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Positive surprise; highest ever store addition

Metro’s 3QFY23 performance was a positive surprise with highest ever store (48 stores) addition till date. This may drive consensus upgrades. Incremental focus towards distribution driven revenue growth under Fila and Proline brands (now consolidated in standalone financials effective 1st Dec’22) is a key growth vector. However, we await more clarity on EBO/MBO mix in the growth plans. As per exit run-rate, these brands likely contribute ~5% to overall revenue. Relative success in ramping-up own brands (revenue contribution at 74% vs ~70% during FY17-19) is encouraging. Sequential deflation in input-cost is incremental positive. BUY. Top pick.

3Q performance was higher than estimated (+26% YoY revenue) driven by aggressive retail expansion (27% YoY retail area). Stabilization in raw material cost and improvement in revenue mix contributed towards gross margin expansion. EBITDA and net margin also stands at healthy levels; 34% and 19% respectively. It added 48 (net) stores in the quarter (EoP stores: 720) with higher addition of Metro (14 stores) and Mochi (17 stores) brands.

Metro Brands’ right mix of brands provide growth runway (of store addition). Its focus on financial discipline along with balance sheet strength provides confidence on the execution. Besides, a platform of choice for international brands aids confidence on new avenues (of growth). Maintain BUY with a DCFbased target price of Rs1,050.

* Retail expansion drives revenue outperformance: Metro Brands reported revenues of Rs5.98bn, up 26% QoQ and up 24% YoY, was above expectations driven by aggressive retail expansion (total retail area up by 27%YoY to 1.04mn sq. ft.). It added 48 stores in the quarter (highest ever new store opening till date) – Metro: 14, Mochi: 17, Crocs: 10, Walkway: 6, Fitflop. Online sales (including omnichannel) continue to outperform; grew 57% YoY (to Rs 500mn), contributing 8% of (standalone) sales. We note that ~25% of online business comes from omni-channel.

* Mix improvement benefits operating margins: Gross margins expanded 10bps YoY and stands at healthy 59.2% (highest over last 10 quarters stands at 59.7%). This was driven by mix improvement (2% higher contribution from own brands). Revenue contribution from own and third party brands stands at 74%/26% in 3Q; in line with long term trends. EBITDA margin contracted 44bp YoY to 34% due to higher staff cost (impact of higher store addition during the quarter). Net margin at 19% is healthy.

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