Metro Brands rallied 59% in last six months; up 153% from its IPO price

Metro Brands saw its shares rise 15.32% in the previous trading session to register a new all-time high of ₹1298.80 apiece. The strong rally in the stock came after the brokerage firm Prabhudas Lilladher initiated coverage on the stock with an ‘Accumulate’ rating and a DCF-based price target of ₹1,231 apiece.

Set up in 1955, Metro Brands Ltd (MBL) is a pure-play one-stop-shop footwear retailer in India, with offerings for the whole family for all occasions. It operates 5 formats and 766 stores in 182 cities as of Q1FY24.

Over the last six months, the stock climbed from ₹794 apiece to ₹1,265, producing a fabulous return of 59.31%. Also, the stock soared 71% from its one-year low of ₹736. The company made its stock market debut on December 22, 2021. At current levels, the stock is trading 153% above its issue price of ₹500.

Prabhudas Lilladher stated that the company has created a pure footwear retailing model with multiple store formats in MBOs (Metro, Mochi, Walkway) and EBOs (Crocs, Fitflop, FILA) across 766 stores.

"Metro Brands has adopted a 360-degree approach in expansion, which involves growing existing brands of MBOs (Metro, Mochi, and Walkway), giving presence in only 174 cities (257 and 411 for Tanishq and Titan, 388 for Bata India), nurturing existing brand partnerships (Crocs, Fitflop, Birkenstock), brand acquisitions (Cheemo, FILA, and Proline), and Omni channel distribution with 3.2x sales since Covid (7.9% of sales)," said Prabhudas Lilladher.

Operates on asset-right (light) model: The company operates an asset-right (light) model with zero manufacturing amid sourcing from more than 250 trusted third-party vendors, variable salary, the least amount of discounted sales in the industry, and revenue share in lease rentals. The asset-light strategy will continue to enable MBL to have a lower capex focus on design innovations and inventory management, stated the brokerage.

Cravatex acquisition to play out post-FY25: The company made a strategic move in October 2022 with the acquisition of 'Cravatex Brands' for ₹2.02 billion to strengthen its position in the fast-growing Athleisure space with exclusive rights to distribute FILA (24 stores) in the Indian sub-continent and ownership of Proline Brand. The company remains bullish on FILA given flexibility in sourcing and brand extension, brand awareness and success of FILA in China. 

The brokerage expects FILA to see a re-launch with premium positioning. FILA reported a loss of ₹278.2 million in the last 2 quarters, and the brokerage expects the same run rate in the coming 2–3 quarters. It believes FY25 is likely to be a year of consolidation, and positive contributions will play out in FY26.

Benefits from the BIS push: The Bureau of Indian Standards (BIS) is set to enforce quality control order (QCO) norms for footwear starting January 1, 2024. Following this date, a BIS license will be made compulsory for manufacturing, importing, or selling products covered by QCOs.

The introduction of norms will improve quality and refine benchmarks for products. The industry foresees some supply-side disruptions in Q3/Q4FY24 as manufacturers will need to adapt their processes to meet these new standards, like setting up testing laboratories, obtaining BIS licenses, and complying with new regulations for issuing ISI marks.

However, the brokerage believes that these norms will be beneficial to ensure quality and deter cheaper imports and counterfeits in the Indian market, which will benefit large organised players like Metro Brands. 

Outperforming Peers: Metro Brands had a poor run in FY21 due to covid impact. Post covid, the industry bounced back from lows with a recovery in consumer discretionary demand. Accordingly, MBL did better than peers, being a pure footwear retailer specialising in the mid- to premium segment with significant scope to increase presence in existing and new cities, the brokerage underscored.

The company's sales per store increased from ₹26 million per store in FY19 to ₹31 million per store in FY23. The brokerage anticipates a 14.7% volume CAGR and an increase in average selling price (ASP) from ₹1,450 to ₹1,609. It estimates a 1.3% increase in sales per store in FY24, but a 6.2% CAGR after that.

Furthermore, the brokerage forecasts a sales CAGR of 20.1%, driven by a 19% CAGR in offline sales and a 32% CAGR in online sales over FY23-26E. The company reported 18.6% growth in PBT from operations during FY19–23. The brokerage estimates 4.7% growth in FY24 and 17% CAGR over FY23-26E.

15 analysts polled by MintGenie on average have a 'hold' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before making any investment decisions.