Fsn E-Commerce Ventures Ltd (NYKAA) Q3 FY23 Earnings Concall Transcript

Fsn E-Commerce Ventures Ltd (NSE:NYKAA) Q3 FY23 Earnings Concall dated Feb. 13, 2023.

Corporate Participants:

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

P. Ganesh — Chief Financial Officer

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

Analysts:

Kapil Singh — Analyst

Sachin Salgaonkar — BofA Securities — Analyst

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Manoj Menon — ICICI Securities — Analyst

Manish Adukia — Goldman Sachs — Analyst

Amit Sachdeva — HSBC Securities — Analyst

Sheila Rathi — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen good day, and welcome to FSN E-Commerce Q3 FY ’23 Earnings Conference Call Hosted by Nomura Securities. [Operator Instructions]

I now hand the conference over to Mr. Kapil Singh from Nomura. Thank you, and over to you.

Kapil Singh — Analyst

Hi. Good evening, everyone. On behalf of Nomura Securities India, I’d like to welcome you to this earnings call. On the call with me from FSN E-Commerce Ventures, we have Ms. Falguni Nayar, Executive Chairperson, MD and CEO; Mr. Anchit Nayar, Executive Director and CEO, Beauty e-commerce; Ms. Adwaita Nayar, Executive Director, Co-Founder, CEO, Fashion; Mr. P Ganesh, CFO; Ms. Sunita Sachdev, VP Investor Relations and Strategy.

With that, I hand over the call to Ms. Falguni for opening remarks.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Thank you, Kapil. Good evening, everyone, and thank you for joining us on the call today. It is always a pleasure to interact with all of you. Before I start the presentation, I would like to take the opportunity to introduce you to our new addition to Nykaa family. It gives us immense pleasure to introduce our new CFO, Mr. P. Ganesh. Ganesh comes with 27 years of diverse industry experience in domestic and international markets. He joins us from TAFE. prior to working with TAFE Group, Ganesh has held leadership position and senior management roles in India and overseas, and has been associated with Godrej Group, Glen Pharma, as well as Pidilite.

P. Ganesh — Chief Financial Officer

Thank you, Falguni, for the warm welcome, and good evening, everyone.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Thank you, Ganesh. I will also begin with a short presentation, and we’ll be happy to take questions later. I wanted to share the results with you with an important backdrop. As retailers, we are very close to the consumption movement. And to put things in context is the seasonality in festive season, as has been called out by most retailers. This has impacted quarter three ’23 when you compare with quarter three of ’22 and the entire festive season following quarter three. What this means is that for this year we had only 34 days of sale in quarter three compared to previous year when it was 42 days, and that was because Navratri is an important festival was in the quarter two of this year compared to earlier years when it was in quarter three. So this like-for-like comparison has impacted certain growth in sales that I wanted to bring it out right at the moment.

As we move forward, wanted to say that the GMV for the quarter has come out at INR27.9 billion, which is a 37% year-on-year growth, and revenue has grown 33% and stands at INR14.6 billion. Our gross profit of INR6.4 billion for the quarter is about 25% year-on-year growth. And our EBITDA grew to INR782 million, which is a 13% year-on-year increase. Profit before tax stands at INR12.7 million and profit after tax is at INR85 million. We can get into the details of the gross margin as well as the composition of the EBITDA growth and PBT as we go through this presentation.

With that, I recommend that we move to slide 6. So here I wanted to show the nine-month period where our GMV has seen a healthy growth of 42% year on year and stands at INR72.9 billion, and the revenues grown at 37% and is at INR38.4 billion. The profit also grew at 40% year on year at INR17 billion for nine-month period and EBITDA grew at 49% year on year with INR1.8 billion. Profit after tax is at INR298 million [Phonetic] and profit after tax is at INR187 million.

Talking a little bit about various businesses and composition of the GMV growth, the beauty GMV grew at 26% on a year-on-year basis, while the fashion GMV has grown at 50% on a year-on-year basis. Both dotcom and the retail businesses saw good consumer demand, and some of the consumer rebalancing of demand has happened from online to offline, but that seems to have stabilized now. It was more pronounced in the last quarter for which we are talking about the results where customers were quite enthused about stepping out, and we saw a growth in all our businesses. Our new business delivered a INR1.7 billion in GMV contribution, growing at 254% year on year, which we believe is a strong growth. These are early-stage businesses, but we are already right-sizing the inputs to keep the goal of our profitable growth.

Moving forward on slide 8, what you can see is that at Nykaa we have created multiple engines of growth. Looking at the GMV contribution from three business verticals, you can clearly see that our desire to diversify and address larger TAM was the right thing to do. Fashion already contributes more than one-fourth of our consolidated GMV. And for a business that’s less than four years old, it is commendable.

At the NSV level, fashion contributes 14.6% of quarter three NSV versus 14% a year ago. On the other segment, which include eB2B, NykaaMan, and International, we’ve also scaled up significantly led by the SuperStore, which is our eB2B business and that now contributes 6% of GMV, which is more than double what it was last year.

A unique transacting customer, in the next slide, continue to grow for beauty, fashion, and other verticals. So for beauty they are at about 9.6 million unique transacting customers on a trailing 12-month basis. For fashion, the number is 2.4 million TTM customers. And in the case of other business, that number is 0.5 million, quite significant considering those are mainly the shopkeepers and other businesses that are our customers there. We already believe that we are transacting with one-tenth of the online shoppers in India at a very healthy AOV level as well as at a very healthy gross consumption level, which we will continue to penetrate further. I also want to highlight that we have retail customers which were another additional 0.5 million, up from 0.3 million a year ago.

With that, I would like to hand over to Anchit to walk us through the BPC performance for the quarter.

Why don’t I continue for a bit till he can join in. I think he is in a meeting… Anchit, we can’t hear you.

Operator

Yes, we’re not able to hear him. Ma’am, maybe you can continue.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yeah, I’ll start till he can join.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Hi. Am I audible?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Okay. Yes, yes.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

You can hear me now?

Operator

Yes, we are able to hear you now.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Okay. So let me first start with a little update on the BPC industry in terms of the market size and the growth that we project over the next five years. These numbers have been updated by us in partnership with Redseer. So I’ll kick it off on slide 11. According to Redseer estimates, the India BPC market was $19 billion market in 2022 and it’s expected to grow at a CAGR of 10% over the next five years to reach a market size of $31 billion by 2027. Within that, online BPC is expected to grow at a much faster rate with the year of 29%, followed by organized retail, which is expected to grow at roughly 14%. The online BPC penetration stood at about 15% in 2022 [Technical Issues] $3 billion market, and it is expected to grow at 29% and account for a third of the overall BPC market by 2027, which will put it at roughly a $10 billion market by 2027.

In the interest of time, I’ll move forward to the next slide. There is some commentary on what the key growth drivers are of the BPC industry, which I will allow you to read on your own time. So coming to slide 12, commenting on our growth strategy, we are focused around five core value propositions. First and foremost is driving customer acquisition and retention. We are focused on acquiring and retaining customers in the evolving and rapidly growing BPC space. Over the years, Nykaa has strived to create a loyal repeat customer base and that is evident in the repeat versus new customer mix — our revenue mix which we show on a month-on-month basis. Second, we deeply value our relationships with our brand partners, both international and domestic, and we have always prioritized and sought to maintain a very symbiotic relationship with them on an ongoing basis. Third is, we continue to penetrate across the value chain and channels to further drive consumption and to truly grow the overall BPC market in the country. We have invested across the verticals to help serve our customers better and this reflects in the launch of our eB2B business as well as our expansion of our physical retail footprint. Fourth, our house of brand strategy continues to evolve. We understand the gap that exists in the Indian BPC market and that has enabled us to develop our own house of brands across mass to premium segment, keeping in mind that the Indian requirement is diverse across price points and consumption behavior. Fifth is the consumer connect. We are a consumer-focused business, and the consumer lies at the heart of every decision that we take. Nykaa has always tried to be at the forefront of consumer engagement. And we have always focused on creating multiple content streams to help increase awareness among consumers, enabling them to make better purchase decisions.

Moving on to the next slide, slide 13. I want to highlight certain key performance indicators that we track at the Nykaa level regularly. The first is our total visits were up 13% to 250 million for the quarter, while our monthly average unique visitors were up 22% year on year. This reflects very strong cohort of customers that we are attracting. We delivered a very strong order to visit [Phonetic] conversion of 3.8% in Q3 FY ’23 versus 3.4% in Q3 FY ’22, a 40 basis point improvement, and our AOV has continued to sustain at INR1,958 in the quarter ending December ’22. Third, our GMV contribution from existing customers was 76% versus 74% last year, signifying better customer retention and loyalty, which helps drive the premiumization trend in the country. Our TTM customer base increased to 9.6 million in Q3 which was a 27% growth year over year.

