Fsn E-Commerce Ventures Ltd

NSE:NYKAA

Earnings Call Analysis

Nykaa's Strong Profitable Growth in Q3 FY24

Nykaa showed remarkable performance in Q3 FY24, continuing its profitable growth trajectory. The company's Gross Merchandise Value (GMV) increased by 29% year-on-year to INR 3,620 crores. Revenue from operations rose by 22% to INR 17,888 million. Gross profit improved by 20% to INR 7,600 million, even with gross margins slightly lower by 86 basis points at 42.5%. EBITDA saw a 26% rise, reaching INR 988 million, with margins up by 18 basis points to 5.5%. Profit Before Tax (PBT) soared by 109%, hitting INR 265 million, and Profit After Tax (PAT) grew 106% to INR 175 million. The beauty segment grew by about 25% and the fashion segment by 40% on a GMV basis. Other businesses, including Nykaa Man and eB2B, saw a 39% GMV increase, with SuperStore by Nykaa growing 68%. Net Sales Value (NSV) growth rates varied, with Beauty at 20% and Fashion at 31%, but improvements in operational efficiencies boosted NSV growth for other businesses to 67%, indicating a strategic improvement in handling leakages. Company diversification is also evident with Beauty now at 78%, Fashion at 15%, and Other categories at 7% of total net sales, reflecting healthily diversified growth across all segments.

Nykaa's Brands Show Strong Annualized Growth, Contributing to Business Expansion

Nykaa Cosmetics, Kay Beauty, and Dot & Key are notable brands under the Nykaa umbrella showcasing significant annualized growth, recording INR 400 crore, INR 200 crore, and INR 500 crore respectively. The company is capitalizing on this momentum by focusing on its owned brands in fashion, which also seem to be thriving with brands like Twenty Dresses and Nykd reaching over INR 100 crore run rate each. The management is convinced that the strategy to nurture and grow in-house brands will position Nykaa as a true 'House of Brands', serving an increasingly brand-conscious customer base and creating a strong foundation for long-term profitability.

Strides in Profitability Led by High Margin Featured Brands and Operational Efficiencies

Nykaa is enhancing its profitability by concentrating on high margin featured brands, which currently contribute 42% of the turnover. The company has improved its contribution margin, showing significant cost reductions in fulfillment expenses (580 bps), field force productivity, and sales and distribution expenses (170 bps). With an expansion of its warehousing facilities to optimize operations and improve service quality, Nykaa manages to strike a balance between business growth and profitability.

Solid Revenue Growth and Margin Expansion with Optimized Expenses

The company reported healthy revenue growth at 22% and 23% for the quarter and nine months respectively. Even with an omnichannel launch in the GCC region and higher ESOP costs adding to the expenses, Nykaa has expanded its EBITDA margins to 5.5% in quarter 3 FY '24. Profit Before Tax (PBT) surged by a remarkable 109%, with Profit After Tax (PAT) following closely with a 107% increase. Looking into individual business verticals, there has been a substantial improvement in the Fashion contribution margins, growing by 510 basis points year-over-year, with other verticals also displaying profitable growth.

Focus on Category Expansion and Customer Acquisition Drive Marketing Expenses

Nykaa's approach to growth involves heavy investment in category expansion and customer acquisition, which is reflected in the increased marketing expenses. Initiatives such as Nykaaland serve as category-building events, alongside a strategic push for acquiring new customers to maintain a leadership position in the beauty market segment. The company abstains from discount-driven marketing, believing it attracts a lower quality of customer and impedes long-term category growth. Partners may offer discounts directly to consumers, without impacting Nykaa's margins.

Earnings Call Transcript 2024-Q3

[Operator]

Good evening and welcome to the FSN E-commerce Ventures Limited Q3 FY '24 Earnings Call hosted by Morgan Stanley. This event is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For more important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. Please note that this call and your questions will be recorded and may in certain circumstances be distributed to clients and/or made publicly available. By participating in this event, you consent to such recording, distribution and publication. [Operator Instructions] I'll now hand the conference over to Ms. Sheela Rathi with Morgan Stanley. Thank you, and over to you, ma'am.

[Sheela Rathi, analyst]

Thank you very much. Good evening, everyone. This is Sheela Rathi from Morgan Stanley Research. Welcome to the FSN E-Commerce Ventures Limited Q3 FY '24 Earnings Call. From the management of Nykaa, we have Mr. Falguni Nayar, Executive Chairperson, MD and CEO; Mr. Anchit Nayar, Executive Director and CEO of Beauty E-commerce; Ms. Adwaita Nayar, Executive Director and Co-Founder, CEO, Nykaa Fashion; and Mr. P. Ganesh, Chief Financial Officer.

Before we start, we would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the presentation. Kindly note that the call is meant for the investors and analysts only.

With that, over to you, Falguni, for your opening remarks.

[Falguni Nayar, executive]

Thank you very much, Sheela. It's a pleasure to be here amongst all of the investors, and thank you for giving us this opportunity. I'll begin with the presentation.

We'll begin with performance highlights. So I think we saw that quarter 3 of financial year '24, Nykaa continues to drive profitable growth. Our gross merchandise value at INR 3,620 crores is about 29% year-on-year growth. The net sales value, and I'll talk the numbers in million, at INR 17,866 million is about 24% year-on-year growth, and revenue from operations at INR 17,888 million is about 22% year-on-year growth.

On the gross profit basis, our gross profit came out at INR 7,600 million, which is about 20% year-on-year growth. And the gross margins are at 42.5%, which is albeit about 86 basis lower on a year-on-year basis. There are more details on each of those in later numbers, and hence I won't elaborate on these here.

On the EBITDA -- sorry, I'll just talk about the EBITDA. On the EBITDA basis, our EBITDA came out at INR 988 million, a 26% year-on-year growth, and the EBITDA margins are at 5.5%, which is about 18 basis point improvement. And on the profit before tax basis, it's at about INR 265 million, almost 109% year-on-year growth with profit -- profitability margin at 1.5%, which is a 62 basis point improvement on a year-on-year basis. With that, the PAT has come out at INR 175 million, which is 106% year-on-year growth with a PAT margin at 1%, almost a 40 basis point improvement.

Taking it forward, I think we are delivering growth across all our verticals, and we are happy about that. I think what we've done is we have given the year-on-year growth for the third quarter of the current financial year. But at the bottom, we've also given a 2-year CAGR for each of the businesses so that you can compare how the business are growing from a medium-term perspective.

On the GMV basis, Beauty grew at about 25% on a year-on-year basis. It's a similar growth rate as a 2-year CAGR. On the fashion business, the GMV growth came out at about 40% year-on-year with the fashion GMV at 10,125 million, and this is about a 45% CAGR growth over a 2-year period.

If I look at the other businesses, which includes mainly the Nykaa Man, as well as the eB2B business platform, which is most significant part of the business, what we call as a SuperStore by Nykaa. That other business has grown at about 39% on a GMV basis. Within that, the SuperStore business has grown 68% on a year-on-year basis and the 2-year CAGR is at about 122%.

The GMV of these businesses now stands at 2,373 million, so it is becoming reasonably significant. On the NSV basis, the growth in Beauty were lower at about 20%, and the NSV was at about 13,805 million. One of the reason for divergence in the GMV and NSV growth in Beauty particularly is that it was a difficult year for many of the Beauty companies in the country. And as a result, the discounting that they are offering to the consumer has gone up. Many of you are aware about some of the rural growth and growth in other channels being slower. And as a result, the discounting in Beauty business has gone up a little bit more this year. And there's more on that, that Anchit will take us through.

On the fashion business, NSV grew at 31% compared to the GMV of 40%. Similarly, slightly higher discounting. And in the Others business, in fact, you can see that the NSV growth was at 88% against the GMV growth of 68%, especially for SuperStore. And for overall category, 67% NSV growth against 39%. This is particularly indicating some of the improvements that Nykaa did in terms of leakages that this businesses used to face. And with that kind of leakage improvement, we've been able to deliver higher NSV growth compared to GMV. NSV growth for other businesses also came out at INR 1,309 million, and a 2-year CAGR on NSV growth has been as healthy as to 221% year-on-year.

