Ethos Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Revenue surged 32.4% YoY, margin-rich: EBITDA grew even faster at 39.8% YoY, driven by a deliberate and near-complete exit from lower price-point watches that sharply lifted ASPs.
• The store footprint is set to double: Management revised its target from 70-75 stores to 145-150 stores over four years, pushing into Tier-2/3 cities and suburban metros, though Q2 added only one store due to mall delays.
• Luxury portfolio is broadening fast: Four new exclusive watch brands signed (including Ulysse Nardin) and the first RIMOWA boutique opened, marking a first step beyond watches into the broader luxury space.
• Capital raise met with unanswered questions: A ₹175 Crores QIP was completed despite ₹180 Crores cash on hand; management declined to detail the specific allocation or the investment quantum for the Favre Leuba relaunch.
• What to watch next quarter: The pace of store openings now that mall handovers are due, any stabilization in the ASP trajectory, and concrete updates on the Favre Leuba relaunch plan.

Growth Drivers & Product Mix Shift

• ASP spike is structural, not one-off: The sharp rise comes from cutting out price points below ₹50,000 while quantities sold above ₹1 lakh and ₹2 lakh have gone up, a shift management says is almost fully complete, so future ASP increases will be more gentle.
• Volume is steady, not declining: Management pushed back on the idea that volume fell, stating volume versus the same period last year remained steady; the stagnation in overall volume is entirely due to exiting lower price segments, with volume growth within each retained segment.
• Non-metro demand is a real signal: Of the 12 stores opened in the prior twelve months, many are in non-metro cities and all have crossed breakeven or are profitable, some by the third month; interest from Tier-2 and Tier-3 cities is growing via digital channels and social media.
• Second-movement watches defy the narrative: Despite reports of pre-owned prices crashing for a few hyped models, Ethos' second-movement business grew 34% YoY even with its Delhi lounge out of operation for an extended period due to mall renovation.

Saboo: "We understand the Indian consumer better than any other global retailer so while we want to learn from everybody, we also want to create our own strategies which are uniquely positioned for our success and for the Indian market."

Store Expansion & Capital Allocation

• Target doubled on a bigger opportunity: The store count goal moved to 145-150 total stores over four years, with a greater spread into Tier-2, Tier-3 cities and suburban areas of large metros, a bet that the luxury watch market is deeper than previously modeled.
• Q2 was a timing blip, not a trend: Only one store opened in Q2 because most new stores are in malls and mall opening schedules slipped; some malls slated for Q2 will now open in December or January, setting up a much higher H2 opening rate.
• Capital is front-ended by design: The ₹75 Crores working capital increase in H1 is tied to new store and new brand signings; stock investment is front-ended with a 3-6 month lag before sales pick up, while steady-state stores generate cash.
• QIP rationale was opportunity, not distress: Management framed the ₹175 Crores raise as entrepreneurial capital to exploit an expanded market opportunity, but declined to answer why equity was chosen over debt when ₹90 Crores from the IPO remained unutilized.

Saboo: "We believe the opportunity in the Indian market has expanded and will remain high. We are in the best position today to exploit this opportunity, capitalize on this opportunity."

Brand Portfolio & Adjacencies

• Ulysse Nardin goes exclusive: The high-luxury Swiss brand, present in India for nearly two decades, will now work exclusively with Ethos; management declined to quantify its current scale, saying they were not part of the brand in prior years.
• RIMOWA opens the non-watch door: The first boutique opened at Jio World Plaza, Mumbai, with early sales described as extremely encouraging; discussions are underway for more stores, but RIMOWA wants to see the first store's response before committing to a multi-year rollout plan.
• Jewelry is a slow-burn second engine: One jewelry brand has been signed and awaits its first boutique opening; management expects no material impact on overall numbers for two to three years, but sees it becoming an additional growth engine thereafter.
• Favre Leuba relaunch is a known unknown: Work is underway, with a global launch planned for next year and product and marketing strategy taking another two quarters; management declined to share investment amounts, calling ballpark estimates not accurate enough to share.

Saboo: "Work on the relaunch of this iconic and amazing brand is well underway and I can assure you that this will be a Swiss watch brand that will achieve Himalayan heights in the years to come."

Margins & Operating Leverage

• Margin expansion is mix-driven, near-optimal: The margin growth so far is largely due to the product mix shift and move to large flagship stores; from a brand perspective, margins are close to optimum levels.
• Future leverage comes from store addition: As the store count rises, store-level costs increase proportionately but corporate and head office costs do not, creating operating leverage that will be the next leg of margin improvement.
• Cost base is not a steady state: Management cautioned against comparing one quarter to another as a run-rate, because the cost structure evolves as stores are added and the mix of fixed versus variable costs shifts.

Guidance & Commitments

Key Metrics