Coming to the category growth, we are actively widening our offering which helps us drive penetration with a significant depth and width of category offering. If I look at our makeup category, that category has grown 12% year over year. Skin care category has grown 37% year over year and hair care 39% [Phonetic]. Our other categories, which include bath and body, health and wellness, mom and baby, fragrances, and appliances have each grown at a healthy clip year over year.

Coming to slide 15. We’ve always maintained a deep and symbiotic relationship with our brand partners, and as of December 31, we had over 3,000 brands retailing on the platform. Of the top 100 brands, we have a diversified offering across both FMCG brands, international brands, direct-to-consumer brands, and luxury brands. And this is just indicative of the diversification that we have managed to achieve in our core dotcom business. As you are aware, we host our largest flagship sale event of the year in November, which is in Q3, that is called the Pink Friday Sale event and that has continued to grow from strength to strength. This year, our Pink Friday Sale registered a 40% growth like-for-like GMV with a 22% growth in underlying visits. We have seen strong performance across festive sale, and we achieved almost 4 million unique visitors every day during the Navratri and Diwali sales as well.

Coming to slide 16, we remain committed to our pole position as the guardians and as the creators of the beauty ecosystem in the country, and we have facilitated this with marquee events this quarter, including the Nykaa Femina Beauty Awards. This is our flagship beauty awards event, which we host on an annual basis. It was not conducted the last two years because of COVID. This year we hosted it once again with fantastic turnout with over 400 brand partners in attendance as well as multiple celebrities. In addition, this quarter we launched a partnership with the Estee Lauder group of companies to launch a incubator program called Beauty & You where we partner to identify and support the next generation of beauty entrepreneurs with a nonequity grant. Third, we were the partner of choice for Priyanka Chopra’s much-awaited brand launch Anomaly in the country. This brand was launched exclusively on Nykaa, and it generated significant coverage given the celebrity status of Priyanka Chopra.

Coming to slide 17. In order to help improve our customer experience, we have invested across physical stores, distribution channel, as well as fulfillment centers to help us be closer to the customer and to increase the customer delight. As of Q3 FY ’23, we had 135 beauty and personal care stores across 56 cities, which achieved a GMV of INR165 crores for the quarter ended December ’22. Our physical stores now contribute to 8.6% of our total BPC GMV versus 8.2% last year. We distribute our own beauty brands across almost 2,400 plus general trade stores and 150 modern trade stores. We’ve also increased our fulfillment capacity, and at the end of the quarter, we have now 37 fulfillment centers, which have a total capacity of 1.2 million square feet spread across 15 cities in the country. This regionalization strategy, when it comes to our fulfillment, has allowed us to improve the order fulfillment from within the state and as well as within the region. Now very few orders are being shipped across state borders and this has made it possible for us to bring down our fulfillment cost which you will see in the P&L in later slides.

Coming to slide 18, talking a little bit about our house of brands. Our own brands achieved a total GMV of INR224 crores, which now accounts for almost 11.8% of our total BPC GMV. Our own brands GMV saw 29% growth year over year in Q3. Talking a bit about the B2B business, we now serve almost 4,000 retailers plus through eB2B App SuperStore, which is a new business in which we are investing heavily. The subsequent slides, slide 19 and 20, are just some images of the key product launches which we had across each of our own brands in Q3.

Coming to slide 21. We actively engage with our customer on our platform. And this quarter there have been some updates which we’d like to share with you. We revamped our loyalty program, which is now called Prive 2.0, and it’s a tiered loyalty program to be more in line with best practice globally. Second, we are now streaming personalized content on the Nykaa Stream, which is our on-app video feature, and this has helped us to drive awareness for consumption of beauty as well as education. We also invested in creating an educative content series known as the Bridal Series for the wedding season, which has achieved the reach of almost 15 million.

With that, I want to thank everyone for joining this call, and I will now invite Adwaita to discuss the Fashion business’s performance for the quarter gone by.

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

Thanks, Anchit. Hi, everyone. I look forward to discussing our fashion business for the quarter. To begin with, we remain extremely excited by the sheer size of the fashion market. The fashion industry is four times larger than the beauty industry, and according to Redseer, the fashion market was $77 billion in 2022, expected to grow at a CAGR of 14% to reach a market size of $147 billion by 2027. On that, online fashion is expected to grow at a much faster rate than the other segments at a CAGR of 27%, and it will eventually be by 2027 a $49 billion [Technical Issues]. The online penetration for fashion has been at about 19% in 2022 and is expected to be 33% of the total fashion market by 2027.

Next. So this slide here shows our focus areas for the business, and in the subsequent slides, I’ll talk about each of these in depth. So touching upon these five here, the first is customer acquisition and retention, and that is a key focus. We’re working on this via a strongly differentiated value proposition and focused initiatives across marketing and products. Second, building engaging and deep relationship with domestic and international brands and creating a comprehensive product assortment. Our third focus is investing and in scaling multiple operating models to make brands available to customers while driving down inventory risk. The fourth, continuing to build our own portfolio of owned brands, which are independent and consumer-first brands. And finally fifth, investing in innovative ways of connecting with our customers led by experiential events and customer-facing technology.

Moving on, here we double click into our key performance indicators. First, we can see that our total visits are up 19% to 137 million for the quarter, while our monthly average unique visitors are up 18% year on year to 19.4 million. Our AOV has held steady year on year with quarter three AOV at MRP at INR4,570 and it’s selling price that is after discount at INR2,526. Finally, we’re quite happy with how our order to visit conversion of 1% have held up. This is up from 0.8% a year ago. A large part of this improvement is a result of both product assortment being better, but also in a large part due to attracting much better quality traffic through marketing, which has been a focus for the last nine months.

Moving on, our trailing 12-month customer base has increased to 2.4 million for the quarter and that’s a 50% growth year on year. Our GMV has grown at 50% year on year to INR724 crores. Sequentially, this is a strong growth of 21% quarter on quarter. We’re feeling good with the acceleration of the growth and do believe that our focused approach to building differentiation in our assortment is now working in our favor. Finally, the chart at the bottom left shows the mix across women, men, home and kids, women being about 70% of the business, and we do believe that the latter three, that is men, kids, home, and others will present opportunities that we can choose to double click and accelerate at the appropriate time in the future.

On the next slide, we’re going to talk about assortments. We now have 2,700 brands on our platform as of the end of December 2022, and this is up from 1,540 brands a year ago. There’s been significant onboarding in the last 12 months, allowing us to present far more choices to consumer can be more. In addition we have come across categories and types of brands, both local and international. However, with even rapid onboarding, the focus for us as a team remains curation. We are convinced that being tightly curated in terms of trend and quality is the core of our differentiation and will ultimately be our right to win [Phonetic]. We’ve taken advantage over this past quarter of the festive season and have worked to strengthen our sarees portfolio, adding brands by Kalki and Unnati, and we do believe that sarees are going to present a great growth engine for the months to come.

In Q3, we have also doubled down on a property called Global Store in which we’re bringing the world’s best fashion to India. It has now hit its stride, and we offer over 600 brands. This particular property has contributed about 17% of the western wear GMV, and I think this is striking because a couple of months ago this property simply didn’t exist. Hidden Gems, another property which I’ve spoken about in the past as well, which includes emerging Indian designers and labels across the country, continues to be sought out actively by the customers and now contributes 7% of our total GMV. And finally, New Season Collection, which is another element to being truly fashion forward, has contributed about 17% of the GMV for the third quarter.

Moving on, a highlight of this past quarter has been the partnership that we launched with Revolve. As many of you know, Revolve is a noteworthy fashion platform in the U.S., and with this partnership we have launched Revolve on Nykaa Fashion. Through this, we’re able to offer the customer more than 600 international brands. I believe that what makes the partnership unique is the unique B2B2C technology that we have developed. And as per this integration, we now connect seamlessly with Revolve’s architecture. We reflect their catalog availability and pricing on our site with minimal manual effort. We don’t hold any inventory and rather push orders and do pickups on a daily basis and for the customer it’s a hassle-free experience. The flowchart here depicts the journey that we’ve built out, and I do believe that the technology we’ve built here can be useful in the future as well, as we sign [Phonetic] partnerships with international companies.