Next, so like we talked about it a couple of years ago that we were aiming for business diversification to serve the larger TAM, and that's exactly what Nykaa has been able to achieve. So if you look at a 2-year period between quarter 3 of '22 to quarter 3 of '24, you can see that against the total net sales value of INR 17,866 million, now Beauty contributes about 78% with fashion contributing 15% and other category contributing about 7%.

I think you can see that all of the businesses are growing healthy in a similar manner with, of course, some of the really nascent businesses outperforming in terms of growth. And this is resulting in a fair amount of diversification and yet diversified growth. Each of the businesses are delivering growth.

On the right-hand side, from the opportunity perspective, we have always said that BPC's overall $31 billion market, and it is broken into 3 components of online being about $10 billion; organized offline, which we call as modern trade, about $9 billion; and unorganized off-line, which is about $12 billion opportunity. And Nykaa now plays pretty aggressively in each of the 3 segments. We dominate online Beauty, but we also have a very significant presence in physical retail now.

And similarly, we are building our presence through the SuperStore to cater to the GT/MT segment. In Fashion, we've always said that it's 5x the size of the Beauty market, and that's what excites us about the business. And we are addressing about INR 49 billion of that opportunity that exists in the online segment currently.

With that, I hand over to Anchit to talk about the Beauty business.

[Anchit Nayar, executive]

Yes. Thank you very much. So I will quickly run through the slides, giving an update on the performance of the Beauty.com, the Beauty, physical retail as well as our private brands on the beauty side are those various business segments.

So if you see the chart on the top left corner, you will notice that the GMV growth over the past 2 years for the BPC segment has been roughly 25%, taking us to about INR 2,369 crores of GMV for the quarter ended December 31. In terms of the mix of business, our -- the loyalty and the stickiness of our existing customers continues to improve, and that reflects an improvement in the mix of business coming from repeat versus new buyers now standing at 78% and 22%, respectively.

NSV growth came in at about 23% over a 2-year CAGR and ended the quarter at INR 1,380 crores of NSV for the BPC segment. Annual unique transacting customers stood at 11.1 million versus 9.6 million the year before and a 21% CAGR over a 2-year period.

In terms of the number of orders that were serviced in the quarter, it was -- stood at, 11.1 million orders were serviced in the quarter ended December 31. Next slide, please.

So this is a very interesting and unique innovative event, which Nykaa hosted for the first time this year. It was called Nykaaland. It was India's biggest beauty festival. It is a one-of-a-kind event in which over 80 global and local brands participated in a 2-day beauty festival. We had 15,000-plus customers who bought tickets to attend this event, and there were over 12 masterclasses that were hosted and 5,000 participants attending those masterclasses.

These events were hosted by makeup artists and professional beauty experts from across the world, including Mario Dedivanovic, as well as others listed on the page. There were significant attendance from celebrities as well, Bollywood celebrities, and over 800-plus influencers and KOLs. As a result, we managed to create over 5.5 billion impressions from the studio event, and 5,000 pieces of content were created and disseminated across both online and offline channels.

So this is an event which we see as instrumental in the role which Nykaa plays in the ecosystem, which is that of category creators, events such as these allows customers to access and to be educated on Beauty as a category. And these are the kind of events that will accelerate the expansion of the addressable market of Beauty in India and help to take the per capita spend on Beauty to higher levels than where they are today, which happened to be some of the lowest in the world. So please enjoy the video. And in about 5 seconds, we can move on.

[Presentation]

[Anchit Nayar, executive]

Great. So moving on to the next slide. This is an important quarter for Nykaa Beauty also from a premiumization perspective. As we have always stated, one of our strategic pillars of the business is to continue to premiumize the consumption of Beauty in India. We believe that not only does India under-indexed in terms of per capita spend on Beauty, but premium beauty as a percent of overall Beauty is also highly under-indexed compared to other developing and developed economies.

As India's GDP per capita increases, we are very optimistic that premium beauty and prestige brands will continue to gain more market share and drive better unit economics for both brands and retailers alike. Here on this slide, there are a couple of examples of some of the brands which were launched by Nykaa in Q3.

As you can see, some of these names you might recognize, they are globally well renowned brands. The first on the page is the brand CeraVe. CeraVe is a derma skincare brand that is owned by the L’Oréal Group, and it was launched for the first time in India in partnership with Nykaa. Second brand on this page is a brand called Urban Decay. It is an iconic cosmetics brand again from the U.S. and again owned by L’Oréal. This brand has been introduced into India exclusively with Nykaa and Nykaa serves as importer, distributor and retailer for this brand.

Also adding to the list is Dr. Barbara Sturm, which is a prestige premium skin care brand out of Germany, as well as ColorPop, which is a Los Angeles-based global makeup brand. These brands as well are exclusive to the platform and are also being imported and distributed solely by Nykaa.

So on the right-hand side, you will see a quick summary of some of the brands, which we serve as importer and distributor for into India. To remind some of you, this business is, we call it as the Nykaa Global Store. These are brands for whom Nykaa handles not only the logistics and the registration and importing of the products, but also the distribution, go-to-market, marketing, pricing and customer service aspects of their business. So we serve as the brand's proxy in the country.

And we have about 35 brands in this portfolio. We have shown the logos for about 9 of them, which we feel are worth highlighting. Some of which we have discussed in the past. This business of ours is growing at roughly 47% year-over-year and is a strong addition to our portfolio as well as moats against other competition.

If I look at the premium business as a whole, today, we have one of the largest, if not largest, assortment of premium brands in Beauty in the country, 250-plus. This segment of our business is growing at about a 50% CAGR over the past 3 years and almost roughly 1/4 to about 1/3 of our GMV comes from what we define as premium and prestige beauty brands. Next slide, please.

Spending a minute on our physical retail business. We believe that brick-and-mortar retail continues to be incredibly important for beauty brands as they look to partner with select retailers. They are looking for retailers who can give them both scale online as well as scale offline.

And today in India Nykaa is one of those players. If I look at our store count, it has increased by almost 80 stores over the past 2 years, and we have opened roughly about 39 to 40 stores in the past 12 months. Today, we cover over 64 cities across 174 stores, and we cover about 1.7 lakh square feet of retail space.

In terms of the key callouts for this business this quarter, I would say is a strong improvement in profitability. The retail segment of our BPC business is showing healthy growth at the EBITDA level of about 35% year-over-year. And today, it contributes to roughly 9% of our overall GMV.

Now I will mention that it's not an exact apples-to-apples comparison. We have over 3,000 brands online and about 80 brands in our stores. So for the 80 brands, which we keep in our physical retail stores, the contribution of physical retail to the overall GMV mix is much higher than 9%.

Finally, we see our stores as a very powerful channel especially for premium beauty brands. Today, we have over 85 premium beauty brands in our physical retail stores. And 65% plus is the share of the GMV in our retail stores that comes from premium prestige brands. As a result, we have what we believe to be a strong productivity and throughput and our GMV per square foot per month is roughly INR 4,109.

On the bottom left, you'll see a breakdown of our store network. We have about 74 Nykaa on trend stores, 67 Nykaa luxury stores and 33 Nykaa kiosks. And the split between metros and nonmetros is about 94 stores in non-metro towns and 80 stores in metro towns.

Q3 is also the quarter in which we host our flagship beauty sale of the year. It is called the Nykaa Pink Friday Sale. This year, this sale has continued to grow from strength to strength. As you can see, we execute the sale now across not only the Nykaa Beauty app, but also the Nykaa beauty physical retail stores, as well as both Nykaa Fashion and Nykaa Man platforms. So this is truly a one Nykaa sale.

