Ethos Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong quarter, guidance held: Revenue grew 32% YoY and EBITDA nearly doubled, driven by India's expanding luxury market and market-share gains. Management held its full-year guidance despite observing a global slowdown.
• Profitability hits a near-term ceiling: Gross margin is now at a level management calls "close to optimal," so future profit growth must come from operating leverage, not further margin expansion.
• A deliberate shift upmarket is reshaping the business: ASP has doubled since FY19 as the company reduces focus on entry-level watches, a strategy that cuts unit volumes but builds a higher-quality revenue base with 46% repeat customers.
• The growth engine is physical expansion: A plan to open 40 new stores in 24 months across metros and new tier-2 cities is the primary growth driver, with adjacent categories like CPO and branded jewellery as long-term bets.
• What to watch next quarter: The pace of new store openings, any new exclusive brand signings, and whether the global slowdown management is "carefully observing" begins to show up in India.

Demand & Revenue Drivers

• Luxury market tailwind: Revenue growth was powered by rising discretionary income among HNIs and India's competitive pricing versus global destinations. The omni-channel platform combining offline and online performed well.
• Repeat customers anchor the base: 46% of business came from repeat customers, up from ~33% two years ago, driven by trust in genuine sourcing, direct brand relationships, and after-sales service. 45% of Q2 customers were repeat buyers.
• SSG momentum: Q2 same-store growth of 17.2% was described as extremely healthy, though H1 SSG of 44% was inflated by a COVID-impacted base quarter last year. The long-term SSG target is double-digit, with stores capable of generating SSG for 7–10 years from opening.
• ASP up, volumes down by design: ASP has doubled between FY19 and FY22 as the company consciously reduced focus on sub-₹30,000–40,000 price points. Volume declines are only in the sub-₹50,000 segment; quantities in higher segments have risen QoQ. The company expects a steady ASP increase over the next 6–8 quarters.
• Global slowdown observed but dismissed: Management is "carefully observing some slowdown in global markets" but believes the impact in India will be limited, citing India's unique growth opportunity and Ethos's market-share gains.

Saboo: "We are carefully observing some slowdown in global markets, but we believe that the impact in India will be limited. Therefore we continue to hold our guidance given earlier this year."

Store Expansion & Format Strategy

• 40 new stores in 24 months: The expansion targets metros and new tier-2/3 cities including Surat, Raipur, Bhubaneswar, Kochi, Ranchi, and Siliguri, while also strengthening presence in Mumbai, Ahmedabad, Hyderabad, and Gurgaon. 9–10 new stores are expected before FY23-end, most in Q4, contingent on mall launch timelines.
• Format evolution: The company no longer opens multibrand stores below 1,000 sq ft. Flagship stores at ~2,500 sq ft will open where potential exists. New stores in untested geographies will be ~1,500 sq ft experience centres, not just fulfilment points. The majority of new stores will be multibrand, not monobrand.
• Store economics: Stores should start breaking even within the first year. New stores see a gestation period in year one, higher SSG in year two, then steady ~10% SSG from years 2–3 through 6–7. Average payback is not expected to change significantly.
• Capex: The IPO prospectus provided ~₹33 Cr for expansion; management indicated it may require "a little bit more, not too much," funded from operating surpluses. No plans to raise more capital.
• Closures minimal: Two stores closed due to deal expirations, with replacement stores signed in the same geographies at better locations. No closures are foreseen in the next two years except possibly a couple of underperforming stores.

