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Ethos IPO: 5 Things to Know

May 17, 2022

Ethos IPO: 5 Things to Know

Equity markets have been on a roller coaster ride since the beginning of the year 2022.

One moment, stocks are rallying like there's no tomorrow and on some days, they are all falling like apple from a tree.

Interestingly, despite the high volatility, investors have not lost their faith in markets. This can be seen from their response to recent IPOs.

All the recent IPOs beginning with big players like Life Insurance Corp (LIC), Campus Activewear, to even small companies like Rainbow Children's Medicare, Prudent Corporate, among others have been oversubscribed.

This means IPOs are still a popular means of investment among investors. Hence investors must keep themselves updated with information about all upcoming IPOs.

Today, we look at the upcoming IPO of Ethos. Here are the key details of the IPO...

Issue period: 18 May 2022 to 20 May 2022

Issue size: Rs 4,722.9 m (Fresh issue worth Rs 3,750 m and offer for sale worth Rs 972.9 m)

Price band: Rs 836 to 878 per equity share

Bid lot: 17 share and in multiple thereof

Application limit: Minimum one lot maximum thirteen lots

Face value: Rs 10 per equity share

Objects of the issue: The company intends to use the funds raised for multiple purposes such as:

  • Repayment or pre-payment, in full or parts, of all or certain borrowings availed by the Company
  • Funding working capital requirements of the company
  • Financing the capital expenditure for (i) establishing new stores and renovation of certain existing stores and (ii) upgradation of enterprise resource planning software.
  • General corporate purpose.

The size of fresh allotment offer has been reduced as the company has made a pre-IPO placement of Rs 250 m.

The company has reserved 50% shares of the offer for qualified institutional buyers (QIB). It has reserved 15% for high net worth individuals (HNI). Hence 35% of shares are available for retail individual investors.

IPO allotment date: 25 May 2022 (tentative allotment date)

Tentative listing date: The shares will be tentatively listed on 26 May 2022.

Here are the 5 things to know about IPO...

#1 About the company

Established in 2003, Ethos watches is one of the most reputed watch retailers. It has around 50 stores in India and sells around 60 premium luxury watch brands.

Ethos is the largest Indian chain of luxury wrist watch boutiques. They sell both new and pre-owned watches. Apart from selling watches they also sell accessories like straps, watch winders, jewellery boxes etc.

They repair and service all watch of around 60 brands. Ethos has online stores along with physical stores. It is also present on social media.

#2 Financial position of the company

The company has a good turnover. But it has almost matching expenses. As a result, the profit margin is very low.

The profit margin before the pandemic was 2.2%. Hence it was very obvious the company would be in losses during the lockdown period.

Moreover, it's also not able to generate a fair return on its net worth. It earned a return of 8.5% in fiscal 2022.

Hence overall the company's financials do not give a pleasant picture.

Financial snapshot of the company

Particulars (Rs m) 31-Mar-21 31-Mar-20 31-Mar-19
Revenues 4,031.4 4,610.1 4,450.9
Revenue Growth (%) (12.6) 3.6  
Expenditure Before Tax 3,951.8 4,586.9 4,286.2
% of Total Income 98 99.5 96.2
Net Profit 57.9 (13.34) 98.9
Net Profit Margin (%) 1.4 (0.3) 2.2
Net Worth 1,556.1 1,498.7 1,304
Return on Net Worth (%) 8.5 8.2 7.7
Basic Earnings per share (EPS) 3.18 (0.75) 5.22
Data Source: Company's Red Herring Prospectus (RHP)

#3 Peer comparison

The company has no listed peers.

#4 Arguments in the favour of business

Ethos aims at becoming the most trustworthy imported watch seller in India. There is a rampant sale of smuggled, fake, and refurbished watches in India. And Ethos wants to be the company known for the authenticity of the product.

Ethos sells around 60 brands.

With its huge number of offline stores across the country, it provides a wide range.

Ethos does not just sell watches but also services and repairs the watches that are sold by them. The customer can walk in offline and get the watch serviced or repaired.

Ethos also boasts a good clientele. Its vast client base appears loyal with repeat purchases accounting for over 35% of total revenues.

#5 Risk factors

  • Huge costs - Ethos has around 50 stores in India. It has to keep stock of branded watches at all places. These watches are too costly and maintaining them is another cost story in itself.
  • Slow growth - The sale of premium watches in India is limited. In a country where the major part of the population lives below the poverty line, the business of extremely expensive watches is bound to be slow.
  • Lower margins - As observed from the data given above, the company had a margin of 1.4% in the year 2020-21. This creates doubt about the sustainability of the business.
  • Dependent business - Indian government allowed the import of premium watches in 2003. Right now there are no restrictions. But if at any point government brings back the ban the company will go out of business.
  • As of 30 September 2022, the company had a contingent liability of Rs 371.8 m. The liabilities are huge and are not recognised as debts. The lability mainly pertains to VAT.

Equity markets are a lot more volatile these days. Even fundamentally strong companies have been taken to the cleaners.

So at a time when even fundamentally strong stocks are beaten down, choosing which IPO to invest in becomes risky.

You must keep in mind that newly public companies lack a proven record of operating in the public domain.

For instance, investors had high expectations from tech stocks like Zomato, Paytm, etc. But all these stocks have largely disappointed shareholders. Even the recent IPO of Rainbow Medicare opened at a discount on listing day.

Hence it would not be an exaggeration to say that no matter how strong, how popular, or how financially strong the company, all have been knocked out clean by the punch of the global downfall.

Amid this chaos, how will a company with weak financial survive? Ethos had losses in 2020-21. It could barely survive the pandemic. So, would the shareholder be put in a position of losses every time the economy comes under pressure?

Stay tuned to get further updates on this IPO and all upcoming IPOs in the market.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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