Buy Ethos; target of Rs 1400: Emkay Global Financial

Emkay Global Financial's research report on Ethos

Ethos’ Q2 EBITDA was ~10% ahead of estimates, led by both revenue & EBITDA margin beat. Revenue grew 32% YoY, on the back of 17% SSG and contribution from certified pre-owned (CPO) business. The stronger growth for Ethos was owing to both, pick up in industry growth and market-share gains. Improved India pricing for Swiss watches and growth in HNIs are resulting in industry growth, while Ethos continues to gain market share with exclusive partnerships and superior experience (repeat sales at 46% in H1FY23 vs. 34% in FY20). Store additions were muted in Q2 due to delay in mall opening. However, Ethos now expects to open 40 stores over the next 24 months (vs. 13 stores by FY24, earlier). Higher expectations are led by healthy online leads and improving focus of brands on Tier-1 cities. In addition, Ethos targets low double-digit SSG over the medium term. CPO business is a bit constrained due to availability of watchmakers, but commentary remains healthy as Ethos targets ~Rs0.75bn top-line in FY23 (>100% growth). Encouragingly, LTM inventory days remained lower at ~160 (vs. 175 days historically), but payable days reduced by 20, to negotiate better gross margins. While the Q2 beat warrants an earnings upgrade for FY24/25, we remain conservative on both, the margin and working-capital fronts, to account for Ethos’ strong expansion plans.

Outlook

We forecast FY22-25E EBITDA CAGR at 47% for Ethos, on: i) 32% revenue CAGR over the same period, led by 13% SSG in new watch retail, 13% rise in avg. store count and 6% growth contribution from CPO/new segments; ii) avg. annual gain of ~100bps in EBITDA margin. Maintain Buy with a TP of Rs1,400, based on 23x Dec’24E EBITDA.

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