margin for e-retail; and at the company level, we were at 6.66%. And clearly, if I were to analyze in some sense last quarter's A&P spend, like a marketing spend, we are about INR 40 crores extra in some sense on a run rate basis and that led to sort of EBITDA margin being 3%. If that was not the case, it would have been 8%. So that's the reason the last swing comes in EBITDA margin, and hence, some perception issue about how the margin outlook could be. And that's the reason I wanted to understand whether investors should understand economics of 2 businesses separately, that would help them understand that one is like in a self-fulfilling mode, the BPC business, and another business in investment mode. But having a blended cost would actually give them more confusion than clarity. If you can separate these 2 economics well, that would really give a lot of clearer picture for people to appreciate 2 businesses and the investment cycle correctly. That's the reason I'm asking this.

Yes, yes. Sure. So I think we understand that. We've just finished the IPO and everything, so we were not confident of being able to give all these numbers on a very sustainable basis for the last 3 years and all that would be expected of us. But I think we are very aware, and going forward, we'll do the right thing in a couple of quarters and try and do that. But also please do understand that it was such a COVID-impacted year. Like we used to have a fair amount of business from GT/MT for our private label business, but that had also come to a standstill. And we as a company, we're not cutting costs because we didn't see the point. We had a strong engine in e-commerce, so we did not really sack even our employees who work in our GT/MT. So we took a human side of the business, and we decided not to cut any employees like we maintained the salaries and also the employees' jobs through the COVID period because we realized that it was a huge human price and we could afford it, so to speak. So I think the true picture will start coming as we get out of COVID, which I think has started happening in October. So if we don't have a third wave, which is way adverse, then we'll see that. In fact, the second wave, which started in April, May of 2021 in India was actually very bad from a price -- that human price there was to pay. However, surprisingly the government did not shut the business on an all-India basis. E-commerce business and our business did reasonably okay for the first quarter also. So I think if we could get a better market for e-commerce, an improving market for what we call as physical businesses, which are physical retail and also GT/MT businesses, which benefit our private labels, I think you'll see a different picture emerge over time.

Got it, ma'am. If I may, may I squeeze in one small question about the skin care or the cosmetics business. If you could think about as a business had some main drivers with e-commerce because of assortment, entries and everything else, could you sort of spell it out a little bit what is the percentage of revenue, skin and beauty in your business, like cosmetics? And is there a particular -- what is the average ticket size you sell for those? And is this -- how big is away from the mass, like mass pricing, you are x, 2x or 3x of the mark. What is your fastest-growing segment which is fueling this growth? What we want to understand is how Tier 2, Tier 3 towns are consuming in terms of those skin products. That's where I'm coming from.

I think because the line is a little bit difficult, I'm having trouble understanding your question fully. But if you are asking about the average selling price of our products, it's about INR 450 or INR 460. And while the AOV is at INR 1,850, I think, on an average, customer buys 4 items in a cart. So typically, the average selling price of a product on our site tends to be INR 450 or INR 460 I think makeup and skin care kind of change -- the relative importance of makeup and skin care changes slightly here and there and it could be similar or sometimes skin care may go ahead especially during COVID lockdowns and there are festive times or wedding season when the makeup goes up. Also more because of we are also quite unique in bringing a lot of international brands in each arena. So for us, those are all balanced businesses. I think we've disclosed in the prospectus that our top 3 categories, which is makeup, skin and hair, account for 70% of our business.

The next question is from the line of Suryanarayanan Manian from DSP Investment Managers.

I just wanted to understand the conversion between MAUs, which are your active users, and the transacting users, which is obviously higher for BPC versus Fashion. But once Fashion sort of starts to scale up, should that conversion be similar? And the related question to that was, does it have an implication on the unit economics for Fashion? Does it require the same level of marketing spend, higher marketing spend? And hence, by default, does it require a higher AOV versus BPC?

Yes. So it's a very interesting question and it's difficult to answer it fully, but I'll try to answer it partially that in terms of, yes, our Fashion conversions are lower than Beauty conversion. And if you look at -- we also look at -- one is conversion, but the other is also unique conversion. So we also look at unique conversions because we are aware, and you have the data, that our customers visit our website many times, this is in a month itself, and many times in a year, for sure. And obviously, each of the time they're not buying. So we've always encourage the user behavior that we like the engagement that they come often and maybe some of those times they buy. So that is the story on the Beauty side. On Fashion also, there are similar behaviors we are encouraging, where we would like them to come and visit us multiple times. And they buy eventually. I think in Fashion, there are certain barriers that we can reach over time, some being easy returns to size barrier, to many other and also trust that comes with passage of time. And also word of mouth as some customers have a very favorable experience and then they buy more. I think we also cracked -- like in Beauty, one of the main barriers is believing that the product is genuine. So [ tenacity ] and genuineness of the product is something we cracked very early on, by year 2 and 3 of our business. And I think since then, there's been no looking back in terms of having customer trust on quality of our products, and hence, the conversion. Conversions, of course, as you may know, vary also between whether they are on our app, whether it's on iOS app, where I think affordability is never an issue. And so iOS app conversion is usually different than Android app conversion. And the mobile web, where a lot of first-time users go there and then over time they download the app. So mobile web conversions are even lower. So the mix of traffic also results in conversion. So long and short is that, yes, there's more work to do. We are just happy that we started getting noticed, and as a result, the unique customer visits on the Fashion is very healthy. In fact, Arvind always points out that at 16 million versus 21 million for Beauty, it's a very healthy number. Market cap for Fashion is also bigger, right? It's 5x. So we really are benefiting from that market cap also in terms of getting customers to come and visit us. And as we offer them meaningful assortment that they get excited about, I think -- and also as we learn about their preferences and match the right product to the consumer, the conversions will definitely go up.

Understood. Just a quick follow-up there was do you need these kind of AOVs to sustain in Fashion for you to achieve whatever is your profitability target?

No. Not really. What we thought is that it's better to make the site aspirational and start at the top end. But if you are asking me a question that can the business be sustainable and profitable even at a lower AOV, of course, it can be.

And just to add to that, yes, we -- it started from the fact that we want to differentiate. And for that differentiation, I think the slightly more premium positioning is what was available in the market. And I think the way I look at it is that if you wanted to go lower in AOV, you could also acquire customers more cheaply. I think it's more expensive to acquire a more premium customer is the way I look at it.

Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to Mr. Sanjay Shah for closing comments. Over to you, sir. Mr. Sanjay Shah, over to you, sir, for closing comments.

Just a quick word of thanks to Falguni, Adwaita, Anchit, Arvind. This was most insightful conversation and set of commentary. Falguni has said there is so much more to do. And for all that you have achieved, I think it's safe to say that the best is yet to come. So we look forward to more interactions in the future. And with that, I would just like to close this call. To all the investors and people from the sell-side who attended the call, thank you so much for taking the time out and we shall talk again. Thank you, everybody.

Thank you. Thank you, Sanjay. Thank you, everybody, for being with us. Thank you.

Thank you. Ladies and gentlemen, on behalf of Morgan Stanley India Company Pvt. Ltd., that concludes this conference. We thank you all for joining us, and you may now disconnect your line.