Arun,
Very well crafted report … Just read the entire thread. Please participate here more often… Your flow of reasoning is nice.
First let me confess, I didn’t look into the financials of KDDL …
The market will grow and may grow very rapidly and substantially with rising income / aspiration etc. Mens’ jewellery as category has very limited options apart from watches. Women have gold / diamond jewelry; handbag; footwear, watch etc but till now men fortunately or unfortunately have only one piece of portable item to show wealth; to show a badge of success or to give a signal of his personal status. Luxury Mobile Vertu till date is a disastrous failure. Also purchase of these costly trivia thrives in the early stages of Capitalism development. If you see the US market, sales of these trivia is almost flat over the years. India, China, Brazil, Mexico are the new market for these products.
I am visiting the Ethos shop since it opened in Delhi and a member of their Loyalty Program for long time. I get calls every now and then telling some or the other brand has some special discounted price (ranging from 10% to 35%); also they have a program (if I recollect correctly) to buy any brand at flat special discount on birthday, anniversary etc (they also make call / send card / token gift etc). Also, they arrange some Summit or Conclave or something or other from time to time either all by themselves or in collaboration with one or two specific brands.
All are fine but a bit banal to me. There is a sameness and mechanicality in the process. In reality, it can’t be otherwise but mechanical as there is a hidden agenda for these “good wishes”… What I mean is, these marketing techniques are very short lived and possibly don’t have as much pay off as being tomtomed by marketing experts. Hasten, to add, it is my gut feel … have no strong data to support it.
They have done a wonderful website and have established an image of trust and genuineness.
I also don’t think smartwatch etc would be a threat to this conspicuous trivia consumption segment. But yes, I guess the Mid Market category “half way wannabe” brands (Tissot / Rado / Tag Heuer etc) may face some heat as there may be a premium category of Smart Watch (even Omega is planning to produce smart watch I guess)
Having said that I have doubts about the investment thesis for long term (short term anything may happen) for the following reasons…
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A distributor margin for an established brand is always a function of volume. There is very very little scope of Margin Improvement apart from cost control. Here Margin means “Sales Price - Purchase Price” … You have said it is 26% but if you take just for Ethos then I won’t be surprised if it is in the range of 35% to 40%. Consolidated Figure minus Standalone Figure of Sales and Cost Price would give you a rough indication.
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People come to buy a Rolex / Omega / Patek Philippe NOT to buy Ethos. These are market access / entry margin and as markets grow the Principals start exerting pressure on distributors — Even a very large distributor has very limited traction on a Principal. And since there are only 4 - 5 large players and the Category / Brand which are the “puller” ---- they can always join hands to put pressure on the Distributor. So, the Supplier Bargaining Power which you said is “Medium” is something which you may rethink. I feel it is high, very very high. Distributor can make money only through volume growth.
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Non exclusive distributorship will always remain an overhang on these businesses. I have just seen on Rolex website store locator in Mumbai ---- Ethos is not mentioned there. But Ethos has quite a few shops in Mumbai. Does it mean these distributor agreements are geography / location specific? Please check. Omega / Rolex etc have their exclusive boutique in most cities … Apart from the types of Kapoors / Johnsons of Delhi. They have great locations and can always upgrade if they sense an opportunity.
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If there is no brand fatigue, there would be shop fatigue / shop environment fatigue which they need to fight with constantly. So regular fixed big expense every 4 - 5 years to shop overhaul would be there. Also, promotions / discounts are always from their margin, if the shop supervisor is to be believed. I asked this few years back. But he may be wrong.
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I have seen in many cases, these brand owners, after initial success, wants to ramp up fast which is sometime difficult for one distributor to keep pace with. And it results in multiple distributorship which makes the brand owner happy / market growing but distributors falling short in margin / profitability. Upfront cost / location / rent is so critical that many time, in spite of category / brand’s grand success the distributorship is not profitable for long term. See the margin and profitability of Ingram Micro / Redington vis a vis that of HP / Cisco./ Microsoft. So success of Luxury watch category doesn’t necessarily mean grand success of Ethos. Here lies the supremacy of a brand.
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If market grows with multiple distributors, own boutique shops, price points may drop … So, per unit realization may come down even if margin is constant. Same store sale is very seasonal and no one likes a crowded luxury store !!!.. So, per shop sales volume may not grow beyond a certain point putting pressure on overall profitability. Per store cost structure is very fixed hence this point needs critical scrutiny if you are looking for long term multibagger opportunity here.
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Chanel / Dior / Hermes are also planning to get into Mens’ Expensive Trivia segment … How they change the rule of the game, if at all would be something interesting to watch. Also, a shift in focus / self image from Macho Man to Metro Man may change the luxury consumption nature, And these changes happen fast and sudden not slow and gradual. So, a newcomer may be better of to notice a shift than an incumbent. But it is just a hypothesis.
Lastly, their after sales service needs improvement … They very nicely and warmly entertains and tries to solve problems but if the problem is not as simple as changing battery they falter in diagnosing. And then takes a very long time to return the watch. Once even without repairing with a big “sorry” smile 
to one of my friend! Also, the repair costs are quite high. But I guess, once business matures, these problems can be resolved.
Overall I feel there are too many moving parts beyond control of Ethos. Ethos can remain profitable as a cost plus type business but expecting something beyond that may be adventurous.
I have no interest in other standalone part of KDDL.
Your informed opinion on these issues are welcome.