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Disciplined and (steadily) growing platform – initiate at BUY

Metro Brands, one of the largest Indian footwear speciality retailers present in India, has a right mix of brands (three umbrella brands + two EBO tie-ups) providing growth runway (of store addition). Its focus on financial discipline along with balance sheet strength provides confidence on the execution. It has an optimized mix of in-house brands and third-party brands in MBOs (Metro, Mochi and Walkway) to drive customer footfalls, improve sales density and gross margins. Besides, a platform of choice for international brands aids confidence on new avenues (of growth). We model revenue / EBIDTA / PAT CAGR of 30% / 28% / 31% over FY22-24E. Initiate at BUY with a DCF-based target price of Rs700. Key risks are (1) delay in store addition and (2) likely increased competition from regional players trying to premiumise.

Store expansion to be a key growth driver: With a portfolio of 624 stores (Mar’22), Metro is looking to add 260 stores in the next three years (expansion of 40%+). We believe the runway of store expansion is good given (1) The brands already have national presence, (2) able to achieve penetration in lower tier cities and (3) has balanced mix of men and women customers. It is targeting growth in all three segments of the market – economy, mid and premium. Metro retails footwear under own brands of Metro, Mochi Walkway, Da Vinchi and J. Fontini, as well as certain third-party brands such as Crocs, Skechers, Clarks, Florsheim, and Fitflop, which complement in-house brands.

Key strengths: (1) Asset light business (outsourced manufacturing) with an efficient business model, (2) Financial discipline led by focus on unit economics, (3) (Potential) platform of choice for third party brands, (4) Strong portfolio of umbrella brands with in-house (brand) contribution of 70% in these stores, (5) Strong promoter background and management team.

E-commerce and other opportunities: Given the underlying trend of e-commerce adoption in footwear space, Metro Brands has ramped up capabilities (8% contribution), with separate platforms for its three umbrella brands. Besides, it is also ramping up its digital presence (consumer connect)

Valuation and risk: We model revenue / EBITDA / PAT CAGR of 30% / 28% / 31% respectively over FY22-FY24E. We initiate coverage on the stock with a BUY rating and DCF-based target price of Rs700. Key risks are (1) delay in store addition and (2) likely increased competition from regional players trying to premiumise.

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