Category Extension Beyond Watches

• CPO business gaining scale: The certified pre-owned segment is expected to clock ₹70–75 Cr for the full year and will see high double-digit growth every year for the next 4–5 years. The growth bottleneck is watchmaker availability and training, which determines refurbishment capacity. A CPO lounge opened in Delhi, with Mumbai and one or two more metro cities planned.
• CPO market potential: Management cited a McKinsey study estimating the global pre-owned luxury watch market is already one-third the size of the new watch market and will grow to 50% in the next couple of years. India's start will be slower, but CPO could reach 15–20% or more of Ethos's overall business in 5–8 years.
• Branded jewellery as a decade-long bet: The entry into branded jewellery is explicitly a long-term play. Management stated it "is not going to be great in three years" but in 6–8 years "we will start to be very happy that we started this now." The segment balances the client base from 75–80% male toward 30–35% female and is the fastest-growing segment among large global luxury groups.
• Rimowa and luxury luggage: Rimowa (an LVMH brand) was added to the portfolio, with a boutique planned for Reliance Jio Plaza Mall in Mumbai. The mall launch is delayed to April/May, so Rimowa is likely to start in Q1 next year. Management noted LVMH still has 40–50 famous brands not yet in India, making the relationship strategically useful.
• Adjacent streams timeline: Jewellery, luggage, and other adjacent luxury streams will remain small relative to the watch business for three years, with a takeoff expected in 3–5 years. Margins on these streams are expected to be "a little better" than watches.

Saboo: "It is not going to be great in three years time but six to seven years and five years plus and seven to eight years from now we will start to be very happy that we started this now."

Margins & Profitability

• EBITDA nearly doubles: EBITDA was up 93% YoY, with margin at 16.4% in Q2, driven by cost optimization and operating leverage.
• Gross margin at near-optimal level: Gross margin has expanded steadily and is now at a level that was the target 1.5 years ahead of schedule. Management considers it close to optimal and does not expect much further growth, with one caveat: a reduction in import duties (currently 23% basic) would have a direct positive impact.
• Future profit growth from operating leverage: With gross margin near its ceiling, further profitability improvement must come from operating leverage as the store base scales. Margins are broadly sustainable, with possible marginal depletion from forex losses.
• Working capital trade-offs: Payable days reduced partly due to negotiating shorter credit periods with brands to improve margins, a move that is accretive given comfortable cash flow. Inventory days may rise during the growth phase due to initial stocking of new stores and brands but should return to the target zone within 12 months. The long-term goal is to bring inventory days from the current level of about 176 to 150–160.
• Supply-constrained vs non-supply-constrained brands: Brands where demand far exceeds supply generate great profit with very little working capital, but growth requires non-supply-constrained brands, which will increase working capital and inventory days over time.

Saboo: "I think we are at close to an optimal gross margin expansion however I do not expect this to grow too much further. Of course profitability will grow through an operating leverage which is kicking in... however I do want to add a little caveat that if the import duties go down... then we can expect a direct impact on the gross margin."

Brand Partnerships & Competitive Position

• Exclusive brand portfolio: Exclusive brands, retailed only by Ethos in India under agreements revised from time to time, account for ~29% of revenue, a share expected to stay at that level or possibly rise. At least five or six exclusive brands rank within the top 10–12 brands overall.
• New brand discussions active: Management is in discussions with several new brands for exclusive India rights and hopes to announce new collaborations over the next two or three quarters. Messika (jewellery) was signed as exclusive distributor, with operations planned to start in Q4 this fiscal year.
• Market position: Management stated that India has "only one player of scale and international quality and that is Ethos," a position that gives it leverage in brand discussions. The company hosted Grand Prix 2022 and the CEO was invited to the international GPHG final in Switzerland.
• Pricing strategy: Ethos and the brands share the burden of import duties to keep Indian consumer prices competitive with the rest of the world.

Saboo: "They are aware that India is the fifth largest economy in the world but we are also aware that in India there is only one player of scale and international quality and that is Ethos."

Capital Allocation & Returns

• ROCE/ROE ambition: Management expects to maintain or probably improve ROCE and ROE during the aggressive 18–24 month growth phase. The long-term goal is to exceed 20%, with an expectation to approach that figure in 2–3 years.
• No capital raise planned: The company has no plans to raise more capital; expansion will be funded from operating surpluses.
• Watchmaker training investment: The company is actively discussing setting up training schools for watchmakers and will initiate talks with organizations in Switzerland, addressing the key bottleneck in CPO business growth.
• International expansion deferred: The focus is "completely on the Indian market." Neighboring country expansion (e.g., Sri Lanka) is "probably on the cards but not immediately, as those countries develop."

Saboo: "I do not think there is any country in the world that has the opportunities that India has and I believe it would be wrong not to focus completely on the Indian market and extract the maximum benefit that we can from the growth that India is going to represent."

Guidance & Commitments

Key Metrics