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* Metro reported significant revenue growth of 35% YoY in 4QFY23, supported by store additions, a strong SSSG, and the impact of the Omicron base effect. However, the high opex resulting from aggressive store expansions and marketing costs, along with a net loss of INR 140m in Fila, contributed to a 2% YoY decline in PAT. Adjusted for Fila loss, PAT grew 19% YoY.

* In the near term, we see risk of growth moderation, potential losses in Fila, which could lead to a moderation in margins. This, along with rebase of discounting and third party sales has pulled down our FY24E PAT estimates by 8%, with an estimated growth of 12%. Despite the revisions in our FY24 estimates, our FY25 estimates remain unchanged. Store addition guidance was increased to 100 from ~80 earlier. The growth opportunity in Fila and the healthy store economics are expected to drive revenue/PAT CAGR by 24/23% over FY23-25. We reiterate our BUY rating on the stock.

Revenue up 35% YoY, but CBL loss and high opex led to PAT declining by 2%

* Metro Brands revenue/PAT grew 35%/ declined 2% YoY to INR5.4b/680m, but adjusted for Fila losses, the revenue/PAT grew 30%/19%.

* Revenue growth (6% above est.) was led by 24% store area additions, midto-high single-digit LTL growth, and the impact of Omicron effect last year.

* Gross profit rose 32% YoY to INR3.04b (6% above est.). Gross margin at 55.9% contracted 140bp YoY. This could be attributed to CBL’s low GM.

* Reported EBITDA grew 11% YoY to INR1.4b (7% below est.) with 580bp margin contraction to 26.4%. This was due to higher expenses, led by advertisement & marketing costs and a CBL loss of INR100m.

* Metro’s PAT declined 2% YoY to INR680m (in line) with a 460bp decline in margin to 12.5% (100bp below est.), due to lower finance cost.

* Metro added 19/116 net stores in 4QFY23/FY23 across all formats against 38 net store additions in FY22. A total of 739 stores were identified in 174 cities as of FY23 (excluding 25 EBOs of Fila) v/s 2,053 POS of Bata in 698 cities. ? For FY23, revenue grew 58% YoY, while EBITDA/PAT grew 66%/71% YoY.

* Net WC days have increased to 171 (from 138/130 in FY22/pre-Covid) with INR4.9b WC, led by higher CBL WC at INR1.4b (29%).

Key takeaways from management commentary

* The strong 58% revenue growth in FY23 was led by an 8% price increase and ~47% volume growth on a low base of FY22. The management expects an annual price increase of 5-7%.

* The company targets to open 200 new stores over the next two fiscal years, excluding FitFlops’s and FILA stores.

* The management has also retained GM guidance of 55-57%, EBITDA margin of ~30% and PAT margin of +15%. Delta between pre and post IndAS EBITDA is between 8% and 9%.

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