Ethos Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Supply, not demand, capped the quarter: Revenue grew 18% YoY to ₹229.7 Crores, but management was “extremely disappointed” by China lockdown-driven supply delays that held back shipments, service and CPO.
• Profitability hit new highs anyway: Highest-ever quarterly EBITDA and PAT, with margin levers in exclusive-brand mix, lower discounting and operating leverage all firing.
• The store rollout is fully loaded: 40 new stores committed over the next 24 months, all locations already signed, and new stores are reaching profitability within weeks of opening.
• CPO is pivoting to an asset-light model: The pre-owned business is shifting to a hybrid consignment model, targeting 85% consignment within two years, which management says will make return on capital “shoot up.”
• What to watch next quarter: Whether the supply chain easing that began in January converts the delayed Q3 pipeline into the promised 70% YoY CPO growth in Q4, and whether the 20 Ethos-specific editions land as planned.

Supply Chain: The Quarter’s Binding Constraint

• China lockdowns hit shipments and components: Severe COVID-led lockdowns in China delayed deliveries of new watches and components needed for service and pre-owned, leaving demand unmet. The bottleneck began easing only in January.
• CPO growth was the clearest casualty: The pre-owned business posted only single-digit growth in Q3 because component supplies did not arrive; management expects this to reverse sharply now that supply is normalizing.
• Lost sales are acknowledged but unquantified: Some part of Q3 sales was lost to the supply disruption, though management said it is difficult to put a number on it.
• China reopening is now a tailwind: Many components and machinery come out of China, so the reopening helps both CPO and new watches; management is “eagerly waiting” for it.

Pranav Saboo: “We were not disappointed by the demand, but we were extremely disappointed by the supply. A lot of shipments got delayed and a lot of components that were to come in and help in service and pre-own did not come in therefore we were extremely disappointed by the supply situation because we could have done much better had that eased out.”

CPO: The Asset-Light Pivot

• Consignment model is the structural shift: Ethos is migrating CPO from a fully paid-up stock model to a hybrid consignment model. Consignment accounted for 30% of CPO sales this quarter, is expected to reach 50% next year, and nearly 85% the year after.
• Return on capital is the payoff: With consignment, total capital employed in CPO falls sharply, and management states that “return on capital will shoot up.” Future paid-up stock purchases will be limited to pieces the company is confident it can sell within 15–20 days of listing.
• Revenue ambition is aggressive: CPO billings are expected to cross ₹100 Crores next year (FY2024), roughly double the ~₹55 Crores expected for FY2023. Q4 FY2023 alone is expected to show 70% YoY growth.
• Service center expansion supports the flywheel: The largest service center is being opened and should be operational within four months, bringing in watchmakers to restore watches, which feeds the pre-owned pipeline.

Pranav Saboo: “So return on capital will shoot up because the total amount of capital employed will be low.”

Store Expansion & Profitability

• 40 stores in 24 months, all locations signed: The pipeline is fully locked in across a variety of cities including new tier-2, tier-3 and tier-4 markets. Delays to date have been on the mall or space-availability side, not from Ethos.
• New stores are profitable almost immediately: The Indore store opened in December and was already profitable in January. Only one or two of the 50 stores are considered a drag, and those are mono-brand boutiques of exclusive brands not expected to hit 15% margin in year one.
• Payback and ROCE targets are tight: Stores typically break even within the first year, with a payback period of less than three years. The stated objective is to achieve a certain minimum ROCE within the first year, and some newer non-metro stores are profitable from day one with higher ROCs than the current average.
• No margin pressure expected from the rollout: Management explicitly stated that new store additions will not pressure margins, citing faster breakeven dynamics and operating leverage. Employee cost and rental cost as a percentage of revenue both declined this quarter.

Brand Moat & Exclusive Strategy

• Four new exclusive brands signed: Tutima, Trilobe, Speake-Marin and Bell & Ross were added in Q3. Bell & Ross was previously with multiple retailers in India and chose to work exclusively with Ethos.
• The strategy is a three-year supply hedge: Management frames each brand signing as securing supply and positioning for three years out, not for the immediate quarter. Brands have a gestation period: Moser, signed three years ago, sold ~15 watches in year one and is expected to sell ~120 next year at an average of ₹30 lakhs each.
• 20 Ethos-specific editions in the pipeline: Twenty brands will create editions designed by Ethos and available only at Ethos this year, including discussions with Rado (not an exclusive brand) and Breitling. Louis Moinet has already designed a full collection exclusively for Ethos.
• Exclusive mix held steady: The exclusive-brand share remained at 27% for the nine-month period, capturing full distribution and retail margin and contributing to the EBITDA margin improvement.

Pranav Saboo: “Every time we sign on a brand it is not for that quarter or next quarter. We are securing supply, we are securing our position for three years from now.”

Margin Structure & Capital Discipline

• Three levers drove the margin record: Higher share of exclusive brands, lower discounting, and operating leverage combined to push EBITDA and PAT to their highest-ever quarterly levels, despite ₹2 Crores spent on the GPHG event and an additional forex loss.
• Employee and rental costs are scaling efficiently: Both declined as a percentage of revenue, reflecting the operating leverage in the model.
• ROCE is the decision-making filter: Management stated that all decisions are led by return on capital employed, with a 25%+ ROCE threshold as the hurdle for taking action.
• Inventory is a strategic asset, not a problem to minimize: Inventory days reduced by three days from the 156–160 day range, but management pushed back on the idea of aggressive reduction, arguing that a certain minimum inventory is essential to offer a global-standard selection and keep Indians buying in India rather than in Singapore, London or Zurich.

Pranav Saboo: “All the decisions that at least I take are led by return on capital employed so if it is going to give us a greater than 25% return on capital employed I will be happy to take that decision.”

Yashovardhan Saboo: “Decrease in our inventory is not really our primary goal. We have seen that in the luxury business you need to carry a certain minimum inventory to have a proper selection of the products which is on par with the global selection available. If you want Indians to buy in India and not go to Singapore or London or Zurich, so there is a limit to how low you can go on the stock.”

New Categories: Luggage & Jewellery

• Rimowa store fit-out has begun: The first store at Jio Plaza Mall, Mumbai is under construction, with launch expected in May–June when the mall opens. Management is discussing other locations but wants to see the first store’s result before rapid expansion; profitability expectations are excellent.
• Messika jewellery is a long-dated bet: A corner has opened at the Mumbai store, but the business is still in an early understanding phase. It is not expected to move the needle for the next two years; management sees new product segments starting to make a difference three to four years from now.
• Watches and pre-owned remain the near-term drivers: Management was explicit that watches and CPO will be the biggest movers over the next two years, with new segments building behind them.

Guidance & Commitments

Key Metrics