Long-Term Growth Prospect Continues; Maintain BUY
Est. Vs. Actual for Q3FY24: Revenue – MISS; EBITDA – MISS; PAT – BEAT
Changes in Estimates post Q3FY24 FY25E/FY26E – Revenue: -2%/1%; EBITDA: -4%/2%; PAT: -5%/2%
Recommendation Rationale
Strong Performance Continues: Ethos posted encouraging results despite the impact of Shradh in October, the 10-day impact of the Chennai floods, and store renovation. Revenue grew 22% YoY (SSSG grew 11%); however, adjusting for impact, SSSG growth would have been at 15% in Q3. On an encouraging note, the company has guided for a CAGR of 25% revenue growth over the next 10 years led by store network expansion, introduction of new and scaling up existing exclusive brands portfolio, and gradual expansion of CPO and new categories – Luggage (Rimova) and Jewellery businesses.
Store opening guidance: As of Feb-24, the current store reach stands at 60 stores and the company plans to open 25 stores in FY25 and 15-20 stores in FY26.
The structural story continues: Ethos’s promising future is underpinned by the company’s robust and consistent performance over the last several quarters. This is driven by – 1) Continued strong demand in the premium and luxury watch space, 2) The company foraying into the fast-growing CPO segment, 3) Increasing share of high-margin exclusive brands, 4) Diversifying into fast-growing luxury segment – Luggage and Jewellery, and 5) strong room for margin and ROCE expansion.
Sector Outlook: Positive
Company Outlook & Guidance: We maintain our BUY rating on the stock based on the company’s bright future prospects. We have increased our FY26E EPS estimates marginally by 2% to account for a better growth outlook on a mid to long-term basis.
Current Valuation: 40x FY26 EPS (Earlier Valuation: 40x FY26 EPS).
Current TP: Rs 3,100/share (Earlier TP: Rs 3,050/share).
Recommendation With a 30% upside from the CMP, we maintain our long-term BUY rating on the stock.
Financial Performance: Ethos posted strong results despite the impact of Shradh in October, the 10-day impact of the Chennai floods, and store renovation. Revenue grew 22% YoY (SSSG grew 11%); however, adjusting for impact, SSSG growth would have been at 15% in Q3. On an encouraging note, the company has guided for a CAGR of 25% revenue growth over the next 10 years led by store network expansion, introduction of new and scaling up existing exclusive brands portfolio, and gradual expansion of CPO and new categories – Luggage (Rimova) and Jewellery businesses. EBITDA grew 24% YoY, while EBITDA margins stood at 15.8%, largely flat on account of higher employee cost ahead of new store openings and currency impact. PAT stood at Rs 26Cr, up 23% YoY.
RF Brands Pvt Ltd. Ethos incorporated a wholly owned subsidiary in Feb’24 to tie up with retailers to sell watches under Rs 80,000. Previously, the company had shifted focus away from this segment to concentrate on watches above Rs 1 Lc. However, due to strong demand from global watch brands, Ethos will now sell these watches through other retailers. Additionally, these watches will be assembled in India under an exclusive contract agreement, enabling Ethos to earn higher margins through RF.
Valuation & Outlook: Ethos’ promising future is underpinned by the company’s robust and consistent performance over the last several quarters, driven by – 1) continued strong demand in the premium and luxury watch space, 2) foraying into fast-growing CPO segment, 3) increasing share of high margin exclusive brands, 4) diversification into fast-growing luxury segment – Luggage and Jewellery and 5) strong room for margin and ROCE expansion. Given the strong investment thesis outlined above, we anticipate robust CAGR growth for the company in terms of Revenue (35%) and PAT (43%) over FY23-26E. This positive trajectory is expected to enhance the overall ROCE profile for the company from 16% in FY23 to 21% in FY26. Currently, at the CMP, the company is trading at 45x/31x 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 maintain a BUY rating and value the company at 40x FY26 EPS to arrive at a TP of Rs 3,100/Share, implying an upside of 30% from the CMP
Click here to download Ethos Ltd – Q3FY24 Result Update by Axis Securities
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