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Consistent outperformance should drive re-rating; maintain BUY

Ethos’ Q2 EBITDA was ~10% ahead of estimates, led by both revenue & EBITDA margin beat. Revenue grew 32% YoY, on the back of 17% SSG and contribution from certified pre-owned (CPO) business. The stronger growth for Ethos was owing to both, pick up in industry growth and market-share gains. Improved India pricing for Swiss watches and growth in HNIs are resulting in industry growth, while Ethos continues to gain market share with exclusive partnerships and superior experience (repeat sales at 46% in H1FY23 vs. 34% in FY20). Store additions were muted in Q2 due to delay in mall opening. However, Ethos now expects to open 40 stores over the next 24 months (vs. 13 stores by FY24, earlier). Higher expectations are led by healthy online leads and improving focus of brands on Tier-1 cities. In addition, Ethos targets low double-digit SSG over the medium term. CPO business is a bit constrained due to availability of watchmakers, but commentary remains healthy as Ethos targets ~Rs0.75bn top-line in FY23 (>100% growth). Encouragingly, LTM inventory days remained lower at ~160 (vs. 175 days historically), but payable days reduced by 20, to negotiate better gross margins. While the Q2 beat warrants an earnings upgrade for FY24/25, we remain conservative on both, the margin and working-capital fronts, to account for Ethos’ strong expansion plans. We forecast FY22-25E EBITDA CAGR at 47% for Ethos, on: i) 32% revenue CAGR over the same period, led by 13% SSG in new watch retail, 13% rise in avg. store count and 6% growth contribution from CPO/new segments; ii) avg. annual gain of ~100bps in EBITDA margin. Maintain Buy with a TP of Rs1,400, based on 23x Dec’24E EBITDA.

Results summary: Revenue grew 32% to Rs1.8bn, led by 17% SSG and contribution from new stores/certified pre-owned (CPO) business. EBITDA margins improved ~500bps, led by higher gross margins, which remained elevated at 32.2% (+530bps). Better gross margins were led by lower discounting and higher exclusive mix at ~30% for Q2. Store additions were muted due to delay in mall development. However, Ethos still expects to end FY23 with 8-10 net additions and 40 additions over the next 24 months. Encouragingly, LTM inventory days remained lower at ~160 (vs. 175-180 days historically), but payable days reduced by 20, to negotiate better gross margins from brands.

Earnings-call KTAs: 1) Ethos plans to open 40 new stores across tier-1 cities like Surat, Raipur, Bhubaneswar, Cochin, Ranchi, and Siliguri, and flagship stores in metros like Mumbai, Ahmedabad, Hyderabad and Gurgaon. 2) In Q2, share of exclusive brands was ~30% vs. 26% in Q1. 3) During Q2, Ethos closed 2 stores due to expiry of lease, and plans to reopen these stores in the same geography at a better location in Q3. 4) Ethos’ share of repeat sales increased to 46% in H1FY23 vs. 41% in FY22, suggesting superior consumer experience. 5) Share of luxury and high-luxury watch sales remains elevated at ~65% vs. 48% in FY20. 6) Ethos has net cash reserves of Rs2.5bn as of H1FY23-end 7) Ethos expects Messika to start operations in Q4FY23 and Rimowa in Q1FY24.

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