Ethos Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Record profitability in a lean quarter: Q1FY23 delivered the highest-ever quarterly EBITDA and PAT, beating even the festive Q3FY22, driven by structural demand and a permanent retreat from deep discounting.
• Demand shift to India is structural, not cyclical: Indians are choosing to buy luxury watches domestically due to price parity, better service, and assured authenticity, a trend management calls a tipping point.
• Gross margin expanded despite a mix headwind: A conscious decision to kill the June sale and reduce discounts on exclusive brands more than offset a dip in the high-margin exclusive brand mix, proving pricing power.
• Pre-owned is a high-ROCE growth engine, supply-constrained: Sales tripled YoY and the business promises higher returns on capital than new watches, but growth is gated by the capacity to restore pre-owned inventory.
• What to watch next quarter: The pace of new store openings, the launch of the Messika jewelry store, and any margin impact from a depreciating rupee, which management expects but has not yet felt.

The Structural Demand Shift

• A tipping point in luxury spending: Strong demand persisted even as Indians traveled abroad extensively in the last six months, convincing management that discretionary luxury consumption in India has reached an inflection point.
• Why India is winning the wallet: Competitive pricing, superior service, guaranteed documentation and authenticity, and easier pre-owned resale with proper papers are pulling purchases back to the domestic market.
• Ethos as the retailer of choice: The company attributes its capture of this demand to having the largest physical footprint, the greatest digital presence, and the best in-store and online experience in the category.
• India’s priority with global brands: For most luxury watch brands, India is rapidly becoming a high-priority market and stands high in the order of importance for product allocation, a tailwind for the entire category.

Saboo: "This is a structural change, Rahul, what I want to mention. This is not a flash in the pan. So this is going to stay."

Margin Architecture & Pricing Power

• Gross margin up despite mix dilution: Exclusive brand share fell from 28% to 26% QoQ, yet gross margin still expanded because the company stopped the traditional June sale and drastically cut discounts on exclusive brands, enabled by strong demand.
• Deep discounting is dead: Management declared the era of 20–40% discounts "gone forever," a structural reset that benefits margins across the industry and is reinforced by improved purchasing processes and data-driven inventory selection over the last 18–24 months.
• Currency stability helped this quarter: The Swiss franc’s depreciation against the dollar has been relatively low, keeping import prices stable, and the currency loss booked was relatively small, providing a benign cost environment.
• The depreciation risk ahead: Management sees the "writing on the wall" for rupee depreciation in coming months and warns that a sudden move creates a time lag before price corrections kick in, during which the company would suffer a bit.
• Margin sustainability conviction: Management believes the current margin structure is largely sustainable, with continuous efforts to enhance it further, though exchange rate volatility, brand pricing policies, and watch availability remain external variables.

Saboo: "The days when 20% and 30% and 40% discounts were been talked about, those are gone forever. And that is good."

Exclusive Brands & Category Expansion

• Exclusive brand revenue at 26% of billings: This high-margin cohort contributed a quarter of revenue, down from a COVID-era peak of 28% when stores were shut and only digital operated, but up from the pre-COVID baseline of 24%.
• Two new Swiss brands added post-IPO: Jacob & Co. and NORQAIN joined the exclusive brand portfolio, widening the offering and reinforcing Ethos’s position as the partner of choice for global luxury watch brands entering India.
• Jewelry and luggage as future growth drivers: Partnerships signed with Messika (jewelry) and Rimowa (luggage) mark a deliberate expansion beyond watches into adjacent luxury categories with large addressable markets.
• Messika and Rimowa launch timelines: The first Messika store is expected in Q3FY23, while the Rimowa boutique at Jio World Plaza, Mumbai, is anticipated to be operational by February 2023, with more boutiques expected to follow given the large Indian market.
• International branded jewelry thesis: Management expects huge growth for international branded jewelry like Messika, drawing a parallel to the transformation Tanishq led in branded jewelry in India over the last 20 years.

Certified Pre-Owned: The High-Return Engine

• Sales tripled YoY, but supply is the ceiling: Pre-owned watch sales in Q1FY23 were more than 3x the same quarter last year, yet demand remains significantly more buoyant than supply, making sourcing the binding constraint.
• Return on capital beats new watches: While the margin on pre-owned sales is slightly lower than the company average, the return on capital is significantly better because the entire business runs from one lounge and a website, making it far more cost-efficient after crossing a threshold.
• Restoration is the bottleneck: The capacity to restore pre-owned watches requires highly skilled watchmakers experienced across multiple brands, and expanding this team is the critical enabler for growth. Ethos has built what management calls the best and biggest watch service and restoration center in India, with 17 trained watchmakers.
• Growth trajectory and footprint: Management hopes to exceed ₹75 crore in pre-owned business by year-end and expects high double-digit or possibly triple-digit percentage growth over the next two to three years, with plans to open only about four dedicated pre-owned stores across India in that period.
• All supply sourced domestically: Every pre-owned watch is sourced from individuals in India; the company does not import used or pre-owned watches, making the supply chain entirely local.

Store Strategy & Operating Leverage

• Flagship stores are the profit and brand centers: Flagship stores are both more profitable than smaller stores and create a stronger brand impression, with same-store sales growth that can be sustained for much longer, a trend management observes globally and in India.
• Directional shift to larger formats: The overall strategy is to move toward larger flagship stores and away from smaller ones, with stores potentially closed or relocated when leases end or if performance falls below required standards.
• Sales to outpace store count: In multi-brand stores, sales will increase faster than the number of stores, a dynamic that drives operating leverage as fixed costs are spread over a growing revenue base.
• Store opening pipeline: New store openings are anticipated to begin in Q2FY23, with Indore and Ahmedabad malls expected, and the Jio World Plaza store in Mumbai expected in Q4FY23, though a month or two of delay is usual.
• ROCE on an improving trajectory: Working capital will not grow proportionately with sales, store count will not grow as fast as revenue, operating leverage is starting to kick in, and the pre-owned business carries higher ROCE, all combining to steadily improve returns on capital toward management’s goal of becoming one of the highest ROCE companies in Indian retail.

Saboo: "So, when you build up a flagship store, it becomes the center of customers' watch experience and then for years, and years and years, we can expect the same store growth to remain strong. This is the trend globally, and this is what we have seen in India as well."

Guidance & Commitments

Key Metrics