This year, we generated over 400 million in terms of social and media reach. This is across roughly a 7-day sale. And we had 50 million unique visitors who visited either our stores or our apps across the period and duration of the sale. To give you a sense of how the sale has scaled over the past 5 years, you can see on the top right bar chart that the GMV that we generate across the sale, the 7-day sale, has increased almost 10x in the past 5 years.

And today, again, as I've said earlier, a key focus of Nykaa is to premiumize the beauty consumption in India, and that is reflecting even during key sale moments such as these. You can see that 1/3 of the GMV for the sale came from premium brands, 32% was the growth for premium brands in terms of GMV versus the sale last year, and 67% growth in offline sales for the -- during the period of this Pink Friday.

In terms of Nykaa Fashion on the bottom right-hand side, you see that in a matter of 2 years, the GMV that we are generating from this sale has scaled almost 5x in just a 2-year period. So also very healthy growth. There is a 29% jump in order conversion that we see on the Nykaa Fashion platform during the sale and 120%-plus growth year-over-year in terms of key categories of women's western wear, GMV versus last year sales. And again, women's bags and footwear, another standout category for the Nykaa Fashion platform during this year's Pink Friday sale, showing about 150% growth year-over-year. Next slide, please.

And with that, I'll hand it over to Adwaita to take you through the Fashion slides.

[Adwaita Nayar, executive]

Thanks, Anchit. So I'll take us through a couple of fashion slides here. Starting off with some metrics in terms of GMV. The quarter 3 ended at about INR 1,000 crores in terms of GMV, and that's a 45% 2-year CAGR. It's up about 40% year-on-year.

From an NSV perspective, you see that we ended the quarter at INR 275 crores for Q3 with a 2-year CAGR of 35%. Moving on to our annual unique transacting consumers. On the bottom left, you can see that we're now at 2.9 million customers as of the end of quarter 3, demonstrating a 36% 2-year CAGR. And finally, on the right-hand side, orders have grown at about 25% CAGR over the last 2 years, taking us to 2.0 million orders in the quarter itself.

So overall, it's been a very strong performance, I think, for the Fashion business. And on the next slide, we'll see some underlying metrics, which are showing very strong improvement. And I think it's important to note that a lot of this strong top line growth has been in the background of a pretty muted fashion environment for a lot of the other competition.

So here on this chart, we show a couple of metrics, which are demonstrating the improved profitability that's also coming through. So if we start on the left-hand side and we look at the order to unique visitor conversion, we can see a very strong upward trajectory consistently over the last 5 to 6 quarters. We're now at 3.2% as the unique visitor conversion, which is up from 2.3% exactly a year ago. On the bottom right below that, you can see that we're now seeing about 50% of our GMV coming from repeat customers or existing customers. This is a good marker of sort of customer love being built and our retention numbers are improving, which have a cohort we look at.

And these 2 things combined, that is conversion rate. And the increase in repeat is actually allowing us to bring our marketing expenses down, which brings me to the middle chart. So in this middle chart, you can see that the marketing expenses are coming down, again, consistently over the last couple of quarters. We're now at 23.9% of NSV being spent on marketing.

And finally, on the right-hand side, the improvements in marketing and there are other line items as well that have improved is really driving a good expansion in the contribution margin. And we're now at 6% for Q3, which is up from 0.9% a year ago.

I do think net-net, it is the commitment to our positioning, the positioning that is to be differentiated, to be curated, to believe in the premiumization of India's fashion story, which is allowing us to deliver the improvement in metrics. And I'm feeling pretty good about Q3, both from a point of view that the growth has come through along with improvements in contribution margin. So I think it's been a good performance from the team in that regard.

Moving on. The big highlight we want to talk about from the Fashion business perspective is the partnership that we've just struck with Foot Locker. It has been in the news a couple of weeks ago. Foot Locker, as you may know, is a U.S.-based company, $8 billion in top line, Fortune 500 company and a very popular multi-brand footwear specialty retailer. They're very well known for their sneaker culture positioning and their sports positioning. And their top brands include brands like Nike, the Jordan franchise within Nike, Adidas, Puma and so forth.

It goes without saying on the next slide that, obviously, sneakers and sports in this country is exploding. And we are seeing that the search trends for sneakers in India are growing at about 5x over the last couple of years. And so Nykaa Fashion definitely wants to play in the sneaker trend that the country is seeing. We think it's a great opportunity, which will likely be about $4.5 billion by 2027. And so it's in the context of finding a great retail partner in Foot Locker as well as in the context of the trends we're seeing in sneakers, both on our site and more generally, that on the next slide, we're really proud and excited to announce our partnership with Foot Locker, where we are going to serve as the exclusive e-commerce partner.

We're going to run their India website as well as provide us shop-in-shop format within the Nykaa Fashion and Nykaa Man apps. And our offering will include footwear, apparel, accessories. I think it's a really strong move from the point of view that we will get access to some fantastic assortment, which will strengthen our positioning as being premium curated and now also a very strong player in the sneaker and sports space.

With that, I'll hand back over to FN to take us through the House of Brands slides.

[Falguni Nayar, executive]

Adwaita, I thought you are going to take us through the House of Brands.

[Adwaita Nayar, executive]

Okay, sure. Moving on. So I think as a reminder, this is not the first time we're mentioning this. We do have a bouquet of our own brands that we're very proud of. We don't call them private labels. These are truly our own brands that were hoping and aiming to build with a lot of consumer love in the country. We have 13 brands on the Beauty side.

On the left-hand side, you can see these we've built in-house, some we've acquired. Three of them have hit actually considerable scale, and you can see those starred on the top side.

So Nykaa Cosmetics is an INR 400 crore annualized brand. Kay Beauty is an INR 200 crore annualized brand, and Dot & Key has hit an INR 500 crore mark. So very proud of sort of the traction we're seeing in a couple of these brands.

On the right side in Fashion, we've spoken about this before, but we do believe that owned brands in fashion have a particularly important role to play. The customers are [starved brands]. And so if we can create a lot of good assortment, which is what we're trying to do, I think it can be a win-win both for the customer and for the platform. [Indiscernible] as well, 2 brands have had breakthrough performance. Twenty Dresses has hit over INR 100 crore run rate as well as Nykd, which has also cross INR 100 crores.

I think particularly in Fashion, the numbers have to be seen in the light that a lot of the brands, which have started in the last 2 to 3 years. So their performance in terms of scale is quite commendable. We are really trying to double down on our own brand strategy, really strengthening to get our capabilities from innovation, creativity, marketing perspective so that we can become a true House of Brands and a true consumer brands company and build some wonderful brands through this.

Moving on. Here, we talk about the top line in BPC in particular, for these owned brands. So you can see in quarter 3, this vertical delivered INR 315 crores of GMV, which is a 34% 2-year CAGR and a 40% year-on-year growth.

In terms of the contribution to the overall BPC segment, it's 13.3%. And on the right-hand side, you can see similar numbers for the NSV level, which has now hit INR 194 crores, NSV at a 32% CAGR.

On the bottom, I'll draw your attention to this pie chart, which shows that a significant portion of the sales are obviously coming from Nykaa. So Nykaa Online is 53%. Nykaa physical stores is 13%, but 34% is also coming from other third-party channels, predominantly GT/MT. And we do believe that for these brands to stand on their own two feet, they do need external distribution as well.

Moving on. On the Fashion side, again, it's been a good performance over the last 2 years with this vertical hitting about INR 116 crores from a GMV perspective and INR 46 crores from an NSV perspective for Q3 showing about a 57% to 60% CAGR -- 2-year CAGR for both metrics.

And from a channel mix perspective on the bottom, you can see that 54% is coming from our own channels and 46% is coming from other parties, whether it's GT/MT, other e-commerce players and so forth. We can move on.

So with that, I'll hand over to Vishal to walk us through the eB2B business SuperStore by Nykaa. Thank you.

