Ethos Limited IPO opens tomorrow: Should You Apply?

Ethos Limited IPO opens for subscription on the 18th May. The company is looking to raise up to Rs 472 crore through the public issue. 

Ethos Limited IPO Details:

Ethos IPO Date: 18 May - 20 May 2022

Ethos IPO Price band: Rs 836 - Rs 878

Ethos IPO Issue Size: Rs 468 crore - Rs 472 crore (Fresh Issue of Equity shares aggregating up to Rs 375 crore and an Offer for sale of 1,108,037 Equity shares)

Reservation: QIB 50%, Retail 35%, NII 15%

Post Issue Implied Market Cap: Rs 2,050 crore (on upper price band)

Minimum Investment: Rs 14,926

Bid lot: 17 shares, and in multiples of 17 shares

Ethos IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes:

• Repayment or pre-payment, in full or in part, of all or certain borrowings availed by the company.
• Funding working capital requirements and general corporate purpose.
• Financing the capital expenditure for establishing new stores and the renovation of certain existing stores.

Ethos IPO: About the company

• Ethos Limited was incorporated in 2007 and is India’s largest luxury and premium watch retail player having a 13% share of the total retail sales in the premium and luxury segment and a share of 20% when seen in the exclusive luxury segment in FY20.
• The company has a pan India presence with 50 stores spread across 17 cities. Ethos Summit exclusively houses bridge to luxury, Luxury & High Luxury Brands, while Ethos Stores house the premium & fashion range.
• Ethos has also opened Boutiques in partnership with prominent market-leading brands like Rolex. 
• Ethos also actively retails through its website. Online purchase is digitally enabled for fashion and below range, while it is voice-enabled for premium & luxury range.
• They also have a loyalty program called Club Echo, a loyalty program of Ethos with registered members, and annually 35% of business comes from repeat buyers registered with the program.
• The company has an excellent social media presence with about 2.5 million website users, over 2,83,300 active email subscriptions, 1,68,000 Instagram followers, 1,57,000 Facebook followers, and 12,300 YouTube subscriptions (31 March 2022).

Industry Overview

• The luxury goods market in India is currently valued at Rs 45,210 crore as of FY21. The Premium and Luxury Fashion and Lifestyle segments have the highest share with a 33% contribution in FY20, mainly because of their higher volumes.
• The overall Luxury market in India is expected to show a path to recovery post covid. It is expected that the Luxury market would be valued at Rs 69,430 crore by FY25 and grow by ~11% CAGR over the next 4 years.
• Watch Market in India was valued at Rs 13,500 crore in FY20 and is expected to grow at a CAGR of 10.6% to reach Rs 22,300 crore by FY25.

Listed Peers

There are no listed companies in India that engage in a business similar to Ethos Limited. Accordingly, it is not possible to provide an industry comparison in relation to the company.

Sales Channels of Ethos Limited

The company sells its product through two channels as below:

• Retail Store: Ethos has a network of 50 retail stores across 17 cities in India, which are categorized into Ethos Summit Stores, multi-brand stores, Ethos Boutiques, Airport Store, CPO luxury watch lounge, and mono-brand boutiques.
• Online Sales: Company's website provides a seamless experience to the customer both online and offline. It provides information about international brands with smart search facilities by gender, price, features, and valuable customer education touchpoints.

Financials

• The company has reported revenue of Rs 443.53 crore, Rs 457.85 crore, and Rs 386.57 crore for FY19, FY20, and FY21, respectively. There has been no significant growth in revenue and in fact, the revenue for FY21 dropped due to Covid.
• The EBITDA for FY19, FY20, and FY21 was Rs 58.26 crore, Rs 54.40 crore, and Rs 56.44 crore, respectively.
• The net profit for the same period was Rs 9.89 crore, Rs (1.33) crore, and Rs 5.79 crore, respectively. The net profit margin was Rs 2.23%, (0.29)%, and 1.50%.
• For the last three financial years, Ethos has posted an average EPS of Rs 2.20 and an average RoNW of 2.83%. 
• Based on FY21 earnings, PE comes to 354. Hence, it is priced exorbitantly. The sustainability of such superprofits going forward is a concern. 
• The average selling price of its watches moved up from Rs 73,261 in FY19 to Rs 84,240 in FY20, to Rs 1,09,864 in FY21.
• The luxury and high luxury watch sales constituted 46.06%, 48.09%, and 58% of the total sale of products for FY19, FY20, and FY21.

