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Buy Ethos Ltd For Target Rs. 1,400

We initiate coverage on Ethos Limited with a target price of Rs.1400 (~53% upside). Ethos is one of India’s most prominent luxury retail brands and the market leader for luxury watches in India. Fortified by over two decades of experience, Ethos manages over sixty watch brands, of which more than 35 are exclusively available at Ethos – a testament to its brand relations, a valuable asset, given that it takes years to develop and nurture these relationships. The company has around 48 stores and is constantly on the prowl to add more stores. Its strategy to further diversify its product range will likely make it synonymous with luxury.

* Driving luxury growth in India, with rising realisations - The company has a market share of more than 13% of the overall watch market and more than 20% of the luxury watch market in India (Technopark Report 2020). Ethos over the years, has built a portfolio of 60+ premium brands, out of which more than 35 are exclusively available at Ethos. The company's strategy of moving away from the fashion segment to the luxury/high-luxury segment saw an average realization increase to ~Rs.150k in FY22 from Rs.62k in FY18. This also instils confidence in brand owners on Ethos, coupled with its pan-India presence, making them an ideal partner.

* India at the cusp of luxury- According to data from The Federation of the Swiss Watch Industry, India has been one of the few bright spots to emerge post the pandemic with a robust recovery. As of Oct 2022, India saw 20% 3 YR CAGR growth in dollar terms. Additionally, globally, the share of Luxury/High-Luxury Swiss watches has increased from 70% in 2020 to 76% in 2022, while lower price points 

* Diversification strategy to play out - The company intends to leverage its deep understanding of the luxury market to foray into other luxury products. Through its certified pre-owned (CPO) platform, Ethos has ventured into the sale of preowned luxury watches, which makes it the only player in this segment in India. Globally, the CPO market plays a pivotal role in developing the luxury market and contributes as much as ~30% to the overall luxury industry, while in India, it's at a very nascent stage. Ethos being the flag bearer, is likely to see strong growth in this segment. The company also intends to diversify into international branded jewellery and luxury travel accessories i.e. luggage and bags, which can provide an additional fillip to the company.

* Valuation & Risks- We expect the company to post revenue growth of 28% CAGR over FY22-25E, with 8% growth in realization and a 16% volume growth. We expect the CPO business to post a growth of 75% over the same period. OPM should expand by 430bps YoY over the same period to 15.9%, led by a 205bps improvement in gross margins. We estimate EBITDA to grow at 43% over the same perod, and PAT at a CAGR of 66%. At a CMP of Rs 916, the stock is trading at 26x FY24E and 20x FY25E. We value the stock at 30x on DEC 24 (fitting for a luxury retailer) EPS to arrive at our target price of Rs.1400, an upside of 53%. Risk- Muted consumer sentiment, lack of quality real estate and change in the duty structure of watches.

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