[Vishal Gupta, executive]

Thanks, Adwaita. Next slide, please. So look, eB2B is a very young business. But every month, every quarter, it is going from strength to strength. As you can see in the last 2 years, we have grown our GMV by more than 31x, our NSV by more than 40x, and all that is coming through expansion of our customer base. And we have 35x increase in transacting retailers and 38x increase in number of orders per quarter, and now we have hit 337,000 orders per quarter.

And you can see that it's a business which is growing quarter-on-quarter as -- and we are improving our importance to the retailers as well as to the brands that we serve because ultimately, it's a scale business. And if you see the next slide, you will see the benefits of scale coming through because while we scale, we are super mindful of improving the profitability. And it becomes a virtuous cycle where scale improves profitability and profitability allows you to improve scale.

You can see that between GMV and NSV alone, we have reduced our leakages by 40%. They are through very rigorous operational control and also improving our service level to the retailers, which means that we have much lower damage returns and returns by our customers. There is some improvement also in the conversion because of lesser discounts and lesser schemes, which means -- which is lower retailer margin, which means better conversion because it's less discounts.

There is a 13% increase year-on-year on the AOV. And this tells us that our importance to the retailer is increasing because the retailers are giving more and more of their business to us, which again becomes a virtuous cycle because we get bigger orders and bigger orders are more profitable and we get more loyal customers.

Importantly, 42% of our turnover is what we call high margin featured brand, which helps us improve our profitability. And you can see the improvement that we have made in our contribution margin which is coming from this profitability as well as reduction in costs. We have reduced 580 bps in overall fulfillment cost through lower warehouse costs, lower fulfillment freight cost as well as much lower packaging costs, which we have reduced by half.

We have also improved our field force productivity and reduced our sales and distribution expenses by 170 bps. So overall, significant improvement in our contribution margin. Next slide. And like I said, this comes a lot by improving our service to the retailers because it is a service business.

And from 10 warehouses, we have moved to 13 warehouses. You can see 3 new warehouses, Patna, Chennai and Bengaluru, and where we are closer to customers, which means lower cost, lower service time and improved happiness of the retailer and improved margins for us. So we have total 2.5 lakh square feet, and we are covering 950 cities. Yes, so month-on-month, very high scaling up of the business, but scaling up with profitability. Over to Ganesh.

[P. Ganesh, executive]

Thank you, Vishal, and good evening, everyone. As you can see, all our business verticals have delivered strong growth in quarter 3 FY '24 despite macro pressures around discretionary sectors. With that context, I would like to take you through the financial highlights for the quarter.

As you can see, our company delivered healthy growth on both revenue at quarter 3 and 9 months level growing at 22% and 23% respectively. Our gross margin came in a little lower at 42.5% this quarter versus 43.4% in Q3 FY '23. The drop is primarily on account of the increased mix in our eB2B business at a consolidated level, as also on account of some softness in service income in the BPC business.

Our EBITDA margins have expanded to 5.5% in quarter 3 FY '24, led by improvement in our fulfillment expenses, employee expenses and other expenses. And this improvement has been achieved in spite of higher ESOP costs and costs pertaining to our omnichannel launch in the GCC region, which cumulatively accounted for 0.6%.

We have greater details on the flow between EBITDA margin and this adjusted EBITDA margin, which I just mentioned about 0.6% in the later slides. Our PBT for quarter 3 FY '24 stood at INR 26.5 crores, growing strongly at 109%. And our PAT in quarter 3 FY '24 stood at INR 17.6 crores, again, with a strong growth of 107%. Going on to the next slide.

Here, you can see a snapshot of our consolidated P&L for the quarter as well as for 9 months. We have achieved improvements in our profitability through improvement in fulfillment expenses, improved scale efficiencies on employee costs and optimization on G&A.

Moving ahead on to the next slide. Here, you can see the vertical reporting, which gives details of the individual businesses. The operating leverages have helped us to drive efficiencies in our contribution margin. Our Fashion contribution margins, as you can see, have smartly expanded by 510 basis points Y-o-Y, while our other verticals have also narrowed down the contribution margin impact and have expanded 344 basis points.

Going to the next slide. This slide highlights how our business verticals have been consistently improving on profitability. As you can see, there is a healthy profitable growth across all the 3 business verticals. And while on an overall basis, the EBITDA margin does not fully reflect this growth, which is seen on account of all the verticals, the primary reason being the eB2B business, as we can see, has been growing significantly in terms of salience and it's upwards of 7% at this point, as you can see in the bottom right chart.

This slide further elaborates the movement between contribution margin and EBITDA, which is primarily on account of employee expenses and other expenses. These expenses, as we have shared previously, were higher in FY '23 since we were in a stage of investing ahead of the curve. They've started moderating over the last few quarters, and those benefits are starting to show up.

Another point to note over here is that almost 40% of our G&A spends are on web and tech investments and with the rest of the G&A spend continuing to be stable.

Moving ahead. Here, you can see the EBITDA to PBT bridge. As you can see, depreciation and amortization expenses at INR 248 million this quarter at a 45% Y-o-Y is on account of expansion of retail stores and expansion of our warehouse capacity over the last year. As a percentage to net revenue, these costs have increased by 22 basis points, lease costs, both in terms of depreciation and amortization as well as finance costs, have been relatively stable. Interest costs have moved broadly in line with expansion in business and resulting increase in working capital and being offset by higher interest on the investments that we hold. And this has resulted in EBITDA margins, improved expansion and aided by DNA, the overall PBT margins have improved by more than 60 basis points. We just continue to focus on growing top line as well as in terms of continuing to grow profitably.

Moving ahead. What you can see on this slide is a summary of the proposals, which were approved by the Board of Directors of FSN E-commerce at the Board meeting held today. A brief summary of the proposals.

The first one is infusion of additional equity of INR 150 crores in Nykaa Fashion. Nykaa Fashion has been scaling up quite nicely. And at this point, we feel it's appropriate to capitalize this company. So that's the driver behind this proposal.

The second one is consolidation of the Fashion owned brands business into the parent company. And this will happen over the next 2 quarters. And in terms of holding structure, it will bring it on par with the holding structure of own brands that we have in the BPC business.

The third one is a demerger of the eB2B business from FSN Distribution to Nykaa E-Retail. This again helps in streamlining the holding structure, simplifying the structure, whereby the online Beauty business gets consolidated into a single entity.

So that's a summary of the proposals, which have been approved by the Board today. With that, I would like to thank everyone for joining this call, and I would like to pass on the mic to Sheela to initiate the Q&A session.

[Sheela Rathi, analyst]

Operator, we can open up for the Q&A session. .

[Operator]

We'll now begin the question-and-answer session. [Operator Instructions]. We will take our first question from Zoom. The first question comes from Sachin Dixit. So please introduce yourself and your company name. Please do ensure that you're unmuted locally. Unfortunately, we are not getting any response. So we will move on to the next question. [Operator Instructions] The next question comes from the line of Vijit Jain.

[Vijit Jain, analyst]

My question is on the BPC segment. The presentation shows and suggests that the premium segment within BPC grew ahead of your overall BPC, GMV growth. And you did -- while you did note pressure in masstige segment in your opening remarks and in the press release and trading update as well, I'm just wondering on why the BPC gross margins look a tad weak given the premium segment did so well. .

And related question to that, did discounting in your own brands go up further in 3Q versus 2Q? And additionally, did retailer margins in the -- in your partner brand see any kind of a change Q-o-Q as the brand partners kind of combated the weak environment in India? That's my first question.

[Falguni Nayar, executive]

So I'll just answer about the private label brand discounting, and then I'll pass it on to Anchit. So yes, I have to say that our private label brand discounting did go up like every other brand in the environment, especially the masstige brands. And to that extent, that is built into that. And I now pass it on to Anchit on commenting on the retailer.