USPs

Company has access to a large luxury customer base: The company has built its customer base over the years and continues to aim to attract new customers to its platform by providing an engaging shopping experience. They have access to an HNI customer base of over 2,83,300. Access to a large number of luxury customers gives them a competitive advantage over competitors in the sale of products and drives revenue and profitability.

Omnichannel retail player of India: Company was quick to establish a robust digital infrastructure which has been its key strength and enabled them to scale its business and increase its customer base. Their digital team consists of over 70 employees across different teams, including performance marketing, creative, content, social media, product/website, technology, and internet sales.

Strategically located and well-invested store network: With 50 retail stores, over 7,000 varied premium and luxury watches, and about 30,000 watches in stock at any given time, its retail stores are located strategically in shopping malls, airports terminals, and other premium areas. Its networks of retail stores allow them to cater to a large section of consumers and ensure effective penetration of the luxury watch brands.

Long-standing relationships with luxury watch brands: Relationships with owners of luxury watch brands typically take many years to develop and are difficult to replicate. The company immensely benefitted from its Promoter’s long-standing relationships with luxury watch brands, developed over the years. 

Growth Potential

Expansion into other luxury verticals: The company aims to increase the product offerings in its current brand portfolio of luxury watches and add newer long-term focused brands in other product categories. 

Expanding physical store network: The company expects the luxury watch market to continue to grow in India as well as neighboring countries like Bangladesh(Dhaka), Sri Lanka (Colombo), Nepal (Kathmandu), and Maldives (Male). It will continue to focus on the continued growth of the luxury watches business in these countries.

Increasing watch brands portfolio: As part of their continuous efforts to offer the widest assortment of brands to their customers, the company plans to invest in entering into new brand relationships. 

Investing in its brand: The company seeks to allocate significant resources in positioning ‘Ethos’ and ‘Ethos Summit’ as premium stores having a variety of luxury and prestigious watch collections. Their branding plan comprises activities including online marketing, electronic media, print media, outdoor event, and sponsorship. 

Risks

No long-term agreement: The company does not have definitive agreements for the supply of products or fixed terms of trade with the majority of its suppliers. Its business growth depends on its ability to attract and retain suppliers. If they fail to leverage their supplier relationship and network, it will impact the business.

Business depends on third-party brands: Company's business partly depends on the continued success and reputation of third-party brands globally, and any negative impact on these brands will affect Ethos business.

Non-exclusivity: The company has not entered into any exclusive arrangement with most of its suppliers. In absence of exclusivity, they are not able to sell exclusive products which may not be available with other retailers in India. As a result, some competitors may have greater resources than Ethos and may offer better deals, discounts, and offers to the customers.

Ethos IPO:

• Decline rise in revenues: Ethos has reported a 15% on-year decline in Revenue in FY21, impacted by the second wave of the pandemic. However, the sales have recovered in the Apr-Dec 21 period to Rs 419 crore. 
• Muted Profit growth: The profit declined to Rs 5.8 crore in FY21, from Rs 9.9 crore in FY19. The company’s bottomline saw a significant improvement in Apr-Dec 21 period to Rs 16 crore, aided by unlocking of the economy.
• Low margins: The company’s profit margins have remained in the range of -0.3% to 2.2% over the last 3 years.   
• Reasonable valuations: At the higher end of the price band, Ethos IPO is priced at a PE ratio of ~96 times FY22 annualized EPS.  
• Final recommendation: Given factors such as decline in revenue and profits, low margins, and aggressive valuations, analysts remain “Neutral” on the long-term prospects of this issue.