Ethos IPO opens today: Should you subscribe to the issue?

The Rs 472-crore public issue of the company comprises fresh issue of equity shares aggregating up to Rs 375 crore and an offer-for-sale of 1,108,037 equity shares aggregating up to Rs 97.29 crore by the shareholders and promoters.

The offer will open for subscription on May 18 and the last day to subscribe to the public offer is May 20 (Friday).

The price band for the offer has been fixed at Rs 836-878 per equity share of face value Rs 10 each.

After the issue, the promoter shareholding will decline 19.36 percent and come down to 61.65 percent from 81.01 percent stake held by the them currently in the company.

Brokerage views

The brokerages are optimistic about the growth prospects of the company as the Indian watch market is sizeable and pegged at Rs 13,500 crore in FY 2020. It is expected to grow at a ~10.6 percent CAGR over FY20-25 to reach Rs 22,300 crore on the back of several factors like higher brand consciousness, greater purchasing power, digitization, and increasing urbanization.

According to a report from the research firm Anand Rathi Research, revenue of the company grew 3 percent in FY20 and fell 16 percent in FY21 (impacted by Covid-19).

The EBITDA (earnings before interest, tax, depreciation and amortization) margins ranged from 13 percent to 2 percent while PAT (profit after tax) margins ranged from 10 percent to -0.3 percent over FY19-21. For the first nine months of FY22, revenue was Rs 420 crore and the EBITDA margin came at 10.9 percent.

The RoE (return on equity) stood at 4 percent in FY21 and RoCE (return on capital employed) came in at 2.4 percent in FY21 while RoE/RoCE were ~8 percent / 9 percent in FY19. The company had a net debt of Rs 31.5 crore in FY21 which it managed to reduce it to Rs 13.1 crore in the nine months of FY22.

“At the high of the issue price-band (Rs878), the stock is valued at 285x FY21 P/E and 55x FY21 EV/EBITDA and we reckon a high and rising market share and unique brand partnerships to be positives,” a report from Anand Rathi Research said while recommending investors to ‘subscribe’ to the issue.

However, the brokerage highlights the concern of reduction in discretionary spending, Covid-19 or any future pandemic and most of its suppliers being non-exclusive.

According to Nirmal Bang Equity Research, going forward, the company is expanding its stores (13 new stores over existing 50 stores in next three years) and with new categories it believes Ethos can grow strongly.

“We understand that the company is very small as compared to other listed retail players and focused on one category (currently), we believe that there is scope for growth in future and on current valuations, it looks attractive on EV/EBITDA and EV/Sales basis and therefore, we recommend “Subscribe for Long Term”, a report from Nirmal Bang said.

The brokerage firm, Marwadi Financial Services recommends a “subscribe with caution” rating to the IPO as it believes the IPO is richly priced and company will have to continue growing its business at high growth rate in order to justify its valuation which keeps us cautious from a long term perspective.

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