[Anchit Nayar, executive]

Yes. So maybe I'll take the question in order. I think a couple of different aspects you touched upon. So the first is regarding the increasing or the faster growth premium in prestige brands on the platform. So I think, look, the reality is that premium/prestige beauty was a very small percent of the overall BPC market, so it is incredibly under-indexed. So it is growing off of a smaller base, so there is more opportunity for those brands to continue to grow faster than the platform. That's one.

Second is as Nykaa, we strongly believe in continuing to drive awareness for and continue to do business in the premium/prestige space because these are the kind of brands that drive strong customer repeat and loyalty. And as I said in the beginning, it's also just generally better unit economics for us. So we're happy with the results that we're seeing with the prestige brands. But again, it's coming off of a very small base.

So generally, the whole market needs to grow, and that's when we'll start to potentially see better or see positive impact from a gross margin perspective. With regards to mass and masstige brands, I think as many of you know the commentary coming from some of the listed names is that the demand has been soft in rural markets. And I think as a result, there was an urgency to get short-term revenue growth and as -- which led them to spend more money on discounts and promos than on marketing investments on platform.

So some of the marketing investment dollars moved from on-site marketing to promo spend. And I think that's probably a short-term impact that should revert hopefully in the medium term. I think FN covered a bit about own brands, discounting. And finally, our retailer margin being impacted by a partner brand, I think the short answer is, no. In terms of product margin that we receive from our brand partners. These are long-term contracts, tend to be anywhere from 3 to 5 years and tend to be renewed at the end of that period of time. So no impact on retailer margin on that front. So I hope I answered all your questions.

[Vijit Jain, analyst]

My second question is just looking at the marketing spend for you guys in the BPC segment, right? I know this is a seasonally strongest quarter for business activity, everything for you guys. So there's a seasonal Q-o-Q uptick to be expected, but it just looks from a Y-o-Y perspective, also up quite nicely at 45%, 50%. So should we read that in conjunction with your comments on how competition was behaving in the own brand space? Or is there more to it?

[Anchit Nayar, executive]

So discounts are not captured in this line item, right? So this is -- I don't think it's got anything to do with our own brands, promo strategy to compete against the competition. What I would say is that, as we've said in the past, we are very strong believers in category expansion. And if Nykaa doesn't continue to invest behind growing the Beauty category in India, then really, I don't know who will take on that initiative. So we feel strongly that as a large beneficiary of this category and as a large player, it is important for us to continue to grow the ecosystem.

And events such as Nykaaland, but many more, we just showed you one example of Nykaaland, but there are other such events, which we host throughout the year, which are category building initiatives that, of course do carry some amount of cost alongside that. And that is showing up in the marketing expense line item. That's one.

The second, and probably the largest share, of course, is our strategic focus on customer acquisition. So for us, a new customer acquisition is a strategic priority, and we definitely pushed the pedal on that in Q3 given that it was a first this time, given that we were seeing good traction. We wanted to invest in new customer acquisition as we go into, obviously, a new fiscal year, we want to be aggressive on acquiring those new customers into the Beauty world, which we are helping to create the market. So we also want to ensure we are capitalizing on those customers and acquiring them early on. So I think the increase in marketing expense is a combination of the 2 customer acquisition spend as well as our category building initiatives. But if there's anything else, either Ganesh or FN would like to answer them.

[Vijit Jain, analyst]

Yes. And just my last question, I suppose, as you look forward into the calendar year 2024 or FY '25, can you talk a little bit about where do you want the overall business margins to kind of go? Is there a target? Or is there any kind of guidance you can give on those front that will be extremely helpful.

[Falguni Nayar, executive]

I think it's too forward-looking for us to be able to address like that. But I think you can see how we are trying to manage all our elements of both margins as well as cost elements.

[Operator]

The next question today comes from the line of Vivek M.

[Vivek Maheshwari, analyst]

Myself from Jefferies. Continuing with the questions on BPC. Just to get it right, the gross profit margin quarter-on-quarter or year-on-year, which are down about 60 basis points, that is essentially because of own labels? It's not because of Nykaa funding part of the discount or promotion. All of it is taken care by the brands.

[Anchit Nayar, executive]

Sorry, Vivek, we are losing you. If you don't mind, just restating the question, if you don't mind. I think you're cutting in and out.

[Vivek Maheshwari, analyst]

Am I audible now?

[Anchit Nayar, executive]

Yes.

[Vivek Maheshwari, analyst]

Sorry about that. So Anchit, my question is this 60 basis points quarter-on-quarter and year-on-year decline in gross margin that's only because of own brands and you have nothing to do with the 3P brands on the platform. Is that understanding correct?

[Anchit Nayar, executive]

So I didn't catch the entire question, but I understood that it refers to the roughly 80, 90 basis point decline in the gross margin for the BPC business. So what I would say is that, as I mentioned in my answer to the previous question, some of that is coming from large mass and masstige brands moving some of their advertising spend away from advertising and into the promo bucket because generally, companies -- consumer companies said to have one large A&P budget and the use of the proceeds, the use of the cash is fungible between either advertising or promo spend.

And as I mentioned, given the other pressures they're facing in other parts of their business and markets, there has been a slight higher emphasis on promo spend than on advertising in this past quarter. So some of the impact is because of that. And there is no real impact of the consumer brand. I think if you look at our own brands, they have in fact gained a little bit of share year-over-year in terms of their contribution to our business. So that is not really the impact that is playing out here. It's mostly, as I said, just some softness on the marketing income this quarter.

[Vivek Maheshwari, analyst]

Okay. And Anchit, because Nykaa is a 1P platform, so potentially buy and sell it's -- because it's a 1P base. If brands are discounting more, do they actually adjust it so that it goes out of their pocket and not your pocket so that you are protected? How does it happen in the real world?

[Anchit Nayar, executive]

So again, I think I caught some parts of the question. But yes, we are a 1P model. But as we have said, historically, that for Nykaa, retailer-funded discounting, we believe is very short-term approach to doing business, and it's not the right thing in the long term, if you're looking to grow the category and to drive what we call it the art of retailing, which is our core focus. And it's short-term gain, but we think longer term. It attracts the wrong quality of customer, and it drives the wrong type of customer behavior.

That being said, of course, if any of our brand partners would like to pass on discounts to consumers that is totally their decision, and they do. So if there is a discount that the brand wishes to pass that is passed directly on to the consumer, there is no role that Nykaa plays on that front.

[Vivek Maheshwari, analyst]

Okay. Sure. Last question, 33.8% contribution margins in BPC, which is a 7-quarter low. Do you think the margins have bottomed out at this level?

[Falguni Nayar, executive]

We can't hear your questions. And I think maybe we can give chance to others if they are in the queue. Maybe you can reconnect.

[Anchit Nayar, executive]

Maybe you can probably type it, yes. If you just type it in the chat box, if you're having some connection issues, we can address it maybe a little bit later.

[Operator]

The next question today comes from the line of Nihal Jham.

[Nihal Jham, analyst]

This is Nihal Jham from Nuvama. My first question was on the BPC bit itself. If I look at the contribution margin for the BPC segment, over the last couple of years, obviously, the fulfillment from -- lever from fulfillment expenses come in. Just wanted to get a sense that where do we see this contribution margin stabilizing in the longer term? And what would be the future levers to achieve that? .

[Anchit Nayar, executive]

So maybe I'll -- yes, go ahead.

[Falguni Nayar, executive]

No, I think these are very healthy contribution margin -- and I think we will continue to work towards improving certain components if we find the ways to improve it. So if there is ability to improve fulfillment expenses, even from here we would definitely capture that.

But I think one trend is clear that we would also like to invest more in marketing and building, driving the category adoption as well as all that Anchit has been saying so far. So like you saw that marketing expenses have also gone up over last year, so I think there will be -- there's no desire to keep improving the contribution margin, but to grow the category and improve the prospects of the business. Anchit, anything you would like to add?

