As per past global data, consumer spending especially in the high-end luxury segment explodes as a country’s per capita income rises from lower middle to upper middle income level. India’s present per capita income is $2500 (where China was in 2007) and is expected to double in 6-7 years. Concurrently luxury consumers in India are expected to grow @ 17% CAGR to 5x in 10 years. Indian consumer data is also validating this trend with growth in sales of upper end segments outstripping mass items.
Watches are one of the most coveted luxury purchases and have an edge over digital watches on two counts. Firstly, people own only one digital watch whereas they like to have a collection of luxury watches. Secondly luxury watch prices are way higher and topline growth can be high as demand increases. Therefore, it seems that the luxury watch business has strong legs for quite some time in India and companies catering to this segment merit close attention from investors.
KDDL which retails luxury watches through its 51% subsidiary Ethos (also listed) is enjoying tailwinds of this megatrend. It has 3 business segments – Watch retailing, manufacturing & sale of luxury watch components to global brands, and a small Stamping division. Watch retailing and component segments contribute equally to KDDL’s EBIT.
Its subsidiary Ethos is the largest luxury watch retailer having 60+ stores as of Sep 2023 and enjoys 20% market share in the luxury segment. It has exclusive tie ups with 46+ brands such as Carl F Bucherer, Raymond Weil, Titoni, Baumi Mercier etc. Exclusive brands give higher margins. In recent quarters, exclusive brands’ contribution to sales was 30%. Ethos has also done a couple of promising forays in luxury retailing. It has started selling Rimowa luggage (an LV brand) in the new Jio Centre in Mumbai. It has also tied up with Messika, a French jewelry brand. Both these have the potential to become a second growth engine in times to come.
Ethos has also taken a bold step outside its comfort zone by acquiring heritage Swiss brand Favre Leuba which it intends to launch globally in about a year’s time. This needs to be watched keenly since global launch can be an expensive affair and on the face of it looks like ‘double or quits’ kind of a bet.
Other risks are a) Watch retailing requires high capex/opex for store openings and high inventory thereby being a capital intensive business. b) Depreciation in rupee vs dollar is negative for margins because brands increase MRP only once or twice a year and until then there is a hit to margins. c) Watch prices in India are comparable to any country in the world which is a key factor to look out for in times to come. Any negative divergence can be crippling. d) Where there is honey, competing bees are sure to come. As of now Titan through its 207 Helios stores is focusing more on its in-house brands but if it enters luxury brand retailing, it could nibble away at KDDL’s market share.
Ethos plans to add around 90 stores in 4-5 yrs which translates to 20% CAGR. As per Ethos’ Q2FY24 concall, same store sales growth (SSSG) for H1FY24 was 23%. Management expects to clock high growth in the foreseeable future on the strength of these two arms. Margins are expected to remain stable.
In five years from FY2018 to FY2023, KDDL revenues have doubled, EBITDA has gone up 3.5 times, PBT has gone up 4 times, PAT has gone up 4.3 times. It had excellent H1FY24 also with revenue up 32%, PBT up 147%, PAT (attributable to shareholders) up 251% and EPS up 251% at Rs 41. It could end FY24 with EPS of around Rs 80 translating to PE of 36 (at current market price of Rs 2900) and ROE of 22%. The stock has already tripled in the last year but could still ring in good times for its investors provided 20%+ growth continues and other risks listed above play out favorably.