Next. A key focus for us over the last couple of years as we’ve been building Nykaa Fashion has been to develop a strong and flexible back end. While the majority of our business is driven by marketplace, we’ve built the tech and operations capabilities in-house to also cater via inventory models and other hybrid models. On the marketplace side, that is the first component and the largest part of our business, we’ve built capabilities to pick up inventory from both multiple warehouses and multiple stores. And as we speak, we’re in the process of building capabilities to integrate with franchise stores as well. All of this will give us a lot more availability when it comes to assortment without actually having to hold inventory risk. The second, the B2B2C technology, which I’ve already described on the prior slide with regard to Revolve, as I mentioned, this can be replicated as we onboard more aggregators. And finally, the this, which is our inventory-based model, we do have the capabilities to run this as well. And however, less than 20% of our business runs on this model, we have ramped up our warehouses as well to support the growth in this business.

Moving on, in quarter three, the owned brand GMV stood at INR90 crores, which was a 122% year-on-year growth. Our owned brand GMV contributes 12.4% to the overall GMV of Fashion and is even higher percent if we were to look at it after discount. Also, from the GMV of INR90 crores, 50% of that is actually contributed by the sale of these brands on third-party platforms. In the past I have mentioned that these brands do sell on third-party platforms, and it’s all part of our vision to actually have standalone consumer-facing brands that are well known and provided to the customer at multiple touchpoints.

In the third quarter, there are two brands in particular that have hit significant size and scale. Up on the right, we mention Twenty Dresses, which has now hit INR190 crores GMV annualized and Nykd which is at INR80 crores GMV annualized. We’ve tried to also [Indecipherable] saree segment and we have launched a brand called Nyri. We also focus on distribution when it comes to some of these brands. And as you can see, we have added 14 MBOs for Twenty Dresses and RSVP, taking the total count of physical presence for these brands to 52. Nykd by Nykaa, our lingerie brand, which I have again spoken about in the past, is a brand that we remain extremely excited about, is now present in 750 general trade outlets and has opened two EBOs with plans to add a couple more this quarter.

Moving on, we’ll just flip through these slides, but this just to give you a sense of the type of brands and the type of product we’re creating. We’re actually generating a huge number of new products every quarter, and we have built our capabilities in house to support this level of growth. Moving on. Finally, we’re going to talk about how we’re trying to stay engaged with our customer. This quarter we conducted physical events. We did do an event called the Global Store Fiesta where we highlighted our global portfolio, and we did a very large-scale event in Delhi called First in Fashion where we enabled brands to show their new season merchandise. Finally, we do believe that passion is the ultimate discovery problem statement and there’s a longtail nature of fashion that merits strong discovery features. How do you show the right product to the right person at the right time? We’ve made good progress in this regard, and we’ve launched hyper-personalized widgets on the homepage. We continue to refine our recommendation engines and features at every leg of the app journey and in order to drive product discovery [Indecipherable].

With that, thank you, everyone. And I’d like to request Falguni to take you through the eB2B business.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Starting with the eB2B business. I just want to point out that we are very pleased to see — as you are all aware that with the B2B business, we wanted to enter the large part of the unorganized market which is currently being serviced by mom-and-pop distributors. And I think there was a need for a specialist organized distributor like ourselves who would focus only on the beauty category. And to our many of the beauty brands we would offer now being able to sell their brands online, being able to sell them in our stores, and also sell it to retailers from where it would onward move on to the consumers. So I think the business model was right as the disruption model where, being focused on beauty category, we would do the right thing in terms of enabling retailers in specialists where beauty was a big sale, and enabling them with the number of all-in-one store, super service on delivery, lot of flexibility, ability to increase their earnings, and also empower them with data and many more things that we can bring to a structured tech platform. So with that we introduced the SuperStore business.

Moving on, I just want to say that from the business perspective, the transacting retailers has grown nicely to about 92,415 in this quarter, up from a very small number of 4,153 in the quarter a year ago, so almost 22 times growth in transacting retailers and telling us that this is something which clearly there is a place for this business. Also the activation rate of registered retailers as high as 69%. From the brand listed perspective, again, the number of brands on the platform has increased from 31 to 185. Large range of national brands are coming in. This has grown by 6 times, again, telling us that from both sides, from the consumer side, which in this case is retailer, and also brand partners that we service, there’s a clear need for this business. From the number of cities perspective, we now service about 652 cities, again, an 8 times growth from 80 to a year ago and the orders that the business saw was about 216,000 orders, which again was a 25 times growth from a year ago quarter. So clearly, the business has proven itself from size and scare. And later in our results you’ll see that we — next, we continue to build it in a manner which is right unit economics. So can we move to the next slide?

So yeah, with that, I hand over on the financial performance to Ganesh.

P. Ganesh — Chief Financial Officer

Thank you, Falguni. Good evening, everyone. I would like to take you through our quarter three and FY ’23 financial update. As you can see in slide number 39, our revenue grew by 33% YoY during the quarter. Our gross margin was at 43.4% during the quarter. We achieved an EBITDA of 5.3% benefiting from operating cost leverage. Our PBT margin was 0.9% during the quarter. We had an incremental impact of INR66 million due to the Ind AS lease cost accounting, about which we’ll delve in greater detail in subsequent slides.

So moving on to the next slide. I’d like to bring your focus on this slide. And as we can see, we’ve improved our operating costs over the year. Operating expense, as a percentage to revenue was 38% in quarter three FY ’23 versus 40% in the same quarter last year. Visualization [Phonetic] of our fulfillment centers has enabled lower [Indecipherable]. Similarly rationalization of our marketing expenses has also helped us reduce costs. Fulfillment expense as a percentage of revenue was at 8.8% during the quarter versus 10.6% in quarter three FY ’22, which is an improvement of 177 basis points YoY.

Marketing costs as a percentage of revenue was 11.2% during the quarter versus 13.7% in quarter three last year, which is an improvement of 241 basis points YoY. We saw a small increase in employee costs as we did hiring ahead of the curve to funnel the growth of our new initiatives. Employee costs as a percentage of revenue was 8.7% during the quarter versus 8.5% in quarter three FY ’22, a growth pf 23 basis points YoY.

Moving on to the next slide. Here you’ll see the waterfall, which will give a better understanding of our EBITDA margin change YoY. Gross margins, as you can see, has declined by 293 basis points during the quarter. And this has been predominantly due to seasonality reasons, and as you will subsequently, on a nine-month basis, gross margins have expanded 79 basis points. If we were to look at gross margins on a trailing 12-month basis, gross margins have expanded by 116 basis points.

Coming back to quarter three, among other reasons, which has resulted in lower margins during the quarter, has also been the strong growth coming in from our eB2B business, which comes with lower gross margins. The strategic moat [Phonetic] that the business provides remains key to our commitment to the segment while also providing an excellent India-wide distribution solution to our brand partners. Fulfillment cost improvement you can see has delivered 178 basis points through our regionalization strategy and marketing efficiency achieved through better order to visit conversion as [Indecipherable] basis points. Selling and distribution cost has increased due to offline distribution of our own brands and employee costs have increased due to investment into new initiatives and investments also into the technology function. Other expense increase has been primarily due to investment in infrastructure.

Moving on to the next slide. Here the waterfall explains the movement from EBITDA margin to PBT margin, which gives a lot more color on the investments that we have been making and its impact by way of depreciation lease accounting. As we can see, depreciation increased YoY on account of incremental capex in retail stores, warehouses as well as office space. Lease cost increases has been due to additional retail stores, warehouses, and offices as we ramp up infrastructure.

Interest on borrowings during the quarter increased on account of incremental borrowing which was made to fulfil working capital requirements for the 3P [Indecipherable] three people. These costs as per Ind AS was higher versus cash lease cost. [Indecipherable] an incremental impact of INR66 million in quarter three FY ’23 due to the Ind AS 116 lease accounting impact versus INR46 million in quarter three FY ’22.

Moving to the next slide. Here you see our vertical performance, which gives you a good insight into the economics across businesses. I want to bring your focus to the bottom part of the table where the cost items are calculated on NSV as the three business verticals are comparable on NSV basis. As you can see, gross margin for the BPC business was 45.4% during the quarter versus 47.5% in quarter three FY ’22. Similarly for Fashion business, gross margin was at 43.5% this quarter versus 48.4% in quarter three FY ’22. And Other gross margin was at 25.5% this quarter versus 31.7% in quarter three FY ’22.

