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Stock Analysis | Ethos Ltd. (NSE:ETHOSLTD): Q3FY23 Results Out; Total Income rises 17% YoY

Ethos Limited (NSE:ETHOSLTD) is India’s largest luxury and premium watch retail player, which was founded in 2003 by KDDL Limited. Ethos offers an extensive range of premium and luxury watches, including 61 brands like Rolex, Omega, IWC Schaffhausen, Jaeger LeCoultre, Panerai, Bvlgari, H. Moser & Cie, Rado, Longines, Baume & Mercier, Oris SA, Corum, Carl F. Bucherer, Tissot, Raymond Weil, Louis Moinet, and Balmain.

Ethos operates through 50 physical retail stores in 17 cities across India, 14 Ethos Summit Stores, 14 multi-brand outlets, 10 Ethos Boutiques, 10 luxury segment mono-brand boutiques, and 1 CPO luxury watch lounge for pre-owned watches. Ethos also offers an omni-channel experience to its customers through its website and social media platforms, which is India’s largest website for premium and luxury watches in terms of the number of brands and watches offered.

The Indian watch market is expected to witness strong growth over the next few years, growing at a CAGR of 10.6% to reach Rs. 22,300 Cr by FY25. The market is divided into two broad categories based on price and product type, namely traditional watches (including analogue and digital watches) and smartwatches.

Although smartwatches have grown faster than traditional watches over the past decade, they are primarily restricted to the price point below Rs. 100,000. Traditional watches, on the other hand, have been the mainstay of the market, attracting customers of all income levels, genders, and ages.

Brands have maintained their relevance in the sector by launching new products that cater to specific customer groups. Traditional timepieces continue to dominate the premium and luxury market, with consumers purchasing them for their quality, legacy, and brand value.

However, the market faces certain challenges, including the risk of declining demand for watches as a functional time-keeping instrument. This risk is mitigated to some extent by positioning watches as fashion accessories. The high working capital requirements of the industry and the absence of definite supply agreements with luxury brands are also key risks that could impact Ethos and other players in the sector.

Ethos’s Club Echo is the loyalty program that has 2.85 lakh registered members as of March 2022, and around 40% of the business comes from repeat buyers registered with the program. Ethos has strong relationships with top luxury brands that provide a wide moat for its business.

Ethos has strategically located its retail stores in premium areas such as shopping malls and airport terminals, allowing it to cater to a large section of consumers and effectively penetrate the luxury watch market. The company’s flagship stores are located on high streets, which has proved to be a structural advantage, especially during the pandemic year.

Ethos has also invested in creating an attractive in-store experience for its customers. The company has categorized its stores into different types such as Ethos Summit Stores, Ethos Multi Brand Outlets (MBOs), Ethos Exclusive Brand Outlets (EBOs), and Second Movement Lounge. Additionally, the company has created distinctive brand imagery and landing pages for each of its luxury brands on its website.

Ethos has established itself as a leading luxury watch omni-channel retail player in India. The company has a robust digital infrastructure, which has enabled it to scale its business and increase its customer base. Its website showcases over 50 brands, offering a great eco-system for visitors to not only purchase these watches online but also to discover watches and understand their legacies.

Ethos uses data collected across its channels to re-market to customers who have shown interest in its website across popular networks and social media platforms. The company’s omnichannel model offers its customers both physical and digital shopping experiences, which allows Ethos to remain relevant at all the touchpoints of a consumer’s journey. Customers can place orders for products either offline or online, and have the flexibility of buying products at one store and returning them at another or browsing product catalogues and placing orders online with doorstep delivery.

Ethos Limited, reported strong financial results for Q3FY23 and 9MFY23. In Q3FY23, the company recorded its highest-ever revenue and PAT, with a YoY revenue growth of 17.6% and a PAT growth of 70.2%. The company also achieved an impressive Same-Store Sales Growth (SSG) of 16%. The company’s omni-channel strategy resulted in strong growth both offline and online. The EBITDA margin expanded by +202 bps/ +95 bps on YoY/QoQ, aided by cost optimization initiatives and operating leverage benefits. The higher share of in-house brand sales continued to improve the company’s margin profile. The company also signed exclusive distribution agreements with leading watch brands in Q3FY23.

For 9MFY23, the company’s revenue grew by 38.8% YoY, and the EBITDA margin was 16.7%. The company’s PAT grew to Rs 47 crore in 9MFY23 from Rs 15.5 crore in 9MFY22. The higher share of in-house brand sales continued to aid margin expansion, and the EBITDA margin continued to expand on the back of cost optimization initiatives and operating leverage benefits.

The company’s CEO, Mr. Pranav Saboo, stated that the company’s revenue growth, profit growth, and exclusive partnerships signed in Q3FY23 show the tremendous potential of finely crafted timepieces, luxury products, and Ethos, to deliver long-term value creation for all stakeholders. The company plans to open 40 stores in the coming 24 months and is focused on delivering value to all stakeholders as it marks its 20th anniversary.

Ethos, has projects a strong revenue, EBITDA and PAT growth CAGR of 30%, 39% and 62% respectively, over the next four years, driven by various factors. These include an improvement in realization and same store sales growth (SSG) rate, new store additions, and an increasing contribution from the CPO (Certified Pre-Owned) business.

The positive long-term growth tailwinds for the luxury watch industry in India and Ethos’ dominant position in the market, making it an attractive long-term bet. The company plans to add approximately 40 new stores over the next two years, resulting in the requisite inventory build-up, which may initially impact the company’s return profile in the near term. However, the report projects that favourable long-term macroeconomic factors, the company’s portfolio of best-in-class brands, and strong execution track record by management should lead to higher operating efficiencies over medium to long-term.

The potential of the global CPO luxury watch market, which was valued at USD 18 billion in CY20 and is expected to grow at a CAGR of 9% from CY19-CY25P to reach USD 27 billion. The adoption of the second-hand luxury watch market is emerging as one of the key reasons for growth and acceptance of luxury watches globally. In India, the overall luxury pre-owned market was valued at approximately Rs 40 Cr – Rs 50 Cr during FY20, dominated by the unorganized sector contributing almost 80% of the market.

However, the organized sector offering certification on pre-owned luxury watches is at a nascent stage in India and was valued at Rs 10-15 Cr in FY20. The overall premium & luxury watch market in India was valued at Rs 6,610 Cr in FY20, making the CPO market to be around 0.2% of the overall market. Ethos’ CPO business dominates the CPO share in India, which is currently minuscule, presenting an opportunity to grow significantly from the current base, in line with global trends.

There are certain risks associated with Ethos that investors need to be aware of. One of the key risks is the absence of definite supply agreements with luxury brands. Ethos does not have fixed terms of trade with the majority of its suppliers, which means that suppliers may terminate their relationship with the company or engage with other retailers that compete with Ethos.

Another risk is the high working capital requirements of the company, which is currently at around 35% of sales. Given the nature of the luxury industry and the increasing store network and brand partners, inventory levels are expected to remain elevated, which could put pressure on working capital requirements.

Lastly, there is a risk of a decline in overall demand for watches, which could impact demand for luxury watches. While the management remains confident of a steady growth in the demand for watches in India over the next 10-15 years, any decline in spending power due to a slowdown could impact demand for luxury watches. However, the risk of such a decline in the functional value of a watch is mitigated by positioning Ethos as a provider of watches as a fashion accessory.

Ethos is well-positioned to capitalize on the positive long-term growth tailwinds for the luxury watch industry in India and benefit from the company’s dominant position in the market.

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