[Anchit Nayar, executive]

Yes. No. I think you summarized it well, which is the priority #1 for the BPC segment going forward will be growth because we feel that we've managed to deliver pretty healthy contribution margins, but we are incredibly optimistic and excited about the opportunity that exists in Beauty in India today, the kind of our focus that India is now receiving from global beauty brands, the kind of customer behavior, which we are witnessing, the kind of premiumization that is -- that the market is undergoing. So we feel there is no time like the present to continue to reinvest in the business.

So I think that's priority #1 will be on driving more customer acquisition, bringing more customers into the world of Beauty. And also, there is obviously a cost associated with retaining customers and driving more customer delight. So investments by us on obviously customer acquisition and retention, but also on customer service as well as fulfillment, I think it's imperative for us to continue that, and you will see more of that to come.

So we feel that we grow this priority #1. But of course, if there is any -- if there are efficiencies that we could find across fulfillment, across marketing, that will 100% be done. But it will also -- those proceeds will be reinvested in continuing to drive outsized growth and growing the overall Beauty market. So we feel that where the contribution margin is today is probably a healthy place for us to be in the short to medium term. Of course, longer term, if things like generative AI and the other tech automation capabilities play out, you could, of course, see meaningful savings across fulfillment and marketing, employee costs, et cetera.

[P. Ganesh, executive]

I'd like to just add, Ganesh here, is that the contribution margins which you have been seeing at present, they are in line with the historical trend that we have had. And as Anchit mentioned, the fact that we have been able to bring in efficiencies on fulfillment, et cetera, over the last few quarters is also creating room in terms of our ability to invest behind the business, invest in customer acquisition, et cetera.

[Nihal Jham, analyst]

Understood. Just one last question related to the larger business, that I am assuming that based on the discussions, that the priority #1 across all the 3 segments remains, I'm assuming GMV/NSV, and margin would be lower than the picking order at this point in time. Would that be a right thought in terms of how we are looking at the business for the days ahead?

[Falguni Nayar, executive]

We are not saying that the margins would be lower. We are seeing that we are focused on the growth. And we will continue to invest in the business, be it for market creation, be it even faster deliveries and delight to the customers. So I think what we are trying to say is that the objective right now is not trying to push the contribution margin higher.

[Anchit Nayar, executive]

Also each business is at a different phase with growth and its profitability, right? So we feel that if you look at the contribution margin for the BPC vertical, it has increased by almost 300 to 400 basis points over the past 2 years. So there has been significant improvement there, and it's in a very healthy place. So priority #1 is growth.

And I think if you ask Fashion, priority #1 is also growth. But there, there is, of course, more work to be done on the profitability side. And I think that we spoke about the good work we've done in the past quarter. So I think, obviously, both are important. The weightages between growth and profitability can be different for each of the business segments based on where each business is on its own journey.

[Falguni Nayar, executive]

I think on the consolidated level, based on improvement in other businesses like Fashion and B2B, we will see that there will be greater coverage of costs -- fixed costs. And as a result, the EBITDA margin on a consolidated level, we can be optimistic about. But we -- it's not that we're going to try to maximize it. We're going to try to continue to invest in all the businesses and then try and manage for growth as well as profitability.

[Anchit Nayar, executive]

I think the best slide to -- if you go back to the NSV mix slide over the past years, you'll see that just 2 years ago, if you look at FY '22, I mean, BPC accounted for 85% of the total NSV mix. And today, that number is 78%. So despite the Fashion and B2B verticals, which currently have a lower profitability profile them gaining and taking increasing their mix of revenue to the overall business over the past 2 years.

Despite that, I think the consolidated profitability has held up. So I think it goes to show you that Beauty's profitability continues to remain healthy, and Fashion and B2B, are not only are they growing the top line faster, but they are also managing to turn a corner on profitability and drive better margins.

[Operator]

The next question today comes from the line of Percy Panthaki.

[Percy Panthaki, analyst]

This is Percy Panthaki from IIFL. My first question is on the one-off costs that you mentioned, that is the GCC ramp-up and the ESOP costs. They total about 60 basis points. So one is, can you disaggregate the 2?

And secondly, just wanted to understand how much of this will be recurring? Is it that there's a big ESOP charge-out this quarter. And then from next quarter onwards, it's going to be close to 0? Or will it continue at the same level as what it is this quarter? And also the same question on the GCC investments. What kind of percentage of total revenues do you want to sort of cap the GCC investments at? So that is my first question.

[Falguni Nayar, executive]

I think, Ganesh, you want to explain the first?

[P. Ganesh, executive]

Yes. So Percy, as far as the ESOP costs are concerned, the cost which has come into the P&L this quarter is about INR 7-odd crores. And while this will be a continuing cost, given the way ESOP accounting happens, over the next 3 years, we still -- this will be gradually tapering down. So that's the way this cost will progress. It will be a continuing one, but it will taper down over the next 3 years.

As far as the GCC costs are concerned, we should bear in mind that there is a stores rollout plan, et cetera, which is happening as far as GCC is concerned. So these are initial costs, about INR 3.5 crores is the amount, and this would vary going forward depending on how the stores rollout happen.

[Percy Panthaki, analyst]

Okay. My second question is on the BPC, NSV growth, which is over the last 2, 3 quarters are sort of around that 20% mark. And before that, it used to be closer to the 30% mark. And even in our analyst meet, I think the expectation for 5-year CAGR was somewhere in the region of about 27% or so.

So in light of this, I wanted to understand what is the reason why the growth has dipped by about 10 percentage points. And also why basically, it's tracking below our sort of medium-term aspiration. I understand the discounting part to some extent, but do you think that this goes away in 1 or 2 quarters as the discounting anniversarizes? And then if the GMV growth is like 24%, 25%, we see the same NSV growth? Or do you think that there will still be pressure on NSV for some reason?

And secondly, just wanted to understand in context of if we see the consumption space, there is pressure at mass and consumption, FMCG products, et cetera. But your average ticket price per item is in the region of about INR 300, which is like the top decile of the entire FMCG space. And that space, really, if I look at not only FMCG, but any other premium consumption space, we have not seen any kind of slowdown. So in light of this, also, I wanted to understand how the slowdown has happened over the last 2, 3 quarters. Sorry for the long question. I hope I've been able to try and convey what I'm sort of trying to get an answer to.

[Falguni Nayar, executive]

Sure. I think I'll address it, and then I'll ask Anchit to chip in. So I want to say that at no point are we seeing that Nykaa's premium customer is affected by what is happening in terms of the rural slow down. I don't think that's what we have said. I think we are saying 3, 4 things.

The first and foremost, what we are seeing is that -- and I think we've said that earlier also that currently the e-commerce, the Beauty online growth is slightly below the long-term average, and that is a post-COVID phenomenon where customers were very happy to be out and about and shop more in physical retail. So there has been a little bit of a suboptimal growth in online BPC, and we believe that, that will correct going forward. So that's first point #1.

Second point is that from the perspective of discounting. Yes, the brands have had to discount because they've had channel adversity in other channels. And as a result, to chase growth, they are doing higher discounting to deliver on their growth targets as a whole. And that is why the difference between GMV and NSV growth is coming because if the brands want to pass on the discount to the customer, that's what is reflected in the NSV. And you're totally right that the current discounting is at a high level, which cannot sustain in the long run, and it is bound to stabilize or go down also in future. But definitely cannot keep increasing from here. With that, if Anchit wants to comment on any additions?

[Anchit Nayar, executive]

No, I think you covered it. Look, I think we were coming out of a pandemic where obviously e-commerce had grown very rapidly and have taken share from physical retail. So some of that normalization is what's been playing out and there has been a return to physical retail, a healthy return to physical retail, which is good for us. It's a benefit to us because Nykaa also has one of the largest networks of physical retail stores in the country.

However, as I showed you earlier in the deck, physical retail business for us is growing very well, but it's still only 9% of our overall GMV to BPC business. So it's not able to move the needle as much. So I think there's a little bit of normalization in the mix between online and offline. And as a result, maybe the mid- to long-term growth at 30% plus for online is looking more like 25%, 26%. So there is a slight decline as some of that demand moves back into the offline space.

