Nykaa hits fresh low but this brokerage sees 57% potential upside in stock

Even though Nykaa shares have been hitting new 52-week lows every other day, brokerage firm JM Financial has given a buy call on the stock for a target price of Rs 1,780, suggesting a potential upside of 57% as it believes the risk-reward ratio for the company would turn favourable for the medium-to-long term.

On the beauty startup, anchor investors’ lock-in period shall expire on November 10. The Street will watch whether the pre-IPO investors offload their positions or continue to hold. The brokerage is of the view that 67% of share capital or around 319 million shares of Nykaa are likely to open for trade on the lock-in expiry day.

“As three other new-age companies (PB Fintech, Delhivery and Paytm) are also expected to see their lock-in expire in November, potential buyers might be spoilt for choice. Hence, there could be a sharp dip in share prices if even a small set of investors decide to liquidate their position,” added the brokerage report.

Nonetheless, the lock-in expiry period coincides with the firm’s earning timeline and strong results might push buyers to take positions in the stock, the brokerage added.

Worth noting is that these sets of investors are sitting on huge profits. The sharp gains can be a reason for selling in order to diversify the portfolio or to book profits, said the report.

So, there is likely to be some action on the counter around the lock-in period expiry timeline.

“Nykaa’s BPC business is actually deserving of a higher multiple than DMart due to its better margin profile and asset-light nature. While the current market price of Nykaa still implies strong valuations when compared to most traditional companies, that does not factor in the growth seeds that Nykaa is planting by investing in Fashion and eB2B segments,” added the report.

The brokerage sees the BPC player as having the potential to create further value for investors.

The brokerage has given a buy call on the stock with discounted cash flow technique based Sep’23 target price of Rs 1,780.

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