EFTA trade deal: Ethos shares may gain on India's signing of TEPA; here's target price

Ethos, which sells over 60 premium luxury watch brands, is seen as key beneficiary of India's signing of Trade and Economic partnership agreement (TEPA) with the European Free Trade Association (EFTA), which will gradually eliminate the incumbent heavy-duty structure of 22 per cent) over 7 annual installments.

Indian retailers and brands currently operate at lower margin in order to offer comparable pricing to consumers against global destinations and Emkay Global said the company  should be the key beneficiary of the reduction in import duties. A 100 basis points margin benefit is likely to push up earnings and return on equity (ROE) estimates by 10 per cent, thereby offering huge upside.

Global retailers like Watches of Switzerland clock much superior gross margins compared with Ethos, despite higher salience of top luxury brands (like Rolex, Patek Philippe, and Audemars Piguet). Typically, top-selling luxury brands offer relatively lower gross margins to retailers because of their strong brand pull. Notably, gross-margin gains for Ethos have more to do with increase in its exclusive mix, as non-exclusive brands provide 20-25 per cent gross margin, while exclusive brands provide 40-45 per cent gross margin.

"Moats and macros are weaving favorable tales for Ethos, given visible growth outperformance and upside from the signed Trade and Economic partnership agreement (TEPA)/ramp-up of own-brand Favre Leuba (FL). The signed TEPA offers elimination of the 22 per cent custom duty gradually, in 7 annual instalments. We believe most of the benefits should be shared by retailers and brands, as consumer pricing is broadly akin to global pricing," Emkay Global said.

Its bear and bull case analyses suggest 20 per cent and 50 per cent target price upsides. Along with this, ramp-up of own-brand Favre Leuba (FL) on target lines (35 per cent CAGR) has potential to raise target price by another 10 per cent, it said.

As regards to execution, the outperformance is continuing as Ethos registered 30 per cent top line growth in the its nine months of FY24 against sub-10 per cent for other categories like QSR, Apparel, and Footwear.

"Ethos has also provided best-in-class medium-term outlook of 25 per cent top line CAGR, backed by share gains in new watch retail and faster growth in preowned/other luxury categories/FL. Increase in GST slab from the current 18 per cent could partly offset gains from the custom duty reduction," Emkay said.

This brokerage has a price target of Rs 2,850 on the stock.