Buy Ethos Ltd For Target Rs.3,500 By Emkay Global Financial Services Ltd
We reiterate BUY on Ethos, and raise TP by ~8% to Rs3,500 (30x Sep-27E EBITDA) on 3M rollover. Despite muted consumption trends at a broader level, Ethos has logged best-in-class topline CAGR of ~26% in FY23-25, aided by 16- 17% SSG with the rest via new store adds. In our view, the ~30% correction in the stock price of Ethos (vs 52-week high) is led by weaker margin performance. However, the margin miss was caused by an adverse CHF/INR trend (up ~30% in FY22-26TD) and front-loading of investments (City of Times/leadership team). Hereon, we expect gross margin to gradually inch up (150bps in FY25-28E), with normalization of CHF/INR and better exclusive mix. Also, our estimates do not fully build-in the potential growth accretion due to the rights issue in parent Ethos nor the Rs1.8bn preferential issue in subsidiary Ethos Lifestyle. The fund-raise in the subsidiary has been accomplished at attractive valuations of ~Rs8.5bn, which corresponds to ~10% m-cap accretion to Ethos
Brand affinity toward India improves significantly: Luxury watch brands are viewing India with a different lens after the EFTA announcement. Potential entry of brands like Patek Philippe, Audemar’s Piguet, Vacheron Constantin, and Richard Mille will expand the TAM by ~20%, in our view. Leveraging its pan-India presence and best-in-class marketing engine, Ethos is best-placed for exclusive partnerships with such brands. In addition, expected launch of Favre Leuba (FL) should further improve its product portfolio and provide margin gains. Potential for network expansion is also increasing, with tier1/2 markets gaining healthy traction and opening up of new luxury destinations in metros. Ethos is also making commensurate brand/team investments to support such growth.
Ambitions amplified for the new Lifestyle vertical: Ethos has raised Rs1.8bn in its subsidiary Ethos Lifestyle via a preferential issue, valuing the subsidiary at Rs8.5bn. With better-than-expected traction in Rimowa, the outlook for the lifestyle vertical has been amplified and Ethos has recently opened its first boutique for luxury jewelry brand Messika as well. With a strengthened balance sheet, we see scope for addition of more brands in the company’s Lifestyle vertical as well as ramp-up of existing partnerships. Rimowa’s first store has ramped up well with current run-rate of ~Rs250mn per store.
Margin/RoCE to inch upward, providing re-rating potential: Though Ethos is seeing exponential growth trends, the low RoCE has been a key investor concern. However, we believe RoIC would inch up by 600-700bps over FY25-28E, as we expect normalization of elevated working capital (FY25-end), which was due to advance inventory sourcing for its flagship ‘City of Times’ project (22,000sqft) and decrease in number of payable days due to receipt of accumulated credits toward FY25-end. We also see scope of margin gains with higher exclusive mix/Favre Leuba scale-up, normalization of currency movement, and discount reductions. Both, margin and WC initiatives, should help in gradually improving its RoIC to 23% over FY25-28E from 16% now.
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