Please remember that Beauty is a category also that lends itself well to offline retail as well. So it's going to be a healthy mix, and omnichannel retailers like us will benefit from that. But I would also like to stress on my other point, which I made earlier, which is that you mentioned some other category discretionary consumer categories that may not be seeing a slowdown. I would also say that Beauty is different in the sense that Beauty is not a category which Indian consumers were historically familiar with. So the awareness for the consumption of beauty in India is still, as I said, one of the lowest in the world on a per capita basis. So a lot of that work needs to be done.

It's not an affordability issue. It's an awareness issue. We always see that consumption of beauty in India is a result of 3 factors. One is affordability, second is availability and third is awareness. And I think the affordability issue is being addressed as the GDP per capita improves, availability in Nykaa is bringing the best brands from all around the world into the country. So that's being fixed as well.

Finally, the awareness needs to improve. If you look at other economies, the frequency of purchase of beauty products, the number of beauty products bought per customer is much more significant than India. So it's an awareness issue that again we're working on through category growing initiatives like Nykaaland and of course, a lot more than we do.

[Percy Panthaki, analyst]

One last quick question, if I might be allowed. Any comments on your market share amongst the e-tailing -- BPC e-tailing space with some new competition coming up. Over a 2-year period, are your market shares in the BPC e-tailing space constant? Or have they gone down?

[Anchit Nayar, executive]

So as you know, there is none of the other Beauty retailers are listed. So it's difficult for me to say with 100% confidence, but of course, we have enough market intelligence and enough understanding of the business. What I would say is that we don't think our market share has declined at all because of the new competition.

When we -- from our understanding, some of the horizontals have been high single digits, low double-digit growth for the category. And the new entrants still are very, very small and are not really impacting us from a market share perspective. So we would -- our understanding is we have probably grown in line, if not slightly faster than the online BPC market growth.

And so our market share is probably very healthy and in line with previous years. But as I said, also remember that we are also a very large offline retailer of Beauty. And there, we continue to take market share because we are expanding our store count very rapidly and becoming one of the largest networks of beauty retailers offline as well. So I think in aggregate, definitely, market share has probably improved year-over-year.

[Operator]

The next question today comes from the line of Abhisek Banerjee.

[Abhisek Banerjee, analyst]

This is Abhisek from ICICI. First question goes out to Ganesh. Sir, this infusion of equity into Nykaa Fashion, this is essentially a noncash transfer, right? So basically, whatever was given in the form of debt is being converted into equity. Is that correct?

[P. Ganesh, executive]

Yes, that's right. Your understanding is right. While there is an INR 150 crore equity, which goes in, it goes into repayment of debt. And repayment of debt given by the parent company. So in a sense, it's a conversion of loan [indiscernible]. We are capitalizing the Fashion business.

[Abhisek Banerjee, analyst]

Understood. And the slump sale, there will be some cash transfer, right?

[P. Ganesh, executive]

That's right. Yes. Just based on a valuation which has been done by Grant Thornton. And on that basis, there will be an actual consideration, which will get paid.

[Abhisek Banerjee, analyst]

Okay. So overall, it is correct to think that probably the contribution margin of the Fashion business will slightly improve after these changes?

[P. Ganesh, executive]

Yes. Again, when you look at the Fashion entity in terms of the fact that there will be a cash infusion, which goes into the Fashion entity, the overall profit profile of Fashion entity will improve to the extent of lower interest cost primarily.

[Abhisek Banerjee, analyst]

Understood. That's very helpful. Now Anchit, if I may ask a question on the growth aspect that you were talking to and one of the earlier callers also alluded to. It is with regards to where you see the growth really coming from? And basically, just to say this quarter, you saw a faster growth in the premium side of Beauty, right? So do you think that is a more sustainable trend? Do you see the premium side growing faster?

And also in terms of customer profile, right? I believe you already have an exposure to slightly more premium customers, right? So whom do you see really buying more? Are the more premium customers buying more? Or do you really see growth from the value customers that you have?

[Anchit Nayar, executive]

So maybe I'll start with on the prestige/premium side. As I said, today, prestige/premium is less than 10% of overall BPC spends in India. So it's very under-indexed. And this will continue to grow. And it'll continue to grow at a rate faster than mass and masstige because mass and masstige brands are very, very well distributed and are already at a reasonable large scale if you really look at few of the large ones across India, right?

So the premiumization of Beauty is a trend that happened globally, especially if you look at China over the past 15 years, and India has not even begun that trend yet. So the premiumization of Beauty will happen, and Nykaa is well placed to be a beneficiary of that. Because as you mentioned, we do have a large percent of the premium consumers in India today are currently Nykaa shoppers. However, that being said, we also have a very large base of nonpremium and nonprestige shoppers. And in fact, that is a massive opportunity for us to continue to acquire customers in the country because today's value shopper is tomorrow's prestige shopper.

As I said, it's not really an affordability issue. It's more of an awareness issue. And that's the work that Nykaa does. Once we acquire customers, our ability to use CRM and CLM capabilities to improve the unit economics, improve the annual consumption value of our customers, improve the average order values of our customers is quite meaningful. And you've always -- we've always said that our repeat buyers tend to have higher average order value than our new buyers. So that's [Indiscernible] we're able to do once we acquire the customer.

But I think the biggest opportunity, again, I'll say it again, is you have even the existing Nykaa customers today, even if they're shopping premium products or they're shopping value products, they are still under-indexing in terms of their frequency of purchase, their number of items in the cart, the category with their annual consumption value is still comparably lower than what it could be. So you will see ACVs of existing customers improve if we do the right things as a company, and you will see a lot of customers who are currently not shopping Beauty at all. You have a lot of personal care shoppers in India. India has historically been a personal care market.

But if you look at other comparable markets, today's personal care shopper is more is Beauty shopper. So there is a large number of consumers who will come into the Beauty funnel. And again, that's Nykaa's responsibility to acquire these shoppers and sell them more Beauty products. So bringing personal care and non-beauty buyers into the Beauty shopping funnel is a massive opportunity. There are millions and millions of customers who currently are either buying personal care or other lifestyle categories who have -- who are not consuming Beauty yet.

So that is also a low-hanging fruit for us, and that's where a lot of the investment in terms of new customer acquisition will go. And as I said, existing customers will be encouraged to shop more frequently and shop more items per cart, and that will be driven by a lot of the repeat customer mechanisms that we have in place.

[Abhisek Banerjee, analyst]

Understood. So you actually also touched upon the theme of the next question that I wanted to ask you, which is you kind of briefly spoke about how awareness is the issue not affordability. And I think that really ties well with the statement that you and Falguni ma'am made on the fact that you think the contribution margins for the BPC business are at an optimal level. So does that really mean that the additional gains, which you would be getting in the contribution margin due to scale that will be reinvested into advertising and maybe more events like Nykaaland, which we saw. Is that the thinking? I'm just trying to understand.

[Anchit Nayar, executive]

Yes. I can say in the short -- look, in medium to longer term, I don't want to give guidance in terms of will all efficiencies and savings be reinvested in marketing. But we think short term, definitely there is a massive opportunity for us to do category expansion work, and that's where we are spending some of the money. And the remainder is, of course, on, as I said, the millions and millions of shoppers in India who are shopping online, who are comfortable with using digital forms of payment, who are shopping large ticket items in other discretionary categories, but are still not buying Beauty. There is tremendous opportunity for us to acquire those customers and do a lot of category awareness work on them.

So I think in the short term, yes, as we said, we are very early in our journey in terms of total number of transacting customers and our platform is still small compared to the opportunity in India. So there is a lot of investment and a lot of work which we plan to do to bring more customers on to our platform. And I think the advantage that we have is 10 years of being in this business, we have tremendous -- we feel brand equity in the market.