We also saw improvement in our fulfillment expenses across businesses. For BPC, it was at 8.6% versus 10.7% last year. For Fashion, it was at 10.3% this quarter versus 11.6% for the same quarter last year. And for others, it was at 9.9% versus 12.3% in the previous year. We have also improved our marketing expenses. And as you can see for BPC it was at 7.9% versus 9.7% in quarter three FY ’22. And for Fashion, it was at 25.6% this quarter versus 30.9% in FY ’22. We have been investing behind selling and distribution expenses, and for BPC it was at 3% during the quarter versus 3.2% in quarter three FY ’22. For Fashion, it has been at 6.7% during the quarter versus 3.3% in the corresponding quarter last year. And for others, it has been at 16.4% versus 5.8% in the corresponding quarter last year. Contribution margins have been maintained at 20.2% during the quarter with BPC accounting for 25.9% during the quarter. For Fashion, the margins coming at 0.9%, and Others coming in at minus 12.6%.

Moving on, here you will see the vertical performance for our businesses for the nine months ended December 2022 as we have demonstrated improved contributions after investing in customer acquisition and incubation of new businesses that are deepening [Phonetic] us. Gross margin for nine months has improved at 45.1% during the quarter versus 44.4% in quarter three FY ’22. BPC gross margin standing at 46.3%, Fashion gross margin at 44.5%, and Others contributing 25.8%. Contribution margin has improved to 20.3% in quarter three FY ’23 versus 17.9% in quarter three FY ’22. BPC for nine-month period standing at 25.9%. For Fashion, it was 2% during the nine-month period, and for Others it was at minus 22.1% during the nine-month period.

Moving to the next slide. Here we have our income statement at FSN E-Commerce Ventures at a company level where you can see that our revenue grew by 33% YoY to reach INR14,628 million during the quarter. Our EBITDA margin was at 5.3% during the quarter versus 6.3% during the same quarter last year. And our PBT margins came in at 0.9% and PAT margins was at 0.6% during the quarter. All-in-all, I believe that we have continued to improve our scale efficiencies in a challenging macroenvironment.

Thank you everyone for joining on this call. I would now like to request Kapil to kindly initiate the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] Frist question is from the line of Sachin Salgaonkar from Bank of America. Please go ahead.

Sachin Salgaonkar — BofA Securities — Analyst

Hi. Thank you for the opportunity. I have three questions. First question, Falguni, I wanted to understand any particular reason for the slowdown in growth apart from the seasonality what you guys indicated. And we are hearing about consumer slowdown across the board, so just also wanted to understand your thoughts on the impact of that on cosmetics and fashion.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

I think clearly, the fact that about eight days of sale was less, and it was in the second quarter compared to third quarter for the previous year, that would take away at least 3% or so in terms of the growth. So that clearly was one differentiator. And I think, in addition to that, we do believe that in terms of this third quarter of this financial year, it was quite strong, but at the margin maybe slightly impacted in terms of consumption because of what’s going on in terms of discretionary spend. But like you can see that we’ve grown nicely and we’ve acquired customers nicely. So, I wouldn’t call it that it was a difficult quarter at all. But in such difficult environment, I think it does, shave away a little bit from the top in terms of consumption. I think there could be slight downtrading from certain types of brand to slightly cheaper brands, but nothing in a very meaningful way that would be of concern. But it does feel that at some level some amount of growth was shaved off the top.

Sachin Salgaonkar — BofA Securities — Analyst

Got it. Thank you. Second question is on the gross margins. Again, they were down both on…

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Sorry, more for the festive Diwali rather than our Pink Friday sale, if I may call it.

Sachin Salgaonkar — BofA Securities — Analyst

Thanks, Falguni. Second question on gross margins. It was clearly down both on cosmetics and fashion. And I do see some comments saying that there were higher brand discounts as well as consumer downgrades. So again, both for revenue as well as gross margins, do we see this likely to continue with an impact and see further pressure on margins going ahead?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Not really. We do feel that the previous quarter margins were at a very, very healthy — previous comparable quarter, a year ago, the margins — the gross margins were at a very, very healthy rate, and hence we are guiding everyone to look at it on a nine-month basis. And you can see that on nine-month basis, there is no erosion of gross margin and, in fact, there is only improvement in Beauty and flat in Fashion. And even on the B2B business clearly, the other business includes both the SuperStore business, where we’ve been guiding that the gross profit margin is at around 15% compared to this overall mix which has certain other new businesses like Dot & Key and Nudge and Man. So it’s very difficult to judge from this.

So I would say a lot of it is a mix issue and more of a category mix issue also in some ways and some ways not really — I keep saying that, we don’t have one cement [Phonetic] plant where the raw materials going in and final good prices determining the margin. We are working with 2,000 brands in both Beauty and in Fashion where the mix of the brand, the margins, the advertising income, and many other things can vary. And sometimes there could be certain differences from quarter to quarter. I think Nykaa also needs to learn [Technical Issues] basis.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

I’d like to just add over here that if you were to look at gross margins on a trailing 12-months basis, you can see an improvement of 116 basis points, so that also gives a reflection that over a period of time margins [Indecipherable].

Sachin Salgaonkar — BofA Securities — Analyst

Got it. Thank you. And my last question is any broad sense you could give us in terms of the mix of GMV between, let’s say, online, offline, eB2B right now, or where we could see that mix, let’s say, in the medium term?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yeah. Online, offline we’ve been giving the numbers. I think online is spite to growing our stores quite aggressively to now very large number, our online — we have been seeing that our online sales still account — sorry, our offline sales in Beauty still account for less than 10% of our total sales. It’s just about 8.6% for this quarter and 8.1% on a nine-month basis. We will continue to roll out more stores and you should expect another 50 more stores for the next year. But I think eCommerce will also continue to grow, so that’s on the physical store picture.

As far as B2B is concerned, I think like you saw, I think the way we treat that business is that we do feel — and you tell me whether this is wrong, but we do feel that B2B business in Beauty is very strategic, and it give us a huge advantage in the long run to be involved from entire — when a international brand comes into India, we are their distributors not just for — we do their eCom sales, we do their physical sales, even if they go to other modern trade channels, we handle that and we also handle general trade.

And besides makeup, which sometimes can manage a narrow distribution, most of the skincare and haircare do need wide distribution. So I think this GT/MT distribution which has been a key to success of FMCG companies, we’ve never offered it to third-party. And what we are trying to do here is build a third-party GT/MT distribution platform that will serve all our brands, our private label brands, it will serve our import brands, and it will also be available to third-party brands to benefit from.

So we think this is a disruptor business. It can grow very fast in terms of revenues that we can service, so orders and revenues will grow very fast. However, the inherent structure of this business will be about say 15% gross margin to start with. In the long run it can trend to 25%, if we add other values like technology and data. But in the short-term, it’ll start at about 15%, and we have to manage the fulfillment costs below that. Right now, we are managing the — we are trying to work on unit economics that will allow us to manage fulfillment costs in a healthy territory, and selling and distribution expenses, which is feet-on-street expenses to build the retailer engagement is what replaces the marketing costs.

So I think we can, at some point, do a more detailed presentation on unit economics. Maybe we can plan for it at the end of the financial year after the March results, but the plan is to have a really clear unit economics that will give confidence to everybody that we are on the right track to build the right business for the long-term. And in Others, that is the one that moves the needle. Others are very small. Not very small, but small relatively.

Sachin Salgaonkar — BofA Securities — Analyst

Thanks, Falguni. Thank you. The next question is from the line of Vijit Jain from Citigroup. Please go ahead.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Thank you for the opportunity. My question is within BPC business, Anchit called out makeup grew 12% YoY, other categories obviously grew faster. Is that also seasonally driven because this is usually a seasonally strong quarter for makeup in general, right. That’s my first question.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Yes, maybe I could come in. So, look, I think there’s two things to keep in mind. One is that, if you remember, last Q3, it was really a standout quarter for makeup in the sense that makeup buying had been subdued due to the pandemic for a couple of quarters before that. So we saw finally in Q3 last year return to social events, weddings, and generally people getting back to the office. So we saw an improvement in makeup consumption. So, I think makeup was coming off of a slightly higher base and that’s why you see this 12%, 13% growth versus the overall growth of 26%, 27%, and as I said, other categories are growing a lot faster. So I think that’s the main reason.

