Nykaa also dips below IPO price; can the bonus issue help?

Amidst the carnage that marked digital stocks post listing and the deep losses in price, the one stock that stood out had been FSN E-Commerce Ventures (the owner of the Nykaa brand). Unlike the other digital names like Paytm, CarTrade, Zomato and Policybazaar, the stock of Nykaa never dipped below the issue price of Rs1,125 for close to a year. However, things have changed drastically for Nykaa in the last few months. In the month of October alone, the stock has lost close to 25%. The table below captures the gist of the price movement in the last 1 month with the high and low prices to give a much better perspective of the sharp fall in prices.

As of the close of trading on 28ths October 2022, the price of Nykaa has fallen below the Rs1,000 mark and the stock has closed with deep losses at Rs981.80. The stock is not just down over 25% in the month of October. If you look at the one year high price of the stock, it had touched Rs2,573 in November last year. From that peak price, the stock is down a full 62% to the current levels. The stock is also 13% below its issue price of Rs1,125 in the IPO. So, what has driven this sudden fall in price?

Of course, there is the digital effect where Nykaa was the only unaffected digital stock for too long. At some point, the reality had to catch up. Secondly, with the completion of 1 year of trading, it opens up the gates for exit to a lot of pre-IPO investors and that is likely to see a lot of selling. Speculators have been selling the stock quite aggressively ahead of the event and that has also led to a sharp fall in the stock price. Above all, the quarterly numbers have failed to flatter the street especially after the promise that it showed around the IPO time. The slowdown is also likely to hit its future fund raising plans and that is a negative too.

Will the bonus help the cause?

Earlier this month, the board of directors of Nykaa had approved the issuance of bonus equity shares in the ratio of 5:1 i.e. Nykaa will issue bonus of 5 shares for every 1 share held as on the record date. The record date for the eligibility to get bonus shares has been fixed at November 03rd, 2022 and so the last cum date will be the 01st of November while the ex-date for bonus will be 02nd November. Bonus shares will be credited to the demat accounts of eligible shareholders within 2 months from the date of board approval i.e. latest by December 02nd, 2022. 

What investors would be really unhappy is that this bonus shares are being issued out of the Securities Premium Account available as on March 31, 2022. Bonus shares are fully paid additional shares issued by a company to its existing shareholders. This eventually boils down to just an accounting adjustment as the premium collected from the shareholders are being ploughed back as bonus shares. That is understandable as it does not have any accumulated profits. For now, the markets are likely to be unimpressed. That is reflected in the stock price of Nykaa.