IPO Size: Rs. 472 cr

• 80% is fresh issue for working cap (Rs. 235 cr), store expansion (Rs. 33 cr), debt repayment (Rs. 30 cr)  
• 20% is offer for sale (OFS) by promoter (81% holding to drop to 61% post IPO)

Price band: Rs. 836-878 per share

• Rs. 25 cr pre-IPO placement in Mar 2022 at Rs. 826 per share to Abakkus Fund

M cap: Rs. 2,050 cr, implying 23% dilution

IPO Date: Wed 18^th May to Fri 20^th May 2022, Listing 30^th May 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Luxury Watch Retailer

65% subsidiary of listed company KDDL, Ethos operates 50 physical retail stores in 17 Indian cities, selling international luxury watch brands. Pre-covid, company’s revenue was Rs. 444 cr in FY19, with PAT merely at Rs.10 cr, implying a paltry 2.2% net margin. Covid severely impacted FY20 and FY21 performance, while in 9MFY22, revenue rose to Rs. 419 cr, with PAT jumping to Rs. 16 cr, leading to 3.8% net margin. Even though margins expanded just before the IPO, it is still lower than most retail businesses and is infact lower than even grocery retail D Mart’s 4.8%, which is otherwise operating in a highly competitive environment and operating on wafer-thin margins.  

Inventory Knocks Down RoE

Indian luxury watch market, in which the company operates, is just about Rs. 6,500 cr, and company’s historic growth rate has also been very low – mere 3% in FY20 (earliest fiscal data available in RHP). Inventory holding period is very high at nearly 6 months (blocking capital as stock purchased by company), keeping RoE very low, at 7.6% in FY19 and at 8.1% for 9MFY22. Mid-single digit RoE is almost like earning bank FD interest and is the biggest shortfall of company’s business model. Just for broad benchmarking, retailers like DMart, Aditya Birla Fashion, Bata, Metro Brands, clock 13-19% RoE.   

Extremely Premium Valuation

Annualising 9MFY22 EPS of Rs. 8.7 leads to a PE multiple of 75x for FY22, which is unjustified for a business clocking sub-4% net margin and single digit RoE. Given the business model, company fundamentals are weak and growth visibility is also not encouraging. Fresh issue proceeds to be used for inventory can not deliver superlative growth, as inventory turnover ratio is just 2x.

Moreover, there is no reason for any premium over pre-IPO price of Rs. 826 per share undertaken less than 2 months ago, even though that premium is just 6%.