Should you invest in Metro Brands IPO?

High valuation dims what is otherwise a steady business for Metro Brands, with its asset-light model, wide network of stores, negligible debt and good margins. At the price band of ₹485-₹500, the PE valuation works out to a little over 150 times annualised earnings of the first half of this fiscal, on the post-issue equity. The high valuation could partly be a function of slightly depressed earnings in the first half of FY22, due to the second wave of the Covid pandemic.

To its credit, the company has made profits of about ₹43 crore for the April-September 2021 period, in comparison with a loss of about ₹43 crore in April-September 2020. Valuation could have also been influenced by that of peers such as Bata and Relaxo which trade at 164 times and 106 times FY22 earnings (Bloomberg consensus estimates) respectively.

However, coming at a time when markets are perched on a peak and intermittent corrections have already been making markets volatile, the Metro Brands IPO leaves very little margin of safety for investors at this valuation. Hence, investors can give the Metro Brands IPO the go by currently.

The company is raising up to ₹295 crore for opening of 260 new stores till 2025. An offer for sale from the promoters of up to ₹1,073 crore is also on the cards.

Metro Brands positives

Metro sells footwear under owned brands such as Metro, Mochi, DaVinchi, Vivado and Walkway (value brand) which bring in about 71 per cent of the revenues as well as third-party brands such as Clarks, Skechers, Florsheim and Crocs. The company operates exclusive business outlets (EBOs) for Crocs, a premium brand. Similarly, Metro also sells another premium brand Fitflop, through its multi-brand outlets currently and is also entering into an arrangement for distributing these products across the country. The company operates on an asset-light model where it outsources production to third-party manufacturers.

Having presence in the mid and premium segments, Metro’s average selling price — at ₹1,300 to ₹1,350 over the last three years — is the highest among peers such as Bata, Khadim, Liberty and Relaxo. Among the leading brands that Metro sells, Crocs brings the highest realisation, followed by Mochi/Metro and Walkway. The company has consistently seen 45-55 per cent repeat sales in the last three fiscals and in the first half of this year, signalling a loyal customer base.

Rise in urbanisation, higher disposable incomes and increasing brand consciousness are tailwinds for the footwear industry. Crisil estimates organised retail penetration to reach approximately 16 per cent in fiscal 2025 from 12 per cent in fiscal 2020. In this, penetration of footwear is expected to touch a higher 38 per cent by FY25, boding well for Metro which has a big presence in this segment. As of September 30, Metro Brands has a store count of 598 stores across Metro/Mochi/Walkway/Crocs.

Metro Brands financials

Revenue from operations stood at ₹800 crore for the year ended March 2021, down from ₹1,285 crore in FY20 and ₹1,217 crore in FY19. The top line has rebounded in the first half of this fiscal to ₹456 crore from ₹176 crore in the same period last year. Profits too followed a similar trajectory, coming down from ₹153 crore in FY19 to ₹65 crore in FY21 and rebounding later. Operating margins have ranged consistently over 20 per cent in the last three years, and are ahead of peers such as Bata, Khadim and Relaxo.

Same-store sales growth is a key metric to be watched out for stocks in the retail space. But this number for the last three years is not readily available in the offer document.

According to the management, due the lockdown and other Covid-induced restrictions, this metric took a knock in FY20 and FY21 for the company (like many others in the retail space) although until December 2019, it showed a single-digit growth. It has again picked up in the second quarter of FY22, according to them.

The company has closed 58 stores in the last three-and-a-half years.

Break-even time for new stores is approximately two years. Higher variable component (linked to sales) in salaries of store level managers helps the company hold a leash on costs.

Besides, tight inventory control is another key strength which reduces discounting of products and hence, its impact on the margins. It liquidates inventory (18 months or older) twice a year and discount sales in the last three years have been only at 6-9 per cent of revenues.

For certain third-party brands, the company is entitled to return certain ageing inventory to the brand owner, reducing the inventory risk too.

Debt to Equity ratio stands at 0.1 times as of September 30, 2021.

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