I think the second thing is there is a big focus from us to expand the customers — the width of the assortment that the customer is buying on our platform. And makeup and skincare are the two dominant categories that we’re really investing behind growing hair care, fragrances appliances and others, which we think longer-term will increase the basket size and therefore the average order values of the customers as well.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Got it. Thanks, Anchit.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

[Speech Overlap] I’d like to point out is that a lot of this data we’re giving on growth is online. And there is a fair amount of uptick in our offline sales growth. I think offline sales growth throughout this year has been very robust and offline, a lot of makeup and in skin care sold in our offline stores.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Thanks, Falguni. The next question is…

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

[Speech Overlap] Yes, go ahead.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Okay. My next question is for owned brands, I noticed you mentioned the revenue run rate for a couple of brands on both BPC and Fashion, my question is, is there a threshold revenue run rate at which you think they’ll start generating positive cash flows or hit target ROCEs for you? I would imagine, given your own distribution platform, it would be lower than for other D2C companies, but is there a threshold for that?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yeah, so our beauty brands are all profitable. They are profitable and they contribute to positive EBITDA after giving all the retailer margins on a arm’s length basis. So we do believe that Beauty has always been very profitable for us. The right annual GMV run rate at which the brands becomes significant is about like a INR100 crore revenue run rate when the brand can start affording like we can afford investing in the brand from marketing perspective, so it becomes an interesting point. And that’s why we started reporting the brands, which are above INR100 crore revenue run rate. So that are close to Kay Beauty, Dot & Key that is 51% owned by us, and couple of other brands also very close to INR100 crores in the Beauty category.

On the Fashion also while all of the fashion brands together, most of the old fashion brands together, are close to breakeven levels, and mainly of these two of them are now trending towards the INR100 crore revenue run rate, so Twenty Dresses, which is something we have acquired a couple of years ago, four, five years ago and we’ve really built it out to now almost INR190 crores revenue run rate. And Nykd is also now trending close to INR100 crores, so for both these out — we have strategies for doing MBOs, EBOs, we are selling NA-KD through general trade. So all that means that, now we are handling it like beyond the D2C brand and investing in the future.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Thanks Falguni. I’ll jump back in the queue.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

We are very excited about our brands. Yeah.

Vijit Jain — Citigroup Global Markets, Inc. — Analyst

Sure. Thanks. Bye.

Operator

Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Hey. Hi, team. Just a couple of lockdown questions here. One, when I look at your Beauty online sales [Technical Issues]

Operator

Sorry to interrupt you. Manoj, your voice is breaking up in between. Are you on handset mode?

Manoj Menon — ICICI Securities — Analyst

I’m actually. I’ll just speak as close to the mic as feasible, is it better?

Operator

Yes. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Okay. No, just take a step back three, five years back where there was abundant capital availability, a lot of D2C brands coming to the market, etc, versus that sort of the degrowth over the last few years versus lets say the investment winter, we are going through currently. Two questions now. If you could break up the Beauty growth in terms of, let’s say the same-store growth concept in online versus let’s say the new brands coming in. And some color on that? And how does that, let’s say translate that into revenue for example?

I assume that you would charge a listing fee or let’s say either a new brand coming to you probably have a knock at your door for a long period of time, quantitatively and qualitatively, just some color on — so what I am trying to understand is your growth, potentially could have been far better had there been a tailwind. So what’s the growth, sort of with the tailwind, without the tailwind is the question?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

I think, what you’re trying to assess is an extremely complex information for a large platform in 2,500 brands, where top 20 brands or top 50 brands can change very rapidly over three months in annual, but definitely over a one-year scenario. So we are a very dynamic, really platform that is really platform that is really doing very, very well.

So if I were to tell you, our top 100 brands, 22 of those are international brands, 17 are FMCG brands, 32 are direct-to-consumer brands, which is clearly a very recent phenomenon over last two, three years, you’ll see so many D2C brands stack up in the top 100 brands. But we must remember that they are backed by a lot of investment in marketing and they are all operating at negative profits or negative EBITDA, whereas the traditional international brands and FMCG brands are not doing that. They are investing within their in total profitability, if I may say so. Then there are the 10 Luxe brands in our top 100 brands and 7 global brands.

So it’s a very dynamic platform with lots happening, what do you to remember is that we get a 1 billion more plus visits on our platform from 25 million unique visitors every month. There are more than 10 million like when we did Pink Friday sale on one day alone there were more than 10 million visits. So we are a much, much platform for any brand that wants to launch and build their brand in the country, because of the cohort — customer cohort that we already have and how dynamic we are in terms of being able to activate those customers towards all of our brands.

Manoj Menon — ICICI Securities — Analyst

Understood.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

And each of our Brands, even the most largest brands like to say, some of the largest brands Mars, M.A.C., Maybelline they also get more than 50%, 60% plus new customers to us every year. So it’s a very dynamic platform that keeps adding customers to EBITDA.

Manoj Menon — ICICI Securities — Analyst

Understood. Falguni, thanks for the clarifications or some comments about eB2B little earlier was very helpful, but one follow-up on the eB2B is essentially that in general, there is an investor perception that given the MRB regime, which is very unique to India, there is only so much, let’s say distribution margins, which is very finite, which is available for any player, however differentiated the offering maybe. So is it fair to assume that eB2B for you from a profitability point of view at scale is a reasonably long gestation? Now, the other point is that because you are one of the unique players who has got the end-to-end capability, it will also means that it is a very high entry barrier business. So how do we look at this, let’s say, from a three, five year sustainable, meaningful profitability metrics point of view?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

To be honest, like all of the distributors for big companies like Hindustan Lever or P&G or all of them, and they all have thousands of distributors throughout the country. And all of them are from small mom-and-pop shops, we’re not going to lose money on behalf of the company. So, in my opinion, if the B2B business is done right, and especially in our industry, where the distributor cum retailer margins are not small. I do feel that you can really add value and especially to that you add EBITDA in terms of what the retailer should start the flexibility to allow them to buy a mix more frequently rather than buy the minimum sizes that others may ask.

So there is a lot of advantages shop keeper has by dealing with people like us, ourselves. So I don’t think — I think the main thing is the business is to remember that it’s a B2B business and not a B2C business and hence in the long run fulfillment costs and marketing costs need to reflect that. And the overhead structure needs to reflect that. And if one doesn’t do that then it can be quite dragging phenomenon.

So where we are is that we have set up almost 11 to 15 warehouses, which take us closer to the customer. We are going to do a business where we will stay within 200-kilometer to 300-kilometer radius of our fulfillment center. We will not jump in anywhere and everywhere. I think it’s a business that we have been very smartly where we will service shopkeepers in a certain — there will be a fulfillment centers in certain square-kilometer radius of that we will focus our selling. So I think if you do it right with the right unit economics, I think it can work. And the power it gives and barriers it creates for entry for future and power it gives to build brands in India is going to be very valuable in the long run.

Manoj Menon — ICICI Securities — Analyst

Understood. And if I may just — please allow me to relay an important conversation point with investors over the last few months at least. Just some comments about how do you think about capital allocation in general. Now this question has essentially come — had come up in the last, let’s say, six months post your GCC forge etc. While I completely understand the disclosures you have done about the market opportunity there. This is just sort of a hanging question about incremental capital allocation. How do you see that over the next three years?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

So, first of all, for us, beauty online, offline, consolidated Beauty business is very important. And in our opinion, we should never under invest in that and we will continue to acquire customers for the Beauty business both online, offline. And also we would like to build private label brands in beauty and become, say, a consumer company like Estee Lauder on L’Oreal coming out of India. So that is a number one priority towards investment and I don’t think we would deprive this business of any amount of investment.

Investment in inventory and warehouses will be needed for — and stores will be needed to continue to support it. But at any point you pull back on those investments and continue to grow online. So — and customer acquisition is another big investment we make, so I think this business has seen huge amount of investment in customer acquisition, investment in fulfillment center, investment in stores, and investment that we’ve done in terms of billing tech capabilities towards this business. So, I think there is a fair amount of investment going in there.

And this is not the price of that, but yes, the profitability of this business is being used to build a new businesses including Fashion, so if you see that the profitability — like if you see at the EBITDA level, the EBITDA — the gross profit of BPC would have been INR523 crores and that some of that has funded, or say its contribution profit is INR298 crores, and some of that has funded investment in Fashion and B2B.

So yes, we are taking the profitability of this business to expand our TAM and invest in Fashion. In Fashion, we are very clear that as the equation between new and returning customer builds up, and it keeps improving with every passing year, Fashion is just the fourth year of the business, but as the situation improves, we are confident that we should be able to bring down the marketing costs from current levels to just about 15 mils to late teens and that itself will be very profitable.

