KDDL (Ethos Watches) - Scalable business model at an inflection point?

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@rohitbalakrish_

I have mentioned earlier in the thread about how Apple watch may have some impact initially for KDDL and its customers. But as I combine the facts from the article you shared with other articles about Apple’s products in India, I’m quite confident that the overall impact would be negligible as they serve different segments of the market.

  1. Quoting from the Apple watch article you shared - “The market for watches that cost less than $1,000 is most at risk, as consumers in that price range have indicated they’re the most likely to buy an Apple Watch, Levin said. Sales of watches costing between $50 and $999 registered drops in June, the biggest being a 24 percent decline in timepieces from $100 to $149.99, according to NPD’s data.”

Average selling price of an Ethos watch is Rs.60,000 or close $1000. (Figure taken from Arun’s initial post)

  1. Apple watch price range is $549-$1099. Very few iPhone owners would be willing to buy the most expensive $1099 watch when you can buy an Apple watch at half the price.
    The only cause for concern here may be if Ethos sells huge volumes of watches in that price range of $500-$700. I don’t have the numbers but I doubt that.

  2. Living in the heart of Delhi, observing life around me I don’t need any conviction on the growth of the luxury watch segment in India. Am I betting on the right horse is the main point?

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42

Interesting take on how luxury is sold. Does Ethos does this all?

https://www.farnamstreetblog.com/2009/07/how-to-sell-a-35000-watch-in-a-recession/

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Thanks Abhishek, Great work. I went through the story of Hengdeli. I think what worked for them was the fact that they had exclusive distribution rights of renowned international brands which KDDL lacks. Also, it formed a JV with Swatch group to engage in wholesale business of Omega and Rado. Due to this arrangement I believe their procurement costs were lower. As a result, other retailers partnered with Hengdeli to buy watches from them which led to topline and profit growth.

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Hi all ,

Has anyone done any scattlebutt research by visting an Ethos store ? I am from Chennai and I am planning to visit the store in Vijaya mall soon. Any specific things you guys think I should watch out for ?

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Promoter shareholding is down in Sept quarter . 52.83% in June end quarter to 47.62% in Sept end quarter. Not a good sign for KDDL.

46

Hey I did go to an ETHOS store in Mumbai. Their staff is a lot more trained than a local luxury watch store. Also the prices are higher at ETHOS. The product range is the same. Also, for quite a few luxury watches, ETHOS had no inventory. They told me that it takes 25 days to get it from Chandigarh! The number of customers were higher at the local store than ETHOS which was empty on that particular day.

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Q2 results
http://www.bseindia.com/xml-data/corpfiling/AttachLive/8B8C1D69_D80F_4A32_B00B_2E1CAC7948E6_200302.pdf

Investor Presentation
http://www.bseindia.com/xml-data/corpfiling/AttachLive/F38F8553_E867_4CF1_ABCB_D94584393C80_200608.pdf

Board Meeting Outcome
http://www.bseindia.com/xml-data/corpfiling/AttachLive/4589B54D_CF60_4922_B668_9A642CAA12A2_200742.pdf

Consolidated Q2 comparison YoY
Revenue growth - 14%
PAT growth - 73%
Operating profit or EBITDA is actually down 15%

As you look deeper, it’s all on account of higher other income and lower tax expense.
Thus, H1 numbers also look fabulous YoY based on the artificial boost of other income and lower tax expense.

Not sure what to make of the numbers,

Disc - Invested

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48

Thanks for pointing out.
The most heartening thing was the ethos part. Other businesses are not where I am interested. That too they claim this is a lean period.
H1: Revenue up 26% to 148 crores and same store sales growth of 18%.

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Yes Gurjot, there has been a decline in EBITDA QoQ however increase in other income and drastic decrease in tax expense and finance costs. Need to find out the reasons for this.

As per company notes: “Other income for the quarter includes income of rs 28.13 million recognised on purchase of subordinated loan in subsidiary Pylania S.A. by another subsidiary Kamla International Holdings AG from third party at a discounted price”

The Ethos business is showing traction and improvement.

