Luxury watch market has a long runway of high growth in India. As per Technopack, the market for luxury watches is expected to grow to over 17000 cr per annum by 2028 from around 6000-7000 cr at present.
Needless to say, companies catering to this demand will witness high growth due to industry tailwinds. Ethos, India’s largest luxury and premium watch retailer having 60 stores across 22 states is going to be a major beneficiary of this trend.
Main pros in favor of Ethos are as follows:
- Due to industry tailwinds, Ethos’ management is confident of increasing sales at 25% CAGR over the next decade which means revenues will grow 10x from around 1000 cr at present to 10000 cr in ten years.
- Management feels that any retailer having 100-150 stores in India will become indispensable for luxury brands wishing to make a mark on the Indian market. Ethos already has 60 stores and it is looking to open 25 stores in FY25, followed by 15 stores in FY26 and targets reaching 150 stores over a couple of years thereafter.
- Certified Pre-Owned (CPO) watches are another growth engine. Worldwide CPO sales are growing at higher rates than new watches and in India CPO growth is over 50% pa which is expected to sustain in coming years. Ethos has made CPO watch ownership hassle free through its website ‘Second Movement’ and offers a two year guarantee which gives consumers a great deal of confidence. Being a first mover in this space, Ethos shall be a major beneficiary of CPO growth.
- Ethos has also entered into retailing of luxury luggage brand Rimowa (a Louis Vuitton company) with its first store in Jio Centre Mumbai. Initial sales trends surpass expectations.
- Talks are underway for a Free Trade Agreement with Switzerland. When signed, it could lead to reduction in import duty of watches thereby facilitating lowering of prices and improvement in margins.
- Ethos has recently acquired heritage Swiss brand Favre Leuba and is planning to launch it globally in August 2024 at a retail price point of around Rs 5 lacs. Management expects to sell three thousand units in the first year going all the way to one lac units in ten years.
Main negatives to look out for are as follows:
- High inventory is required which ties up working capital.
- Luxury watches are imported mainly from Switzerland. Depreciation in Rupee versus Swiss Franc can affect margins since brands increase MRP only once a year and in the meantime margins are negatively impacted.
- Watch prices in India are comparable to any country in the world as luxury brands supply to Indian retailers at globally competitive rates. Any change in the pricing structure can have a huge negative impact on the industry.
- At present competitive intensity is low as Titan is focusing more on its own brands in its 200+ Helios stores. If it decides to enter luxury watch retailing, it can give serious competition to Ethos.
- Tata Cliq has already set sights on the CPO market in India with acquisition of Jay Watch Store which deals in restoration and sales of pre-owned luxury watches.
After a great FY23 in which revenues were up 36%, Ebitda up 61%, PAT up 161%, Ethos had a good 9MFY24 as well despite rupee depreciating around 15% in the last one year. Its revenues in these nine months were up 29% at 762 cr, Ebitda was up 33% at 131 cr, PAT was up 32% at 62 cr and EPS was up 32% at Rs 26.
Of all its verticals, Favre Leuba seems to be the most interesting as well as riskiest. A luxury brand coming out of India is unheard of and if successful, it could catapult Ethos to the global league. However such launches can be expensive and if the brand fails to take off, it could mean outsized losses. At FY24 estimated EPS of Rs 32, it is trading at elevated PE of 75 but could still give decent returns if it is able to do 20% plus growth for next few years and Favre Leuba does not turn out to be a ticking time bomb.