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Ethos delivered a 23% EBITDA beat, led by 300bps better margins on faster MRP revisions and lower operating costs. Robust outperformance continued vs. other retail formats, with 32% topline growth in Q2/H1 (23% SSG). Demand trends remain encouraging in the luxury space (21% growth in Indian Swisswatch exports in 9MCY23) and Ethos should be a key beneficiary with a strengthened balance sheet (Rs3.7bn: QIP raise + net cash). Ethos’ focus is to grow faster, and it plans to use proceeds towards (1) accelerated network expansion (~100 stores over FY23-27 vs. 25-30 stores earlier), (2) frontloading of inventory purchases for exclusive partnerships and (3) ramp-up of acquired brand – Favre Leuba. We maintain BUY and raise our TP by 15% to Rs2,300, led by a 5-8% increase in estimates on margin beat, 12% increase in TP multiple on strengthened balance sheet and 4% negative impact of equity dilution. A better return generation in Favre Leuba is a potential upside.

Ethos: Financial Snapshot (Consolidated)

Robust growth amid strong demand; outperforms other retail formats:

Q2 revenue grew ~32% to Rs2.4bn, led by 23% SSG and network expansion. In our view, ASP grew more than 30% in Q2, while volume was flat as the company shifted its focus towards higher-end watches. The share of luxury watches (>Rs300,000) improved 450bps to 69% in H1. CPO business grew 34% YoY in H1 and contributed Rs0.32bn to revenue. Gross margin at 31.2% declined 100bps, led by tail impact of the mismatch between MRP revisions by brands and INR depreciation. Ethos expects the pricing mismatch to be corrected completely by Q4. Despite the decline in gross margin, strong operating leverage led to EBITDA margin (Pre-Ind AS) gaining 140bps to reach 11.9%. Delay in opening of malls led to store count remaining flat at 60; expect H2 to mitigate Q2 shortfall with higher additions. Ethos has guided to reach 140-150 store count in the next four years. Ethos raised Rs.1.8bn via QIP route in Q3, in addition to cash reserves of Rs1.8bn at H1 end; funds raised will be used for new store openings (WC/capex), front-loading of inventory for exclusive partnerships and ramp-up of Favre-Leuba.

Earnings call KTAs: 1) Ethos entered into four exclusive partnerships in Q2 with Ulysse Nardin, Gerald Charles, Chrono Swiss and Nivada Grenchen. Ulysse Nardin is specifically important as it is one of the Top-50 luxury brands globally and has been, hitherto, operating in India with other retailers. 2) The first Rimova (luggage) store opened in Q3, with the brand nearing USD1bn sales globally. A positive response should help in gaining more store rights. 3) A sharp rise in ASP from Rs84K to Rs187K over FY20-H1FY24 is on account of strategically getting out of lower price points. Ethos is mostly done with this correction and expects a gradual rise in ASP from hereon. 4) Volume was largely flat, led by growth in higher price-point watches and a significant decline in lower price-point watches. 5) Ethos is witnessing better-than-expected traction in Tier 2/3 cities, with awareness increasing for fine watches; Ethos aims to fast-track its plan to expand its reach to Tier 2/3 cities with the help of raised funds. 6) New stores are seeing faster breakeven with most stores opened in the last 12 months being profitable. A few stores have reached breakeven as early as three months. 7) It claimed to have a ~21% market share in the luxury watch segment and plans to grow the same with exclusive partnerships, content-led marketing and pan-India omnipresence. 8) It informed that price correction in the pre-owned market is limited to specific brands and watches; however, prices for such watches still remain higher than new watch prices. 9) Regarding Favre Luba, it will take two quarters to come out with a market strategy and projections relating to further investments will be clear by the start of FY25.