Ethos: The Timeless Elegance
We are initiating coverage on Ethos Ltd. with a BUY recommendation and a price target of Rs 3,050/share, representing an upside of 27% from the CMP. Our confidence in Ethos’s promising future is grounded in the company’s robust and consistent performance over the past several quarters. This trend is expected to persist in the coming years, supported by factors such as consistently strong Same Store Sales Growth (SSSG) of over 15% and an improving EBITDA margins trend, rising from 11.3% in FY20 to 14.5% in FY23. This performance is attributed to the company’s continued focus on store expansion and an increased emphasis on growing its exclusive brands portfolio, resulting in an overall Average Selling Price (ASP) increase of 2.2x from Rs 84,200 in FY20 to Rs 187,500 in H1FY24.
With a target of reaching 140-150 stores in the next four years, along with an intensified focus on increasing overall ASP, scaling up the Certified Pre-owned watch segment, and expanding the exclusive brand portfolio, Ethos is expected to achieve healthy Revenue/PAT growth of 35%/42% CAGR, respectively, over FY23-26E. This growth trajectory is anticipated to elevate the company’s Return on Capital Employed (ROCE) from 16% in FY23 to 20% in FY26.
Investment Thesis
Structural growth trend in the Luxury space
India is at the cusp of a luxury demand boom. According to some estimates, the Luxury market in India will expand 5x in the next decade as the number of affluent consumers in the country continues to multiply with higher aspiration and disposable income. In recent years, the sales of luxury products have been at an all-time high in many luxury segments including luxury cars (up 3x), luxury real estate (up 2x), Premium clothing, etc. Moreover, The demand for luxury products is not restricted to metros but also has extended to Tier 2 and 3 cities. This represents an unprecedented opportunity for retailers of premium and luxury products like Ethos.
Ethos is embracing the transformation for the next leg of growth
Foraying into the fast-growing Certified Pre-Owned (CPO) segment due to the shortage of new luxury watches is a step in the right direction. CPO is an asset-light model. It has lower Capex and requires a lower working capital cycle of 50-60 days vs. 140-150 days for new watches. As a result, it has a higher ROCE of 20%+ vs. 15-18% for new watches.
Increasing share of high-margin exclusive brands in the portfolio is expected to drive the overall margins profile, given that these brands command 2x gross margins (~35-40%) compared to non-exclusive brands. As of now, exclusive brands contribute ~ 30% to the sales, a figure that is projected to rise in the coming years.
Diversifying into fast-growing other luxury segments such as Luggage (Rimowa) and Jewellery (Messika and Bvlgari) though the company is at a nascent stage in this segment, it is staging for future growth as it could be its next growth driver.
Room for margin and ROCE expansion: We expect the company’s EBITDA margin to expand 100bps to 15.6% by FY26E from 14.5% in FY23, led by 1) Improving product mix – gradual increase in the ASP and exclusive brand portfolio, 2) Store expansion and operating leverage, and 3) Increasing CPO business further improving the company’s ROCE from 16% in FY23 to 20% in FY26E.
Valuation & Recommendation
Given the investment thesis outlined above, we anticipate robust CAGR growth for the company in terms of Revenue (35%) and PAT (42%) over FY23-26E. This positive trajectory is expected to enhance the overall return profile for the company. Currently, at the CMP, the company is trading at 44x/32x its FY25/26E EPS. With improved visibility in earnings growth and a stronger return profile, the stock appears attractive within the Small-cap space. We initiate the coverage on Ethos Ltd. with a BUY rating and value the company at 40x FY26 EPS to arrive at a TP of Rs 3,050/Share, implying an upside of 27% from the CMP.
Click here to download Ethos Ltd – Initiating Coverage by Axis Securities
Leave a Reply