We are recognized as thought leaders and almost being synonymous with Beauty by the consumers. So really building upon that good momentum and work we've done over the past 10 years as opposed to starting from scratch and trying to build legitimacy from scratch. I think that's something that we have our work around for us. But of course, there is investment to be made and time to be given to this strategic priority.

[Falguni Nayar, executive]

Anchit, I don't know whether you spoke about CSMS. But when we did the education on CSMS as a routine, cleanser, moisturizer, serum and sunscreen, I think what we found was that the growth in sunscreen as well as serums on our platform was in excess of 60% to 100%. Like on serum, 60%, 65% year-on-year growth and sunscreen was 100% year-on-year growth.

So I think a very wide education needs to be done to create the demand. And we are believers that for capital consumption of Beauty can go from $15 to $50 with increasing per capita income. And affordability is not an issue, but it's the knowledge and education that is important, and Nykaa's done that from day 1 to grow the market.

[Abhisek Banerjee, analyst]

Perfect. Very clear. Adwaita, just one question to you also. So amazing improvement in the Fashion business as of now. Just one question that I have is on the new sneakers business that you seem to be getting in. And my understanding is, generally, globally, it is a more male-centric kind of product category. So do we really have the kind of customers or consumers on our platform who would really be looking for sneakers? Or are we trying something different here?

[Adwaita Nayar, executive]

So a couple of thoughts. First is, no, I feel that sneakers is a great opportunity for women as well. We see that it's growing incredibly fast already with the category that we have on our site. So I wouldn't say that it's just a male dominated category. I would say that there's potential in both genders for this to be a significant play.

Secondly, I do also see it as an initiative that will help us acquire more male customers into our business, and that too, with the right type of product, which is premium sports and sneakers. So to answer your question, I think, one, we will be able to serve our existing customers better. They are most definitely interested in these products. If you look at all the women around you, they are wearing Nike, Puma, Adidas and so forth on their feet. But it also allows us to attract the male consumer with a very compelling offering. And through this, we'll have some assortment, which no one else in the country has. So we hope to capitalize on both.

[Falguni Nayar, executive]

And also, we have both men on our Nykaa Fashion platform as well as we have Nykaa Man as a platform, which is also growing nicely.

[Abhisek Banerjee, analyst]

Okay. So this could be a hook to get in more men into the platform?

[Falguni Nayar, executive]

Yes, also.

[Abhisek Banerjee, analyst]

Understood. And just one last final question on the B2B business. I saw that you have created a warehouse footprint, which is quite spread out. But generally, in this kind of a business, the traditional thought process is to go by a cluster kind of approach, build scale in one cluster through higher density and then scale up. Any reason why you are taking this approach?

[Falguni Nayar, executive]

I think we wanted to build a national scale to be relevant to our brand partners. And we are achieving that with this network, and we may go to a few more because I think intrastate is what is clearly necessary here -- at least minimum and then also certain radius around the warehouses are all very critical to success. And these have been carefully chosen from that perspective.

And there will be more warehouses -- few more warehouses going forward, like at least one per state. But you have to also superimpose this on already existing warehouse network that we have for our e-commerce business, which also by now is in every state pretty much. So for us, it's not -- I mean we're not a start-up company. So we have a lot of investments already made, which can plug and play into this to do the section.

So like some brands we may receive inventory in larger warehouse and then send it to the smaller warehouses. So I think what works for Nykaa is very different than from a total start-up company. So thanks.

[Operator]

The next question today comes from the line of Kapil Singh.

[Kapil Singh, analyst]

This is Kapil from Nomura. Most of my questions have been answered. Just wanted to check, what are the growth trends we are observing currently in the key segments? Is there any improvement that you're noticing? Or they are fairly similar to what you saw in the last quarter?

[Falguni Nayar, executive]

So I think without sounding too optimistic, I'd like to point out that the global CEO of every beauty company has visited India over last 6 to 9 months. So I think Indian market has become a very promising beauty market for global companies, where from earlier ranking, maybe in top 7 or 8 it is starting to rank in the top 5 markets, sometimes top 3 from importance perspective.

So I think the -- and also Indian customer wants best of what the world has to offer because of social media. So I think now the challenge lies and of course, companies like Nykaa have put in place very effective supply chains, very effective network already in place, like our store network is already 175 stores in 65 cities plus, and we will take it to 100 cities before you know it, it will be at more than 250 store network.

So I think we've created the networks that are -- it's possible for these global brands to leverage. And that's why we keep harping on education, but I think the trick lies in more and more education. And I think Nykaaland, and we do a lot of beauty bars now, we do a lot of in-store master classes for the customers. And there is a big, big emphasis on education so that we can grow the category demand.

Like if you look at certain -- like if you take a little bit of a far seat and you see the number of people who are trading stocks, so if you see the number of people who are flying airlines, domestic airlines, these are all very large numbers. And I think why can't beauty consumption be at that level. It's not a very large ticket item. It is a very small ticket item, and it's a very affordable item for most consumers. And I think the Indians have not been very enthusiastic about beauty and personal care consumption. And I think the beauty and personal care industry is very underdeveloped in India compared to globally, like I keep pointing out every time, Fashion also is 5x the entire beauty and personal care market.

So we think that there is work to be done, and Nykaa will continue to do that work. And of course, lot of beauty companies will -- beauty and personal care companies will also do the work. Like you are aware that Hindustan Unilever has now -- have a beauty specific focus rather than just the personal care. So I think more larger companies in the world are joining the bandwagon, like L’Oréal Luxury, which was L’Oréal Luxe, which was not present in the country, is entering with [Indiscernible] Lancome and more brands, like Urban Decay through us, and they came in through CeraVe. So we do see the big companies investing in India opportunity and together, all of us being able to grow the market to its rightful size and scale.

And on the Fashion, I think what I would like to point out is that we are just a 4-year business, which sometimes people forget, and there's a lot of assortment growth at this early stage. And with every passing year, we are bringing new assortment that makes the platform more complete and improves conversion and customer stickiness to the platform. And that same will continue over the next couple of years. Foot Locker is one such effort in that direction, but there will be more.

And I think through that process, also, we feel very excited about what possible future lies ahead. And I think marketing costs, if we can bring it under control, then that means we can afford more investment in the business.

[Kapil Singh, analyst]

Okay. And just one small follow-up on this adjusted EBITDA margin that we have reported. Could you tell us what was the adjusted EBITDA margin like-to-like for Q2 of FY '24 versus Q3 of last year so that we can understand what you're trying to convey here?

[Anchit Nayar, executive]

No, just to clarify, these are ESOP costs, which have kicked in now. And so also as far as the GCC spends are concerned, they have kicked in now. Since it's coming for the first time, that's the reason we have highlighted. So while there have been past ESOPs, et cetera, there's been a grant which has come in now. And given that this is sizable at around INR 7-odd crores and coupled with the GCC spend, which is about INR 3.5 crores, it's a sizable amount. So that's the reason we have flagged it.

[Kapil Singh, analyst]

So we will be reporting this adjusted EBITDA margin every quarter from now onwards or this is just highlighted for this quarter?

[Falguni Nayar, executive]

We've just highlighted for this quarter so that you could understand. I don't think we want to create too much of special reporting every quarter.

[Operator]

That was the last question we can take today. You may reach out to Nykaa's Investor Relations team for any additional queries. I'd now like to hand the conference over to the management team for closing remarks.

[Falguni Nayar, executive]

Yes. Thank you very much, team Morgan Stanley, for as usual doing a brilliant job on facilitating excellent interactions. And I hope we've satisfied all the participants, and thank you very much for all the participants for being on the call. And pretty insightful questions, and I hope we've been able to provide answers to most of your questions. But otherwise, please reach out to us separately.

[Adwaita Nayar, executive]

Thank you.

[Anchit Nayar, executive]

Thank you, everyone.

[P. Ganesh, executive]

Thank you very much.

[Operator]

On behalf of Morgan Stanley, that concludes this conference. Thank you for joining us, and you may now disconnect.