Buy Ethos Ltd For Target Rs 2,800 By Emkay Global Financial Services Ltd
We maintain BUY on Ethos, while trimming our TP by ~5% to Rs2,800 from Rs2,950 (26x Mar-28E EBITDA), as continued currency depreciation and negative operating leverage led to a ~4% EBITDA miss and ~300bps EBITDA margin dip in Q4. However, topline momentum further accelerated and surprised positively, with 33% YoY growth (~4% beat). Despite a TP cut, we maintain a positive stance on Ethos, driven by best-in-class revenue growth of ~29% (14.2% SSG in FY26) and gradual margin recovery with the normalization of currency impact/cut in customs duty under the EFTA agreement. Balance sheet remains healthy, with Rs7.6bn net cash (~85% of current invested capital as of FY26-end). Despite weak margin and accelerated expansion, operating cash flow encouragingly turned positive, helped by ~25 days of working capital optimization in FY26. Among emerging growth drivers, Ethos’s CPO vertical grew ~23% in FY26; its lifestyle subsidiary (Messika/Rimowa; ~75% stake) opened two new stores and was PAT-positive in FY26. Losses from associates/JV (Favre Leuba – 34% stake; Pasadena – 50% stake) stood at Rs46mn in FY26, as these likely remain in a ramp-up phase.
Robust revenue growth; OCF (pre-IndAS) turns positive in FY26
Revenue continues its strong growth momentum, up ~33%/29% YoY in Q4/FY26 to Rs4.1bn/Rs16.1bn, respectively, led by healthy SSG growth (14.2% in FY26), and the rest via store additions (21 net additions in FY26). Forex impact on gross profit in Q4 was Rs44mn (Rs13mn from restatement of creditors and Rs31mn from notional exchange losses/increase in COGS). EBITDA margin at 12.4% (pre-IndAS: 7.8%) for Q4 narrowed by ~300bps YoY, due to a ~170bps dip in gross margin and ~80bps/40bps higher employee/other expenses due to negative leverage on new stores being at the nascent stage of operations. Encouragingly, CFO (pre-IndAS) for FY26 has turned positive, at ~Rs120mn (vs negative ~Rs720mn in FY25), though FCF remained negative at Rs580mn but improved significantly vs negative Rs1.46bn in FY25. Working capital improved by ~25 days, led by a reduction in inventory days by ~16 and increase in payable days by ~6. Ethos added 6 new watch boutiques in Q4. Further, in Q1FY27TD, 4 watch boutiques were added, with store-count now at 98.
Investor presentation KTAs
1) Higher employee/rent expenses for FY26 were attributed to costs associated with increased manpower and rent for new store additions, which are still at nascent stage.
2) The company increased its marketing expenses by ~67% in FY26 to Rs400mn, to support new businesses, new boutiques, and brand launches.
3) SSG was healthy at 14.2% in FY26, likely helped by strong same-store volume growth, as ASP was flat at ~1%.
4) Ethos entered six new markets in FY26: Ranchi, Jodhpur, Srinagar, Kanpur, Agra, and Faridabad, expanding its presence to 32 cities.
5) The company signed 4 exclusive partnerships in FY26: 3 in the watch segment and 1 in the luggage category.
6) Billing from the certified pre-owned (CPO) segment was up 22.9% in FY26.
7) Share of luxury and high-luxury watches has risen from 70% in FY25 to 71% in FY26
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