IPO Analysis: Ethos Ltd

IPO Rating: Avoid

About the issue:

If you fancy buying highly luxurious ever-expensive watches like Rolex, Arnold & Son or H. Moser & Cie., then for you, Ethos is the place you need to check out. Ethos is India’s largest retailer for premium and luxurious watches. It is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The maiden offer comprises of fresh issue of Rs 375 crore and offer for sale by existing shareholders of Rs 97.29 crore, according to its red herring prospectus. The price band of the issue has been fixed at Rs 836 to Rs 878 per equity share. The IPO opening date is May 18, 2022, and it will be closing on May 20, 2022. The issue will be listed on the exchange on May 30, 2022. The IPO market lot size is 17 shares. A retail-individual investor can apply for up to a maximum of 13 lots (221 shares or Rs 194,038). 

The objects of the issue are:

• Repayment or pre-payment, in full or in part, of all or certain borrowings availed by our Company.
• Funding working capital requirements of our Company.
• Financing the capital expenditure for establishing new stores.
• Financing the renovation of certain existing stores and upgradation of enterprise resource planning software.
• General corporate purpose.

Ethos Ltd IPO Details:

About the company:

Ethos Limited is the largest luxury and premium watch retailer in India. The company delivers premium luxury watches through websites, social media platforms and physical stores. Ethos Limited operates on an omnichannel model and allows customers to order products either offline or online and have the flexibility of buying products at one store and returning at another or browsing product catalogues and placing orders online with doorstep delivery.

The company's watch portfolio has 50 premium brands including Omega, IWC Schaffhausen, Jaeger LeCoultre, Panerai, Bvlgari, H. Moser & Cie, Rado, Longines, Baume & Mercier, Oris SA, Corum, Carl F. Bucherer, Tissot, Raymond Weil, Louis Moinet and Balmain.

The company has 50 physical retail stores in 17 cities in India including New Delhi Mumbai, Bengaluru, Hyderabad, Chennai, Kolkata, Chandigarh, Ahmedabad, Jaipur, Lucknow, Gurgaon, Guwahati, Ludhiana, Nagpur, Noida, Pune and Thane. Ethos Limited has 7,000 different premium watches and 30,000 watches in stock at any given time.

As of December 31, 2021, the company's website had 21,844,216 visitor sessions.

Competitive Strengths:

Access to a large base of luxury Customer.

Deep understanding of digital and Omnichannel commerce.

Strategically located and well-invested store network with an attractive in-store experience.

Strong and long-standing relationships with luxury watch brands and luxury groups.

Leadership position in an attractive luxury watch market.

Experienced and committed management team with a proven track record.

Company Financials:

For the period from FY19 to FY21, the revenues of the company have declined by 9.4%. The average selling price of its watches has however increased from Rs 73,261 in FY19 to Rs 1,42,795 as for the nine months period ended December 31, 2021. Although the topline doesn’t appear impressive, the company’s profitability has improved significantly for the nine months period ended December 31, 2021.

Recommendation:

The Premium & Luxury Watch Market comprises of the segments High Luxury (INR 10 lakhs and above), Luxury (INR 2.5 to INR 10 lakhs), Bridge to Luxury (INR 1 to INR 2.5 lakhs), and Premium Watches (INR 25,000 to INR 1 lakhs). According to Tecknopak analysis, The High luxury market is growing faster than other segments & the overall market, at a CAGR of 14% and is expected to reach INR 1,040 Cr in FY 2025 from INR 540 Cr in FY 2020. The overall market for Premium & Luxury watches is dominated by Organised players and Ethos has 13% share of the total retail sales in premium and luxury segment and a share of 20% when seen in exclusively luxury segment in the financial year 2020.

It is the market leader in luxury watch segment in India, and it also leads the luxury omnichannel market in India, with wide omnichannel presence and focus. In FY 2020, 36% of Ethos’s revenue came from digitally enabled sales. 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, airport terminals and other premium areas.

In addition to its premium and luxury watch retail, it also undertakes retail of certified pre-owned luxury watches under ‘Certified Pre-Owned’ (“CPO”) luxury watch lounge located at National Capital Territory of New Delhi. It started its pre-owned luxury watch retail business in Fiscal 2019. CPO is a destination for selling and buying pre- owned luxury watches under technical expert supervision providing a 360- degree physical inspection and verification of watches and certified with a two year warranty.

Talking about the valuations of the company, the asking P/E with the annualized earnings of nine months ended December 2021 earnings stands around 96 and if we consider EPS of FY21, the P/E turns out to be around 354 which is so expensive just like the luxurious watches. Hence, we recommend to AVOID investing in the IPO.