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Stellar growth continues; Fila/Proline acquisition to lift growth trajectory

* Metro continued its stellar performance with revenue growth of 47%/ 60% over 2QFY22/pre-covid, led by store adds and ASP increase. This translated into 100bp EBITDA margin adds on a YoY basis to 30.9%. Pace of store adds remains strong with 48 new stores added in 1HFY23 and the company is on track to add >85 store annually. The company acquired exclusive rights for Fila/Proline.

* We have marginally increased our consolidated EPS, factoring revenue/ EBITDA CAGR of 30%/33% over FY22-25E. Metro superlative store economics, healthy portfolio of products, recent acquisitions of Fila/Proline and a strong balance sheet/FCF productivity warrants rich valuation. We reiterate our Buy rating on the stock.

Revenue/EBITDA grew ~50% YoY; store adds pace continues

* Revenue increased 47% YoY to INR 4.7b (in-line) in 2QFY23, led by store additions (15%) and increase in ASP.

* Revenue per sqft grew 26% YoY to INR4,900 in 2QFY23 vs INR3,900 in 2QFY22

* Revenue per store grew 31% YoY to INR 7.2m in 2QFY23 vs INR 5.5m in 2QFY22 ? Gross margin were marginal down 20bp YoY to 57.3% in 2QFY23. GM moderated marginally in Q2, primarily due to EOSS impact in Aug-Sep and change in in-house v/s Outside brands mix. Management reiterated guidance of ~ 55-57% levels in the coming quarters.

* Reported EBITDA were up 52% to INR1.5b (in line) in 2QFY23, guiding operating leverage benefit. Due to this, EBITDA margin improved 110bp to 30.9% in 2QFY23.

* PAT also increased 40% YoY to INR774m (in line) ? 28/48 net store added in 1Q/1HFY23 across all formats. Added 17/5/4/2 stores in Metro/ Mochi/ Crocs/ Walkaway, indicating healthy store adds in the Metro format.

* Inventory has increased to INR5.7b in 2QFY23 vs INR4.2b in FY22 to cater to the upcoming festive/wedding season & new store openings. Inventory days and net WC remain stable at ~110 days and 71 days v/s the last fiscal.

* The company has acquired 100% in Cravatex Brands Ltd., for an Enterprise value of INR2b with revenue of INR1.6b in FY22. It has exclusive long-term license for the Italian sportswear brand FILA & owns the Indian sportwear brand Proline

Key takeaways from the management commentary

* Demand remains strong with healthy customer sentiments for the Oct month, led by the festive season. This is not due to pent up demand seen earlier, post covid.

* Average ASP of the Metro was INR 1400 in Q2FY23, up 5-7% YoY. Also, higher ASP products, i.e., INR 3000+ have exhibited good traction with healthy volumes.

* The management has guided for 55-57% gross margin for all formats.

* The company reiterated the guidance of 260 stores over the next three years. This should increase with the addition of FitFlop and Cravatex acquisitions.

* Fila and Proline to rejig the existing stores to grow through EBO and own MBO additions with aim to achieve margins similar to the existing business over the next three to five years.

Valuation and view

* METRO trades at rich valuations, backed by: a) internally funded growth, because of a strong OCF-to-EBITDA ratio of over 50%and b.) a balance sheet that is par excellence, with a healthy RoIC of 20% for FY22 (65% on Pre IND-AS 116),

* The company has been witnessing a consistent healthy double-digit revenue/PAT growth over the last 10 years. We have factored in revenue/PAT CAGR of 30%/37% over FY22-25E, respectively, led by healthy store additions and strong recovery in SSSG.

* The missing piece in their product portfolio was sports and athleisure, the fastest growing category in the footwear market, for which, the company has acquired exclusive rights of Fila/Proline from Cravatex Brands Ltd. at Enterprise value of INR2b (EV/Sales at 1.3x on FY22). This could clearly lift METRO’s growth trajectory.

* The company’s combination of superior store economics and strong runway of growth should allow it to garner rich valuations going ahead. We value the stock at 52x P/E on FY25E EPS, i.e., at par with our footwear coverage universe, to arrive at our TP of INR1,050 and reiterate our Buy rating on the stock .

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