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Outperformance continues; Best placed to play luxury tailwind; BUY

Ethos continued to outperform, with 22%/27% revenue growth in Q4/FY24. Advance investments in Employees (planned store roll-outs/new vertical) and Tech/App led to a ~140bps miss on EBITDA margin which should normalize in coming quarters. Back-ended store openings in FY25 and the general elections should cause some growth moderation in H1, driving a 5-7% cut to our revenue estimate. However, margin tailwind from the expected custom duty waiver and MRP revisions (7-8% price hike) should more than offset the negative leverage and lead to margin gains in FY26E. With the landmark duty agreement, Ethos expects India allocation by luxury brands to materially improve, and targets 10x revenue by FY34 (~25% CAGR). Ethos is also making the right investments in mobile app, AI, new verticals, network expansion, exclusive brands (Favre Leuba), and marketing, to gain market share. Despite the weak macros, Ethos has topped most retail formats, and the recent correction (down ~20% over the last 3M) only adds to its attraction; retain BUY and TP of Rs2,950/share.

Strong trends sustain; outperforms other retailers:

Q4 revenue grew 21.7% to Rs2.5bn led by 10% SSG, with the balance growth coming in from network expansion. We believe ASP grew 20.8% in Q4, implying flat growth in overall volume. However, volume growth (over Rs100K) for the focused watch segment stood at a strong 19% for full year. Exclusive brands contributed ~29% in FY24 (vs. 27% in FY23). The CPO business clocked ~Rs0.7bn for FY24, and is expected to maintain the strong growth. Gross margin at 29.2% was largely flat in Q4, with MRPs now mostly in line with current CHF-INR prices. Higher bench strength for upcoming stores, senior hires for the Lifestyle vertical (Rimova/Messika/QLOCKTWO), and higher technological investments (AI/App) led to an 80bps higher employee cost. Despite the flat gross margin and higher employee cost, EBITDA margin was up by 170bps to 9.8% on FX gains. Delay in mall constructions led to slower store adds, at 9 in FY24, but outlook remains strong with 20-25 additions in FY25 and overall network of 150 stores in coming 5-6 years (63 stores at FY24-end).

Strong commentary keeps us optimistic:

1) Benefit of the duty reduction EFTA agreement is likely to start from H2/early H1FY26, with 3% reduction in Phase-1. Ethos also expects India allocation to improve with duty reduction. 2) Focus is now on network expansion (to add >20 stores in FY25), improving digital network (launch app/revamp website), deploying the AI model in sales, network and increasing its exclusive brand moat. 3) Ethos has a clear vision of adding 150 stores over 5-6 years and increasing sales by 10x over the decade. Planned store pipeline: 1 store in Kochi (July), 1 in Dehradun (June), 1 airport store in Bengaluru (July), 6 stores in Mall of Asia (H2), City of Times (multiple stores), and 1 in Mangalore (H2). Ethos will also add Messika and a QLOCKTWO store in H2. 4) With its Delhi service center doing well, it will open another service center in Bengaluru in H2. 5) Given dilution of ~60% stake in Silver City to KDDL, Ethos will focus on exclusive retailing of Favre Leuba and receive investment support from KDDL for manufacturing operations. 6) GM trajectory is likely to trend upward, with Ethos aiming for 50% contribution from exclusive brands and gradual margin benefits from the duty waiver. 7) Rise in inventory by Rs1bn is largely due to signing of new exclusive brands and delay in store openings. 8) Drop in online traffic is due to removal of lower price-point watches; but absolute online business/profitability has improved. 9) Ethos targets ~20% ROIC for new stores in Y1, with further increase in subsequent years. Number of 5-star hotels, luxury car dealers, and external consultants, along with unpaid consumer traffic, are key parameters for a new store location. 10) Ethos’s exclusive brand contracts are for a 5Y period with an auto-renewal clause for another 4 years.

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