And on the B2B business, it’s literally first year. We are very happy with the scale and the retention and reactivation numbers. And we do believe it will need another year or two of investments before we can talk about being profitable, but none of it will be massive losses. So like contribution margin is, would be only minus — even this year, it was only minus 12.6% negative, and next year would be lower. So like I said, path to profitability is clearly in our mind and we will, at the moment, we are only investing in these three, four businesses. So UG, like I already spelled out, Fashion, we have also been in some private label brands, but investment has been INR4 crores, INR5 crores in those and we have — but Fashion platform itself we’ve been investing, but it will turn profitable overtime and B2B business where we are investing will become profitable.

I think, GCC we see a very — I joke about it, that in India, we have customers, but we struggle with the wallet. And in GCC the customers have the wallet. So I think, it can potentially be a very profitable business, but we will be in any measured. And I think it’s a market that will have a lot of dominance of physical retail compared to eCommerce. So the mix will be little different — like the mix will be 50/50 and also the fact that the physical retail in those markets can actually turn profitable very quickly compared to India.

Manoj Menon — ICICI Securities — Analyst

Fair enough. Thank you. Thank you so, so much. Appreciate it. Good luck.

Operator

Thank you. The next question is from the line of Manish Adukia from Goldman Sachs. Please go ahead.

Manish Adukia — Goldman Sachs — Analyst

Yes. Hi, good evening. Thank you so much for taking my questions. My first question is on the Fashion business. So, Falguni, on the first question, you had mentioned that some impact on the top of the pyramid the shave off growth discretionary spend impact. Now on the Fashion business and if I look at this quarter growth actually accelerated during the quarter. So can you actually talk about just the difference in dynamics between the Fashion in BPC grew during the quarter?

And a related question, when we look at one of the explanation on all the slides around gross margin impact and you mentioned consumer downgrades as one of the reasons, just trying to understand what you mean by consumer downgrade because AOVs have moved up in the quarter both quarter on quarter and YoY. So if you can just explain volume in the consumer downgrades.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Like I think consumer sometimes — I mean, none of these are like — want you to remember is that 2,500 brands with lots of trends being around, so none of those are like a dominant long-term trends. So we do expect that in general in the industry there premiumization and customers are buying more premium products, they’re buying more luxury products.

But if you look at it, at least the last one year, there has been some amount of popular, I mean, customers are down trending at least in certain categories from luxury brands to more and more premium and mass brands. So there is some amount of that going on. I think it could be short-lived and it can change. But yes, there was some amount of inflationary pressure which is making customers hold back or choose the slightly lower category of [Technical Issues]

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

I think just coming in on the gross margin side of the question, at least, I think we definitely want to draw the attention to slide 44 where we show the nine months — sort of the nine months numbers, because and that is quite clear. We have just [Indecipherable] but from that it’s quite clear that if you get both the businesses, BPC and Fashion, on a nine-month basis, there is improvement on both. So Fashion is on from 43.7% gross margin as NSV to 44.5% and Beauty is on from 44.7% to 46.3%. So we would encourage folks to look at the nine-month numbers, and there’s more sort of plan to deteriorate margin at all.

Manish Adukia — Goldman Sachs — Analyst

Sure. And my second set…

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

BPC and Fashion, we have a lot of imported brands now. We are doing business in Revolve. We are doing business in a number of imported brands like Cider and all of that you can see. So there are lot of mix changes that happen from quarter to quarter. While we are trying to show that we try and manage all this in a more uniform manner, but please appreciate that the kind of mix changes that happen, new launches that happen, and the impact it can happen sometimes in the near term.

Manish Adukia — Goldman Sachs — Analyst

Sure. Thank you so much. My second question again just continuing on the Fashion business. So clearly, I mean 50% YoY growth this quarter, here we still holding up quite well at around INR4,000 odd. I’m just trying to understand, I mean do you think this kind of growth rate could sustain with the kind of AOVs that you have? Or do you think, have to keep growth elevated maybe you will have to compromise a little bit on AOV. And that we have a point earlier, I mean you called out gross margins for the business clearly across both BPC and Fashion gross margins are currently comparable, but there is obviously a very large differential between the contribution margin. So as well, let’s say three-years our, do you think even contribution margin for these two businesses could be comparable?

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

Yeah. So, in terms of growth, I think we’re pleased kind of the Fashion Group that comes in this quarter. I do feel it’s the work of many things coming to effect, whether it’s the brand assortment, whether it’s some be fabulous international wins that have come through, whether it’s a breakthrough on the marketing side. As I’ve always said in the past calls as well, [Indecipherable] never marketing at any cost — it’s always, sorry, we have topline at any cost, is always the right marketing. So I think somewhere this quarter the ratio was in sort of the mix that we wanted from a marketing cost effective also lined up. So there were at least two or three different things that propel the business forward, everything from assortment, product features to right marketing with the ones.

So the quarter has held up. I would like to maintain, a sustained sort of growth trajectory for the Fashion business. Obviously, with every passing quarter is on a higher base growth, that is something to be kept in mind, but this does feel like something we should be able to kind of hold on to.

From an AOV perspective, we’d like to hold this AOV, and I definitely feel at least another 12 months at least there is no billboard requirement to reduce the AOV, to kind of grow in the way we want. So for the near future, there is a focus on retaining the AOV and I do feel that this AOV is important from the perspective of having the right build economics to make this business work.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

So having said that, that I should say that the AOV is not something we insist, this is what we discovered that our customers are coming out at that right. But it is coming from a perspective that they are not flooding them with, trying to give a lot of cheap products in terms of discovery or trying to give them a lot of discounts to convert, and how the AOVs are holding up.

We take pride in the fact that such a large percentage of our sales happens at full price. So a large percent of our sales is happening at, of the new season and that also has lesser discounts. So I think, it’s all baked in many of those things rather than being rigid about moving the AOV.

Manish Adukia — Goldman Sachs — Analyst

Sure.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Right. And maybe coming from that question on just when we see the contribution margin ending up? So again, if we go to the Slide 44 only, where you can see the nine-months number for the three verticals. Over time most of the three verticals. Over time our ambition is definitely gross margin can get to kind of Beauty level. I think the major flex in the next 12 months obviously comes from marketing and advertising line item, which is at 25.5% NST today. And I think there are big strides that we would like to make in this line item itself. I think, over the long run, definitely getting to EBITDA breakeven as a key priority for Fashion, but that’s the medium term, and I think in the longer run getting into a similar cost structure Beauty does seem attainable and something you would stride for.

Manish Adukia — Goldman Sachs — Analyst

Thank you.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

I just want to come in and say one thing which I believe in that there is a lot of inefficient marketing in, what you call, performance marketing. And one has to constantly optimize and reach a good healthy balance between reaching the width of customers that you’d like to engage with and convert on your platform over time, and not doing these full expenditure that is just chasing the visits, so just chasing sometimes the downloads which are never going to convert in any healthy manner. And finally, what you want is the LTV of the customer or the right annual consumption value from that customer.

So, Nykaa clearly is optimizing on the campaigns from these parameters rather than chasing any numbers like any artificial visits or app downloads or a lot of traffic comes through wrong mediums that will never convert in any meaningful way. And sometimes just certain incentives are given to convent — for sake of convincing. So I think Nykaa stays away from most of those.

Manish Adukia — Goldman Sachs — Analyst

Very helpful explanation. Thank you so much.

Operator

Thank you. The next question is from the line of Kapil Singh from Nomura. Please go ahead.

Kapil Singh — Analyst

Hi, good evening. So my question is a bit long term, where we have seen a projection of close to 30% growth for online business for Beauty and Fashion. I just want to understand how do you envision Nykaa’s growth in comparison to that? Will it be similar? Will it be much higher? What do you envision? And what are the top new initiatives that you need to take to get there?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Anchit, you want to take that? Or Adwaita? Or should I think it?

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

Go ahead, Anchit.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

No, I was just saying that for Beauty for BPC, we believe that the market, as I showed earlier in the slides, will grow at — online BPC will grow at roughly 29% and the overall BPC market will grow at 10% CAGR over the next five years. And we are — we feel confident that we will continue to grow in line, if not slightly faster than the overall market, despite us already being one of the larger players on the online side. We see — we continue to see and are confident in healthy growth and for maybe possibly faster than market growth on the online side due to multiple factors including premiumization, including depth and width of assortment as well as availability. And finally, increasing awareness that should drive increasing basket size of the customers.

