Ethos IPO: How good is it? | Value Research Ethos, India's luxury and premium watch retail player, has come out with an IPO. Here is a set of questions (and answers) that will help you decide about it.
IPO Analysis

Ethos IPO: How good is it?

Ethos, India's luxury and premium watch retail player, has come out with an IPO. Here is a set of questions (and answers) that will help you decide about it.

Ethos IPO: How good is it?

In our previous part of Ethos IPO story, we read about the key details of the IPO. Here we will answer some questions about Ethos and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
No. The company's earnings before tax were Rs 8.1 crore in FY21.

2) Will Ethos be able to scale up its business?
Yes. The company will use a part of the IPO proceeds to open 13 new stores. Moreover, factors like increasing discretionary spending on watches, increasing penetration of smartwatches and the development of omnichannel markets will help the company scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. The brand 'Ethos' is well recognised and trusted by customers.

4) Does Ethos have high repeat customer usage?
Yes. The company's loyalty programme, Club Echo, brings in about 35 per cent of annual business from repeat customers.

5) Does the company have a credible moat?
No. Though the company is a leader in its industry, it doesn't have any credible moat.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No. The company is susceptible to changes in import duties on watches.

7) Is the company's business immune to easy replication by new players?
No. New players can and have entered the market.

8) Can the company's product withstand being easily substituted or outdated?
Yes. Firstly, there are no substitutes for watches. Second, retailing of watches can take place either through physical stores or through e-commerce channels. The company has a presence in both.

9) Are the customers of Ethos devoid of significant bargaining power?
Yes. The company has mainly high net-worth customers, and this is a fragmented group with luxury being their primary driver of purchase.

10) Are the suppliers of Ethos devoid of significant bargaining power?
No. The company's suppliers are mainly international luxury watch brands, and they dictate the terms and conditions.

11) Is the level of competition the company faces relatively low?
Yes. The main competitors for the company are other watch retailers. However, most luxury and premium watch retailers have few stores in one or two cities. Moreover, there is no competitor with a comparable digital presence as Ethos.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 61.7 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Managing Director Yashovardhan Saboo (also one of the promoters) has been the managing director since 2007, and CEO Pranav Saboo has held the position since 2018.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes. However, there are 13 tax-related litigations against the company amounting to about Rs 37 crore.

16) Is the company's accounting policy stable?
Yes, the company's accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledge.

Financials

18) Did Ethos generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
No, the company managed to generate a three-year (FY19-21) average return on equity of 5.2 per cent and a return on capital employed of 14.2 per cent. For FY21, the company generated a return on equity of 3.8 per cent and a return on capital employed of 12.9 per cent.

19) Was the company's operating cash flow positive during the last three years?
No, the company has reported operating cash flow of Rs -1 crore in FY19, Rs 37 crore in FY20 and Rs 63 crore in FY21.

20) Did Ethos increase its revenue by 10 per cent CAGR in the last three years?
No. The company's revenues decreased from Rs 443.5 crore in FY19 to Rs 386.6 crore in FY21.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
No. The company's net debt-to-equity ratio stood at 0.91 as of December 2021. However, the interest coverage was low at 1.29 times for FY21. Ethos would use Rs 30 crore of IPO proceeds to repay a part of the debt.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
No. The company needs huge working capital for its daily operations. However, around R 235 crore of IPO proceeds will be used to fund these requirements.

23) Can the company run its business without relying on external funding in the next three years?
No. The company expects its borrowings, existing cash and IPO proceeds to meet its present and anticipated requirements over the next 12 months only. Thus, the company would turn to external sources for funding at some point in the future.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company's short-term borrowings have pretty much remained the same. It was at Rs 61 crore in FY21 and was at Rs 63 crore as of December 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, the company is free from meaningful contingent liabilities. However, there are specific claims under dispute regarding tax and customs with an aggregate amount of Rs 37 crore.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will only offer an operating-earnings yield of 0.4 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Not applicable. The company doesn't have a listed peer. Post-IPO, the company's stock will trade at a P/E of around 354.4.

28) Is the stock's price-to-book value less than its peers' average level?
Not applicable. The company doesn't have a listed peer. Post-IPO, the company's stock will trade at a P/B of around 3.6.

Ethos IPO: Scorecard

Also read our earlier story on Ethos IPO to learn about crucial IPO details and important company information.

Disclaimer: The author may be an applicant in this Initial Public Offering.


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