Shares of Ethos Ltd. have surged up over 140% in the last year, but analysts at Axis Securities think the stock still has some steam left.

The Ethos Analyst: Preeyam Tolia for Axis Securities initiated coverage on the stock with a “buy” rating and a target price of ₹3,050. The target indicates a 32% upside from the stock’s last closing price of ₹2,309.30.

The Ethos Thesis: The brokerage said that Ethos, with its strong and consistent performance over multiple quarters. The company’s robust outlook is underpinned by factors such as a consistently impressive same-store sales growth (SSSG) exceeding 15% and a positive trend in EBITDA margins, which have risen from 11.3% in FY20 to 14.5% in FY23. The brokerage attributed the performance to Ethos’s strategic focus on store expansion and an increased emphasis on growing its exclusive brands portfolio, resulting in a substantial Average Selling Price (ASP) increase from ₹84,200 in FY20 to ₹187,500 in H1FY24.

With an ambitious target of reaching 140-150 stores in the next four years, coupled with a heightened focus on overall ASP growth, expansion of the Certified Pre-owned watch segment, and a wider exclusive brand portfolio, analysts said that Ethos is poised for healthy Revenue/PAT growth, with an expected CAGR of 35%/42%, respectively, over FY23-26E.

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The domestic brokerage also noted that India stands at the brink of a luxury demand surge, with estimates suggesting a fivefold expansion in the Luxury market over the next decade. This growth is attributed to the multiplying number of affluent consumers in the country, driven by higher aspirations and disposable income. Recent years have witnessed record-high sales in various luxury segments, including luxury cars (up 3x), luxury real estate (up 2x), and premium clothing. Furthermore, the demand for luxury products has extended beyond metros to Tier 2 and 3 cities, presenting an unprecedented opportunity for retailers like Ethos specializing in premium and luxury products.

The brokerage also pointed out that the company’s strategic entry into the burgeoning Certified Pre-Owned (CPO) segment is a well-judged move, especially in the context of the current scarcity of new luxury watches. The CPO model represents an asset-light approach, characterized by lower capital expenditure and a shorter working capital cycle of 50-60 days compared to the longer cycle of 140-150 days for new watches. This move not only aligns with market dynamics but also positions the company favourably in terms of efficiency and capital utilization, the domestic brokerage firm added.

Price Action: Ethos’ share price was up 0.98% to trade at ₹2,332 in the early hours of trading on Thursday.

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