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

I think on the Fashion side, we see that the overall fashion industry is growing at 14% and within that online is growing at 27%. So most definitely Fashion will grow faster than the overall growth rate for the online segments, given that we’re at — given that we’re on a lower base. That being said, I think all of you know that we sort of be in a ready more creative zone, so I think it’s not going to growth at any cost, it’s going to be kind of honing in on the positioning and the differentiation that we’re going forward. Within that we’ll be in a very, very number, sort of, one choice for the customer. Just [Indecipherable] definitely growing faster than the 27% CAGR, but also keeping in mind that for now, at least our focus on positioning differentiation hold.

Kapil Singh — Analyst

Can you also talk about any initiatives that you need to take to get there?

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

So, I think at least from a fashion…

Kapil Singh — Analyst

[Speech Overlap]

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

I mean, I think, to answer that, a high level — I think it’s the same playbook that we started with in terms of [Indecipherable] to start with fantastic assortment, just as [Indecipherable] you said, I think you’ll see that we’ve added 1,200 brands or so. I still feel there are lot of strategic brands we still need to win, we still need to add. So assortment itself will trigger quite a bit of growth, that’s what we [Indecipherable] already in India. Then of course we can go abroad as we’ve been doing that.

That I think again can be a big unlocker of growth. So I think assortment remains one. I think the next remain the customer journey, the retention. I think holding the cohorts ratio that the redemption rates are exactly as we aggressive as they can be is something that will drive significant growth. At the same time, new customer acquisition, of course, is the full breadth and ensure that every year that a significant increase in new customer acquisition.

And then finally the third bucket, I would say, is app experience. There’s a lot of focus on making sure that there are very few friction points for the customer, the conversion rate is improving, and of course my favorite topic which is just discovery. That’s the customers really being able to discover what they want, which can be done through like fantastic posterization and product features. So assortments, retention of customers and U.S. acquisition and finally product features that can drive discovery [Indecipherable].

Kapil Singh — Analyst

Thanks. Second question is on gross margins, particularly for BPC business that — what I wanted to understand is, when you look at over the next two to five years, do you think we are closer to the right level or do you think we have reasons to believe that even the gross profit margins could have good headroom to improve, and if so, what are the reasons?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

I think the Beauty gross profit margins are at a very healthy level. But as you are aware, it improves the advertising income because we have so many eyeballs from really the relevant beauty customers, even though with very high conversion — unit conversion, but still I think at 3.5% conversion, which means that any advertiser can get so many more relevant eyeballs to focus on their product. So I think Nykaa’s effort is to become bigger on the app platform side. And we have some investments being made to be a very significant player on that side, where we will open our brands to add more value and give them more sophisticated add experience on our side, and that can help us improve the gross profit margin a little bit. But from product margin perspective, Beauty is in a very good place. And then, again our private label share can also determined higher gross profit margin.

Kapil Singh — Analyst

Okay. Thank you.

Operator

Thank you. The next question is from the line of Amit Sachdeva from HSBC Securities, please go ahead.

Amit Sachdeva — HSBC Securities — Analyst

Hi, good evening. Thank you for taking my question. My first question really on, like partially alluded to 3% impact on growth, purely on cyclicality because of the days were different. But as you go in, I’m just looking to whether January and February so far have you seen, has it shown some amount of more normalization even if say same growth rates sort of structurally trend is Jan has been looking better than last quarter or is it sort of — could you give us some amount of thought on how the marginal growth is shaping up on demand side purely.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

So, I think — so, November, December is a seasonally strongest quarter and it’s difficult to replicate that strength in a quarter. So on a quarter-on-quarter basis, I don’t think Jan, Feb, March can we massive growth over previous quarter. But on a year-on-year comparison, the Jan, Feb, March is likely to be — is definitely likely to be decent, because I think it did start with that — I think it has all to do with how the wedding dates are in India and all that. And that has made this quarter more interesting than we would have normally have been.

Amit Sachdeva — HSBC Securities — Analyst

Sure, sure. That’s very helpful.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

We also have one more sale which is you know Pink Cloud sale.

Amit Sachdeva — HSBC Securities — Analyst

Sure, sure. That’s helpful. My second question is actually on gross margin, which I am trying to sort of understand the moving parts. Is it — one is on BPC where the margin impact on YoY is less from Fashion optically is higher, if you take the gross margin purely on the revenue basis. Coming to Beauty, is there some rather down-trading or something else? Is there also effect that’s playing out where some brands are really iconic in their category and they tend to give higher — lower margins, but they be advertise more on the platform versus some new brands, which are like they don’t have such massive advertising budget, but they can give higher margin for being on the platform and maybe spend less on advertising.

So in sometimes — is there like a mixed shift happening where iconic brands are growing much more dominant way, but newer brands or D2C or something which have lesser presence, they are sort of, it’s not falling by the wayside, but maybe they are sort of plattering, is that sort of trend that you’re seeing, which is also in part reflecting in the margins, because as we say that iconic brands will take probably pay lesser margin and that’s what is slightly more structural than cyclical?

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

I’ll come in the BPC side. So the short answer is no, I don’t think there’s any generalization we can make on that point. It’s really a mixed bag. As we said, out of the top 100 brands, almost 30 of them are direct to consumer brands, right, who come up in a very short span of time. And also, when I look at the margins, to your point, I wouldn’t call them iconic, what I would say is FMCG, CPG brands, more established MNC companies, they may give slightly lower product margin but they make up in advertising, but even equally so on the direct to consumer side, they give higher product margins, but they also are, as we mentioned earlier, are well funded and are willing to spend heavily on advertising to acquire customers from probably the most relevant platform for customer acquisition that they have in the country today which is Nykaa.

So I don’t think it’s a really this MNC or this FMCG versus D2C debate. But as we said, it’s really hard to pinpoint because 3,000 plus brands and some being luxury, some being mass, some being hair, skin, makeup, multiple categories, multiple types of brands. Some brands might go aggressive in one quarter and slightly less aggressive in another depending on their own ability to pay and spend. So I don’t think you can really call you can — I don’t use any generalization we can take out of this for coming quarters.

Amit Sachdeva — HSBC Securities — Analyst

Okay, understood. So there is no real structural thing here, it is just what it is right now because of the seasonal change in mix and things like that that would just impact margin temporarily.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

And also, as we said — I think we said 340 basis points of growth has — was preponed into Q2, which is worth noting, and there has been a slight return to travel. Travel retail was back in the quarter as was physical retail. Even though in physical retail we are becoming a very large player and we are soon to become the largest on the Beauty side, but still there are other players, and it’s a very unorganized market offline. So I think online to offline into category shifts some amount of pull back from luxury just for the quarter. So I think it’s really an interplay of these couple of factors.

Amit Sachdeva — HSBC Securities — Analyst

Got it, got it. That’s very helpful, Anchit. But on the gross margin side, again, like if you look at the headline basis, the Fashion was 81% and now 71% EBIT, so it’s obviously could be optical. But I just wanted to know whether it’s also driven by like a mix changing because more you sell your own brands optically it reduces gross margin because the marketplace would theoretically will be 100% gross margin category because it’s net of all expenses and COGS. But your own brands come with certain COGS as well. And hence probably shift from 8.4% to 12.4% is perhaps optically gross margin reducing but it might increase the value capture anyway. It is also playing out or is there any other factor which has also led to some drag on Fashion side?

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

So on Fashion, I think your understanding in terms the owned brand tables is not correct. I think the gross margin would increase on private label front. If you go to slide 44, I think the metrics that I would draw your guys attention to is actually the last five rows in the column, which is on NSV. So that like normalizes for any marketplace inventory diverse mix. So first and foremost, private label share and expansion of that should and will increase this percentage. Again, I think what we’re trying to kind of say, from a margin perspective is that we’d like to kind of focus on the nine months drilling.

I think there’s a lot of seasonal understanding and changes that keep happening to the business, whether it’s regarding income, whether it’s regarding costs. So I think we have some mortgage with that regard as well, but if you look at a nine month basis there is an improvement. Like I said before, on the Fashion business, we actually don’t to see a decline in gross project going forward being would like to hold it or improve it. And we feel pretty confident to do that.

