Buy Ethos Ltd for the Target Rs.3,500 By Emkay Global Financial Services Ltd
Outperforming consumer peers; expect ST margin weakness
We maintain BUY on Ethos with unchanged TP of Rs3,500 (30x Sep-27 EBITDA), as Ethos’s Q2 performance was largely in-line. Topline outperformance continued, with 28-29% growth in Q2/H1 vs muted trends for most consumer peers. However, the adverse FX movement (CHF/INR up ~15% in H1) and growth investments restricted EBITDA growth to 5-7% in Q2/H1 (pre-IndAS). Margin headwinds, though, are short-term in nature and should turn with correction of MRP mismatch and ramp-up of the new flagship location (City of Times). We also see the first customs duty cut (wef Oct-25 under EFTA) as directionally positive which, along with improving exclusive mix, remains a healthy margin improvement lever. WC optimization (in H1) has been decent (a 10-day reduction), largely led by improvement in credit period from brands. The balance sheet is in good shape, with ~Rs8bn net cash (~100% of current Invested Capital). Among notable developments in Q2/H1, Ethos successfully raised Rs1.8bn preferential issue in subsidiary ‘Ethos Lifestyle’ and incorporated another subsidiary (Micron Watch Service; 50.1% stake), which will engage in setting up watch service centers in select Indian cities.
Robust revenue growth continues; forex headwinds weigh on margins
Q2/H1 revenue grew a healthy ~29/28% to Rs3.8/7.3bn, led by strong SSG growth (16.5% in H1FY26 vs 15.5% in H1FY25), as ASP likely grew a marginal ~1%. Gross margin declined by ~120bps to 29% in Q2 (vs 30.2% in Q2FY25), primarily due to adverse forex movement as the CHF appreciated sharply against the Indian Rupee (~9% CY25TD). The forex impact on gross profit in 1H was estimated at Rs107mn (Rs33mn from re-statement of creditors and Rs74mn from notional exchange losses/increase in COGS). EBITDA margin was 12.8% (pre-IndAS: 8.4%), down by 140bps, owing to a ~120bps dip in gross-margin and ~30bps higher employee expenses on opening of new stores. In H1FY26, Ethos added three new exclusive watch brands (Fabergé, D1 Milano, and Unimatic) and 1 lifestyle brand (FPM Milano). Also, 3 new watch boutiques were added in Q2, while 1 CPO boutique was relocated. Further, in Q3TD, 2 watch boutiques and 1 Rimowa store were added, taking the count to 86. Ethos continues to strengthen its lifestyle segment with the opening of India’s first Messika boutique and its second Rimowa boutique – both witnessing encouraging traction.
Investor PPT KTAs
1) The higher rent expense was due to increased rent of new stores, which are still in the early stage of generating sales. 2) SSG was best-in-class at 16.5% in H1, likely helped by strong same-store volume growth. This was likely due to ASP growing a marginal ~1%. 3) Ethos opened 16 boutiques in H1: 9 exclusive and 7 multi-brand. Of these 16, 1 is in the certified pre-owned (CPO) segment and 2 are lifestyle boutiques, taking the total store-count to 86, with presence across 26 cities. 4) Maintaining focus on lifestyle brands, Ethos has opened its second Rimowa boutique in DLF Emporio, New Delhi. 5) Billing from the CPO segment was healthy, and up 25% in H1. 6) The share of luxury and high luxury watches rose further to 72% in H1FY26 (vs 70% in FY25).
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