Is this a luxury investment opportunity worth exploring?

India is on the verge of a major surge in demand for luxury goods. According to forecasts, India’s luxury goods market could grow five-fold over the next decade, driven by a surge in the population of wealthy individuals with increasing disposable income and aspirations.

Recently, sales of luxury goods have reached record highs across a variety of sectors, including luxury cars (up 3-fold), luxury real estate (up 2-fold), and premium clothing.

Additionally, the demand for luxury goods is no longer limited to the metropolitan area but has also spread to second- and third-tier cities. This presents an unparalleled opportunity for retailers specializing in premium and luxury products, like Ethos.

Ace Investor’s Bet

ethosThe luxury watch retailer debuted on the stock exchanges through an initial public offering (IPO) on May 30, 2022, raising Rs 472.29 crore by selling shares at Rs 878 each.

Experienced investors Mukul Mahavir Agrawal and Sunil Singhania of Dalal Street retained their stake in Ethos Ltd during the December 2023 quarter.

The company has generated significant returns for investors since its stock market debut, marking a successful trajectory. The stock price soared 242% since its debut. Over the past year, the stock price has soared by a whopping 160%.

Nonetheless, Mukul Agrawal and Sunil Singhania acquired shares in the company before the IPO, increasing their stake as the company went public. stock exchange.

As of Dec 31, 2023, Mukul Mahavir Agrawal held 640,000 shares of the company’s stock, the same number of shares as on Sep 30, 2023. Similarly, Sunil Singhania’s Abakkus Growth Fund-II retained ownership of 302,663 equity shares in the company. The Company during the December 2023 quarter.

So should you own this stock too? Well, let’s find out!

Ethos Company Overview

Established in 2003, Ethos Ltd is one of India’s leading retailers specializing in luxury and premium watches. The company has a significant presence in the market, with a 20% share in the luxury segment and a 13% share in the premium watches segment.

Ethos, which operates as a subsidiary of KDDL, has over 60 stores across 23 cities in India. In addition to brick-and-mortar stores, the company has adopted an omnichannel approach, leveraging its website and social media platforms to reach customers.

Ethos caters to a wide range of customers by offering products from over 60 premium and luxury watch brands, including 46 exclusive brands available only through Ethos. The extensive portfolio consists of over 7,000 SKUs covering premium, bridge to luxury, luxury and high luxury watches.

Ethos boasts an impressive lineup of renowned brands including Rolex, Breitling, Omega, Frederique Constant, Jacob & Co, and Ulyssse Nardin. In particular, in May 2023, Ethos expanded its portfolio by acquiring a 100% stake in the 280-year-old brand “Favre Leuba” through its wholly-owned subsidiary Silvercity Brands AG.

Ethos has established itself as a leader in the certified pre-owned (CPO) luxury watch market. Through this segment, the company offers comprehensive services for buying and selling pre-owned luxury watches, with each watch undergoing a thorough 360-degree inspection and verification process along with a certified two-year warranty.

Seeking to diversify into other luxury categories, Ethos has signed partnership agreements with Messika, Bvlgari and Rimowa. This collaboration will enable Ethos to retail fine jewelery from Messika & Bvlgari and luxury travel accessories from Rimowa in the Indian market.

finance ethos

In FY 2023, Ethos Ltd saw significant growth in its revenue, surging 37% to reach ₹788.53 crore compared to ₹577.28 crore in FY 2022. After analyzing four years from FY2020 to FY2023, the company has recorded a solid Compound Annual Growth Rate (CAGR) of 20%.

At the same time, there has been a notable increase in net profit, with a 158% increase from ₹23.39 crore in fiscal 2022 to ₹60.3 crore in fiscal 2023.

In FY23, Ethos Ltd maintained favorable financial metrics with return on equity (ROE) of 13.97% and return on invested capital (ROCE) of 17.55%.

Future Plans ethos

Certified Pre-Owned (CPO) Sector: The Next Growth Driver

In 2019, Ethos entered the certified pre-owned (CPO) segment, gaining an initial foothold in the largely unstructured and organized CPO market in India.

In fiscal 2023, Ethos experienced significant revenue growth of Rs 50 million, equivalent to 6% of total revenue. This notable increase represents a remarkable 61% year-on-year surge, achieving an impressive compound annual growth rate (CAGR) of 127% over the period FY20 to FY23.

The company foresees strong growth prospects for its CPO segment in fiscal 2024, driven by continued demand for pre-owned luxury watches. Ethos sells CPO watches through its website and operates a lounge dedicated to CPO luxury watches in New Delhi.

The management said the business does not need many stores to run, so it plans to add smaller stores, but plans to open its next store in Mumbai and one or two more stores in other metros in the next few years.

Pre-owned watch retail has lower gross margins of 20-25% compared to more than 30% for new watches, but lower capital expenditures (Capex) and shorter working capital cycles of 55-60 days compared to 140-60 days. For a new watch it is 150 days. As a result, it boasts a high return on profit (ROCE) of over 20%, compared to the 15-18% range for new watches.

Driving premiumization

Ethos maintained strong momentum (24% in FY24) with same-store sales growth (SSSG) of 23% in Q2 2024 compared to 30% in Q1 2023. Despite the overall slowdown in the retail industry, Ethos’ performance remains strong, with most of its growth attributed to the increase in average selling price (ASP), which currently stands at Rs 1,87,500.

In a strategic move made a few years ago, the company shifted its focus from watches priced below Rs 50,000 to focus on those priced above Rs 50,000. This decision was taken due to increasing competition in the low-cost segment. As a result of this strategy, ASP increased significantly by 2.2x from Rs 84,200 in FY20 to Rs 1,87,500 in H1FY24, reflecting realized growth of 22% CAGR.

The rise in ASP also contributed to gross margin expansion, which improved by 210 basis points from 28.1% in FY20 to 31% in FY23. As a result, the company’s return on invested capital (ROCE) improved, increasing from 10% in FY20 to 17% in FY23, driven by Ethos’ premiumization strategy.

conclusion

In conclusion, Ethos’ strategic focus on premiumization, expansion into the certified pre-owned watch segment, and diversification into other luxury categories are positioning the company for solid growth. With India’s surging affluence and aspirations, what are your thoughts on the future potential of the luxury market and Ethos’ prospects within it?

Written by Narin Surya

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