Amit Sachdeva — HSBC Securities — Analyst

Okay, guys. Thanks a lot.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

[Speech Overlap] Yes. In Fashion a year ago I see the small business and in terms of discipline of booking, we mean — so, what we’re saying is from quarter to quarter, they may not be a good discipline of booking things in the right quarter, so FY nine months tales away those differences.

Amit Sachdeva — HSBC Securities — Analyst

Got it. Well, thank you so very much. That’s very helpful.

Operator

Thank you. The next question is from the line of Sheila Rathi from Morgan Stanley. Please go ahead.

Sheila Rathi — Morgan Stanley — Analyst

Okay. Thank you for taking my questions and good evening everyone. My first question was, because Falguni talked about some downtrading and some weakness in demand. Even though the AOVs held up. So is that — is it correct to say that the number of products in the basket actually went up, is that a fair assessment here?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

No, no, I think, my comment on downtrading is being seen in a much bigger light when necessary. So I just wanted to say that, honestly, in terms of downtrading what I meant was that there is a lot of growth in certain price point brands, which are growing very rapidly, all across. So, like for example, if you see many of the D2C brands like where the Minimalist, Swiss Beauty or so many of those brands are growing quite nicely. And they all tend to be slightly lower price point than their Luxe equivalent. So if such large brand proliferation of B2C brands in India was not there, they would have been bigger growth of many large of the luxury imported brands.

So, that was only limited point I was making. It’s a very complicated point to make, because again if you look at FMCG, those were always very mass brands. So, I’m not talking about mass brands at all. I’m talking about a little bit cheaper products that kind of imitate the international luxury brands and sometimes Indian consumers are okay to consume to. That’s the kind of down trading I was talking about.

Sheila Rathi — Morgan Stanley — Analyst

Understood. And how would you look at competitive intensity in this quarter, both from online players in Beauty and Fashion retailers on the offline side, I mean for both the businesses. Has there been anything which is monitoring tool for you on the competitiveness — competitive intensity side?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

For Beauty, so Anchit can answer. Anchit, are you there?.

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Yes, I’m here. So I think there has been a lot of noise in the system around increasing competitive intensity and this is something, which has probably been discussed a lot since pretty much we went public as a company. I think as I’ve always said, there is a on and off focus on this category from some of the horizontals from time to time, but nothing that we feel is really going to impact the growth because we have to realize that the consumption in India is so low, on a per capita basis. And there is such a massive room to grow and Nykaa is still seen as the destination of choice for Beauty Brands as well as for Beauty consumers.

And I gave a couple of examples earlier when I spoke that when Priyanka Chopra launched our brand in India, she had a choice to really partner with anybody, but she chose to come exclusively with Nykaa. And same thing when the Ordinary, which is a brand-owned by the Estee Lauder group which is one of the best-selling brands globally for skincare. So Anomaly to launch in India, which was Nykaa exclusive partners. I think brands continue to choose us as the board of call for their entry into India. Customers see us — continue to see us as the number one destination for the latest trends within Beauty.

So I don’t think that is changing. If there is an increase in competitive focus on this category, I don’t think that’s necessarily a bad thing. That will help increase the awareness, as well as the availability of beauty in the country, which should only help accelerate the consumption on a per capita basis. So, to answer your question, nothing really meaningful to discuss this quarter, but obviously we monitor it very closely. So we’re happy to update you in a couple of quarters.

Sheila Rathi — Morgan Stanley — Analyst

And just a follow up here, Anchit. Just — and thanks for making the point on the launch of Ordinary and Anomaly. Has it become more — or let’s put it this way, has it become less easier to get brands on an exclusive basis versus, say, two years ago? Because now even offline retailers are also focusing on expanding the beauty — their Beauty businesses. So that’s where I’m coming from that is it less easier than where we were, say, two years ago?

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

I think it depends. There are premium luxury brands, who are very conscious about having limited distribution. And for them Nykaa remains indisputably the choice — first choice. Now for more mass brands, for them it makes sense to have a wide distribution. So even they continue to partner with Nykaa first. But yes, when they do choose to distribute slightly more widely because for them the whole game is about distribution.

Versus a couple years ago, yes, there are more options for brands. But we’re still not seeing our several losing brands, if I could say that to competition, I mean Nykaa is the default platform on which any beauty brand who wants retail in India has to list on whether they choose to list on other platforms as well, that is, yes, I mean, that’s something that depends brand to brand and could potentially be something which brands choose to do going forward.

But we still account for a majority of their online sales and as Nykaa having both physical retail distribution as well as online. There is no other competition right now in India, who is offering that very healthy mix of both 150 stores on the retail side, plus 20 million, 25 million visits, visitors, unique visitors on a monthly basis online only looking for Beauty. So I think it’s quite a difficult proposition to replicate for competitor. So yes, we’re not seeing it yet, but even if the brands choose to not remain exclusive with Nykaa that’s not the end of the world, because by listening on other brands, the brands are able to build greater awareness and that snowballs into better momentum on sales, which then comes back to benefit us as well. So it really depends on the brand strategy in the country.

Sheila Rathi — Morgan Stanley — Analyst

Thanks. And on the Fashion side how has been the competitive intensity, especially from the offline players?

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

I think, in Fashion, again, we’re not the first movers. So there has been competition. And there has been players who resisted in this market. But I think a couple of things, first and foremost, again we always keep orienting ourselves to the size of the market and the industry and is $49 billion. This deal is going to happen online by 2027. There’s a lot of space for definitely a couple of sales. And I think we’re keen to be one of those for sure. What we feel is obviously we’re growing much faster than the online market. So we are taking share. And even anecdotally, when we talked to a lot of our brand partners, it’s quite clear that for several brands now we are clearly aware they are easy to stay off of them in the market. So what I will say, if there’s a need of us taking market share and I think the market is large enough definitely for us to emerge as a very need for sale.

Sheila Rathi — Morgan Stanley — Analyst

And just one follow-up on Fashion, what has been the retention rate, which we have been in the last six months or nine months?

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yes, we do track that. But we’re not releasing that number. So we won’t be able to share that on this call.

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

So, I would say, they’re quite healthy and slightly behind our Beauty retention which is truly I will see very, very robust.

Sheila Rathi — Morgan Stanley — Analyst

Thank you.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

[Speech Overlap] on it and we trying to do…

Sheila Rathi — Morgan Stanley — Analyst

Sure.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yes. Go ahead.

Sheila Rathi — Morgan Stanley — Analyst

One final question. How has been the trend on the inventory days for all the three businesses say over the last — over the last quarter? Has it moved out, the inventory days?

Anchit Nayar — Executive Director, Chief Executive Officer, Nykaa E-Retail

Inventory days have gone down.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Inventory days have come down significantly in Beauty. I think we had pointed out that last quarter, September quarter was just before the season. So we had also stocked up on inventory, especially international — I mean, important brands, and other inventory. So I think that is clearly come down. And here you find it in our results and I think as far as Fashion is concerned, we are a marketplace business with the exception of owning our own private brands as well as some imported brands where we take inventory. That’s reasonably small percentage, but growing, but yeah, we do manage our inventory with a keen eye on number of days of inventory that we are taking.

Sheila Rathi — Morgan Stanley — Analyst

Understood. Thank you. Thank you so much.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Thank you. So it is end of our call.

Operator

Due to time constraints, that was the last question taken for today. I would now like to hand the conference over to management for closing comments.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

Yes, just thank you very much everyone for being here. I think we find it extremely difficult to do this presentation without just on audio call, the presentation right in front of you. But unfortunately, that’s what we have now, but I hope you understood what we were trying to say. And we are always — yes, you may download the presentation from our investor presentation. And we are always available for any clarification that you may need, but we really appreciate taking interest and talking to us today.

And the big thing is that we are definitely investing for the future and I think, I’m really glad that this was an audience that understood that below EBITDA line is all just investment for the future. So I think, just want to continue to say that we are investing for the future and remain very confident about building the right businesses that will pan out.

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

And each of our three businesses are really taking the right steps in terms of the fast profit of EBITDA. That should also be clear from financials when you release them.

Falguni Nayar — Executive Chairperson, Managing Director and Chief Executive Officer

What we remain proud of is that it’s been a period of large amount of investment in customer acquisition, fair amount of investment in stores and warehouse rollout and fair amount of investment in building offices and teams for future businesses. So, even with that, I think we are really happy on where we stand in terms of our being able to maintain our contribution margin and being able to deliver profitability. Thank you very much.

Adwaita Nayar — Executive Director, Chief Executive Officer, Nykaa Fashion

Thank you.

Operator

[Operator Closing Remarks]