Disc- Invested

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I managed to attend conf call and below are my notes. My objective is to learn more about the business model. Disc: I hold a tracking position (2% of my PF).

Added result update presentation Q2 FY16 link
http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/F38F8553_E867_4CF1_ABCB_D94584393C80_200608.pdf

Ethos: H1
41 stores: 8 summit stores, 3 duty free stores, 27 Ethos format stores, rest 3 could not capture ?
2 new stores in Mumbai:

  • Mumbai international airport domestic terminal
  • Taj GVK hotel

Store at Ambience mall gurgaon – very good performance.
Same store sales growth 18%.
56% increase in online leads generation.
Expenses reduced from 13.5% to 12.6%.

Advertisement / Branding initiatives: half page ads in few newspapers
Trust campaign: increase consumer awareness, receiving positive feedback.
Brand recall of Ethos is strong now as compared to last 2 years.

Inventory carrying
H1 FY16: 8.6 months
H1 FY15: 9.3 months

New initiative:
Special section in shoppers stop for premium watches. Trial basis in Mumbai and Hyderabad. This is in line with global trend of premium watch location in departmental stores

Parent business:

  1. How things are shaping up next 12-18 months ?
    ⦁ Expect to grow 10-12% per year
    ⦁ Hit a bit of speed breaker due to global soft conditions
    ⦁ Now an indicator of strength
    ⦁ Domestic demand turning up
    ⦁ Revival expected from Q4
    ⦁ 10-12% growth on watch components side

Precision business:
a. Electronics & Electricals
b. Aerospace & Defense – expect to improve
c. Auto
Expect growth from 25crs to 100 crs over next 3-4 years. Average growth 30% with earnings lumpiness.
Growth much better. Aggressive plans Precision stamp -> Precision moulding.
Capital raise 30 crs – funds for expansion. Capital expenditure – engineering side.
Land in aerospace development park in Bengalore. Some capex has already started.

Ethos business:
25% growth. Offline and online combination – depends on effective logistics
Next trigger: GST
Expand portfolio of brands and products
320 employee strength in Ethos.
Trend more on digital media.
Absolute spend -> advertisement / marketing 2.2% of Ethos sales.
Same store sales growth 1Q 16%, 2Q 19% 1H 18%.
Margin contraction: overall market business has been soft.
Overall 1H better than previous year.
EBITDA margins 5% last year to 8-10% next 3-4 years

Ethos Market Analysis:
Market growth single digit, we are growing 25%. Some competitors are bleeding and we are gaining market share. Online business share set to improve.
Number of leads are increasing.
High focus on leads conversion improvement.
Capex plan 25 crs next year. KDDL will invest more in Ethos. Will strengthen equity holding in Ethos.
Pressure point on the margins – due to higher discounts offered. Increase in discount 1% lead to drop in EBITDA margin by 1.2%. Higher than budgeted consumer discounts. 1% higher than what was budgeted.
Number of watch specialists 25
Implementing a program of watch specialists: deputing then to physical stores.
Visits to website: 17 lakhs as compared to 14 lakhs last year
Leads 33000, little bit lower than last year. Focusing on quality of leads.
Conversion rate 8.1% this year as compared to 4.5 % last year. Q3 seeing a big peak.
Club Ethos membership 99800

Service & Repair watch vertical (important vertical)
Online and integrate. Looking for robust platform.
Over next 4-5 years span, premium & luxury watches 30crs a year. Plan to capture 1/3rd of this.
Packaging business – assessing whether to continue or not

ROE estimates:
a. Ethos (KDDL retail business) next 3-4 years > 20%
b. KDDL manufacturing business – already > 20%

Do customers research before buying a watch ?

  • Yes if it is expensive. Active dialogue with our information centre (> 30 people)

Rationalizing brands, how do we add a new brand ?

  • Check high leads. People are enquiring. Global trend.
    Luxury value – making brands rare – corporate strategy. Reduce point of sales.

