Ethos IPO review (Avoid)

•    Ethos is engaged in the luxury and premium watch retail segment. 
•    It has posted inconsistent financial data so far.
•    Super profits for 9M-FY22 raise eyebrows and concern over sustainability.
•    Even on the basis of super earnings, IPO is priced exorbitantly.
•    No harm in skipping this pricy issue. 

ABOUT COMPANY:
Ethos Ltd. (Ethos) is the second company going public from KDDL (erstwhile known as Kamala Dials  & Devices Ltd.) It is India's one of the largest luxury and premium watch retail players having a 13% share of the total retail sales in the premium and luxury segment and a share of 20% when seen in the exclusive luxury segment in the financial year 2020, (Source: 'Industry Report on Premium and Luxury Watch Retail in India dated April 26, 2022, prepared by Technopak Advisors Private Limited' available on the company's website, delivering a content-led luxury retail experience to customers through online and physical presence. 

In addition to its chain of 50 physical retail stores in 17 cities in India in a multi-store format, Ethos offers an Omnichannel experience to customers through its website and social media platforms. It has a sizeable portfolio of premium and luxury watches in India enabling it to retail 50 premium and luxury watch brands like Omega, IWC Schaffhausen, Jaeger LeCoultre, Panerai, Bvlgari, H. Moser & Cie, Rado, Longines, Baume & Mercier, Oris SA, Corum, Carl F. Bucherer, Tissot, Raymond Weil, Louis Moinet and Balmain. 

In addition to premium and luxury watch retail, it has also undertaken retail of certified pre-owned luxury watches since Fiscal 2019. Ethos's Omnichannel approach is premised on an endeavour to provide experience, content, customisation, reach and convenience to customers. Its website "www.ethoswatches.com" is India's largest website for premium and luxury watches in terms of the number of brands and watches offered (Source: 'Industry Report on Premium and Luxury Watch Retail in India dated April 26, 2022, prepared by Technopak Advisors Private Limited' available on the Ethos website.

As of the date of Red Herring Prospectus, it has an extensive network of 50 (fifty) retail stores spread across 17 cities of the National Capital Territory of Delhi Mumbai, Maharashtra; Bengaluru, Karnataka; Hyderabad, Telangana; Chennai, Tamil Nadu; Kolkata, West Bengal; union territory of Chandigarh; Ahmedabad, Gujarat; Jaipur, Rajasthan; Lucknow, Uttar Pradesh; Gurgaon, Haryana; Guwahati, Assam; Ludhiana, Punjab; Nagpur, Maharashtra; Noida, Uttar Pradesh; Pune, Maharashtra and Thane, Maharashtra in India. As of March 31, 2022, Ethos has 424 employees, out of which 79 are women representing 18.63% of total employees.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its funding needs for repayment/pre-payment of certain borrowings (Rs. 29.89 cr.), working capital (Rs. 234.96 cr.), the establishment of new stores/renovation of existing stores (Rs. 33.27 cr.), up-gradation of ERP (Rs. 1.98 cr.), Ethos is coming out with a maiden combo offer via book building route to mobilize Rs. 472.29 cr. at the upper price band of the IPO. The company has fixed a price band of Rs. 836 to Rs. 878 per share of Rs. 10 each. It will issue fresh equity (approx. 4271080 shares) worth Rs. 375 cr. and an offer for sale of 1108037 shares (worth approx. Rs. 97.29 cr.). The issue opens for subscription on May 18, 2022, and will close on May 20, 2022. Minimum application is to be made for 17 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 23.04% of the post issue paid-up capital of the company. The issue is allocated as 50% for QIBs, 15% for HNIs and 35% for the Retail category. 

The company has done a pre-IPO placement of 302663 shares at Rs. 826.00 per share (i.e. approx. Rs. 25 cr.) in the month of March 2022. Hence the fresh issue size is reduced from Rs. 400 cr. to Rs. 375 cr. Surprisingly, it is asking more price at the upper cap from the new investors. 

The issue is jointly lead managed by Emkay Global Financial Services Ltd. and InCred Capital Wealth Portfolio Managers Pvt. Ltd. while KFin Technologies Ltd. is the registrar to the issue.  

Having issued initial equity at par, Ethos issued further equity in the price range of Rs. 22.50 to Rs. 826 between February 2009 to March 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 28.86, Rs. 36.38, Rs. 93.51, Rs. 99.09, Rs. 100.95, Rs. 121.96, Rs. 130.80, Rs. 140.24, Rs. 141.36, Rs. 180.56 and Rs. 186.24 per share. 

Post-IPO, Ethos paid-up equity capital will stand enhanced from Rs. 19.08 cr. to Rs. 23.35 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 2050.06 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, Ethos has posted turnover/net profits of Rs. 445.10 cr. / Rs. 9.89 cr. (FY19), Rs. 461.01 cr. / Rs. - (1.33) cr. (FY20), Rs. 403.14 cr. / Rs. 5.79 cr. (FY21). For the first nine months of FY22 ended on December 31, 2021, it has earned a net profit of Rs. 15.99 cr. on a turnover of Rs. 429.35 cr. Thus while its top-line posted inconsistency, its bottom line marking a sharp jump in pre-IPO periods raises eyebrows. 

For the last three fiscals, Ethos has posted an average EPS of Rs. 2.20 and an average RoNW of 2.83%. The issue is priced at a P/BV of 8.32 based on its NAV of Rs. 105.48 and at a P/BV of 3.43 based on its post-IPO NAV of Rs. 256.13. 

If we annualize super earnings of 9M-FY22 and attribute it to post IPO fully diluted equity, then the asking price is at a P/E of around 96 plus. Based on FY21 earnings, it comes to 354 P/E. Thus the IPO is priced exorbitantly. The sustainability of such superprofits going forward is the main concern. 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer documents. It will adopt a prudent dividend policy post listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per offer documents, Ethos has no listed peers to compare with. 

MERCHANT BANKER'S TRACK RECORDS:
The two merchant bankers associated with this issue have the following track records:

Emkay Global Financial Services Ltd.: This is the 2nd mandate from Emkay in the last three fiscals (including the ongoing one). The only listing that took place so far opened with a premium of 43.54% on the day of listing.

InCred Capital Wealth Portfolio Managers Pvt. Ltd.: This is the 1st mandate from InCred in the last three fiscals (including the ongoing one) and has no past track records.