Top 50% online sales (10-12 brands)
Visit website: watch articles and blog
Pushing brand knowledge
Brands are embracing more online presence

51

Hi

Wish to know if there is any mention of the valuation ETHOS got when they raised private equity of Rs.30 crores ?

Regards

KP

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52

Hi, sorry for a late response. I do not recall if this was mentioned.

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Management is great. They have benchmarked themselves against hengdeli corp. Which shows their ambitious plans going forward. The only thing that needs to be watched out closely is, disruption from iwatch or similar new players.

Watch industry has largely remained unaffected as traditional handmade luxury watches are still the most desired item on mens list. Can iwatch or new age devices change it ?

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54

KDDL Ltd has informed BSE that CRISIL has upgraded the Credit Rating of the Company w.e.f. December 15, 2015 for Long Term Bank Loan Facilities from ‘CRISIL BBB-/Stable’ to ‘CRISIL BBB/Stable’ and for Short Term Bank Loan Facilities from ‘CRISIL A3’ to ‘CRISIL A3+’.

http://www.bseindia.com/corporates/ann.aspx?scrip=532054&dur=A&expandable=0

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297.50: “1008400 shares have been allotted at a premium of Rs.287.50 per share to non promoter on preferential basis.” from capitaline database.

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The only major risk here is disruption from other players. Titan etc. have huge cash flows & marketing power. They can topple ethos traffic in a very short period of time & beat them at their own game. Seeing the traction Ethos is getting from tier 1 , tier 2 cities is not likely to get un-noticed from big players. And they will surely latch on to this as they are in search for growth.

It’s a pretty high risk & fragile business model with no entry barriers. Not worth even at CMP.

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http://m.dailyhunt.in/news/india/english/live-mint-epaper-livemint/ethos-watch-eyes-rs1000-crore-revenue-by-2020-newsid-57480542

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58

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Hello,

I have a very basic Cash flow question. Please see the above cash flow statement. 2 questions

  1. What does a negative “Cash and cash equivalents at the end of period” mean (picture 2 of the above)? If I understand it right, they fell short of cash in the 2 years under consideration above and funded it by using bank overdrafts ? Is that right ?
  2. Where do Bank overdrafts appear on the Balance Sheet (BS) ? Under current / short term borrowings ? Also, would it exactly tally with the figure on the BS given the indirect method of cash flow calculation is more a end of the year academic exercise and the company would have borrowed from the bank in a staggered manner, as needed, through the year ?

Any insights to the above would be much appreciated, esp by the start accountants on the forum ! :slight_smile:

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KDDL Ltd
 Q3 was the best quarter for the company in terms of sales led by good response from their newly opened stores & festive demand. However, SSG showed a de growth of around 5% due to supply shortage of Rolex watch, without Rolex, Co has achieved 11% SSG growth in this quarter.
 9M ended retail and manufacturing business grew by 31% and 20% respectively. In the manufacturing segment, precision engineering business reported 18% revenue growth slightly lower than last year due to the shift in their plant. The segment contributed 23% of the total manufacturing revenue and rest is contributed by watch component segment.
 In the Ethos business share of contribution from exclusive brand has increased from 21.6% to 27.9% in the 9M ended, and in Q3, contribution increased from 22% to 31%.
 In Q3 gross margin has expanded due to product mix and lower discount. Co has managed to maintain 30% growth in luxury segment which helped them to maintain the strong topline.
 In Q4 the Co. is anticipating a slowdown in sales due to depressed sentiment in the market because of election and other macro factors. Co. is confident to bounce back after that.
 Co has established new service center in Delhi to launch their pre-owned watch business, in the next quarter onwards Co will focus on this. Co has maintained that this will help them to increase their sales in the long run through exchange.
 Mgmt has guided for 10-12% SSG growth & confident to achieve ~10% EBITDA margins on annual basis over the next 2-3 years

https://www.kddl.com/investorInfo_cat/director-information/

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Here’s an update for Q4FY21 prepared by me.KDDL Q4FY21 Result Update.pdf (306.6 KB)

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