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Long runway for growth

Metro Brands’ (MBL) stock performance has been flattish in CY24 and has underperformed benchmark indices due to both internal and external factors. Internal factors included: a) the liquidation of old FILA inventory, which impacted gross margins, and b) a decline in revenue per sq. ft., driven by a lower share of Crocs in the incremental store rollouts. External factors included: a) challenges arising from the BIS implementation, which led to delays in the FILA expansion, and b) overall demand weakness in the footwear category. However, we believe these are short-term bumps and remain optimistic about the long-term outlook for MBL, given its: a) strong runway for growth, funded through internal accruals, and b) superior execution and store economics, as reflected by its healthy RoIC of 30%+. We reiterate our BUY rating with a TP of INR1,460 (based on 70x Dec’26E P/E).

FILA and Foot Locker ramp-up delayed, but remains the key growth driver

* Sports and Athleisure (S&A), the fastest-growing footwear category, was a key whitespace in MBL’s portfolio. MBL addressed this by acquiring licenses for FILA and Foot Locker (Sneakers and Nike).

* MBL planned to relaunch FILA in FY25, but due to challenges arising from the BIS implementation, it has deferred the opening of FILA EBOs to 2HFY26.

* MBL opened its first Foot Locker store in 3QFY25, but the ramp-up is likely to be gradual, with only three leases signed so far.

* We view the delays as short-term bumps and believe that FILA and Foot Locker will continue to be key growth drivers for MBL in the long term.

* Given the long runway for growth in S&A, MBL can potentially open ~300 FILA EBOs, similar to the top sportswear brands in India, and generate ~INR6-9b sales over the medium term.

* Similarly, Foot Locker offers a premium play in sneakers for MBL and has the potential to generate ~INR2.5-6b in sales from tier 1 cities over the medium term.

* We believe that FILA and Foot Locker together could generate ~INR9-15b in sales (38-63% of MBL’s FY24 revenue) at margins similar to MBL’s existing margin profile over the medium term.

Superior store economics and cost controls to drive outperformance

* Weak discretionary spending over the past few quarters, along with BISrelated challenges, have weighed on MBL’s performance as well, resulting in modest revenue growth of ~2% in 1HFY25.

* Despite weak revenue growth and the impact of FILA liquidation, strong cost controls have helped MBL maintain its gross, EBITDA, and PAT margins at 57%, 28%, and 14%, respectively, all of which remained within the guided range in 1HFY25.

* In our view, MBL’s superior store economics (~INR20k SPSF, ~2 years store payback), combined with its strong cost controls, has enabled it to continue its outperformance over other footwear peers.

* With the liquidation of FILA inventory largely behind and a higher number of wedding days, we expect both SSSG and margins to improve from 2HFY25.

Stock Performance (1-year)

Long runway for growth funded by internal accruals

* MBL has a presence of 873 stores across its formats in <200 cities compared to 400+ cities for Titan and ~600+ cities for Raymond, offering a long runway for growth.

* MBL can expand its presence to 300 cities for its Metro and Mochi formats, while also deepening its presence in existing cities over the medium term.

* The company is focused on refining the store economics for its value format, Walkway, which we believe could expand its presence in tier 3+ cities.

* Further, the ramp-up of recent additions to MBL’s portfolio, such as FILA and Foot Locker, provides a long runway for growth.

* With a strong net cash balance sheet and healthy OCF generation of ~INR13.5b over FY24-27, MBL can potentially double its store count (average capex of INR10-12m per store) over the next three years through internal accruals.

* Conservatively, we assume ~100-110 store additions on average annually over FY24-27 (vs. an average of 380 annually based on MBL’s OCF generation).

Valuation and view

* MBL trades at a rich valuation, with a P/E of ~70x on FY26 EPS, driven by: a) superior store economics, with industry-leading store productivity and strong cost controls, and b) a long runway for growth, largely funded through internal accruals, given its strong balance sheet and healthy RoIC of ~30%+.

* Although the ramp-up of FILA and Foot Locker has been delayed due to challenges posed by BIS implementation, we continue to view FILA and Foot Locker as key growth drivers for MBL in the medium term.

* Our earnings estimates remain largely unchanged. We factor in 14% revenue CAGR over FY24-27, driven by ~12% footprint CAGR and ~17%/20% EBITDA/PAT CAGR over FY24-27, supported by continued strong cost controls.

* We value MBL at 70x Dec’26 PE to arrive at a valuation of INR1,460 per share. We have not factored any significant contribution from FILA and Foot Locker in our estimates till FY27, and a faster ramp-up could provide further upside potential.

* Our TP implies ~12%/13% revenue/EBITDA CAGR over FY25-50E, driven by a) ~7% CAGR in store additions, b) ~4% annual increase in store sales throughput, c) discount rate of 10.5%, d) a terminal growth rate of 6.5% and e) FCF to pre IND-AS 116 EBITDA improving from ~41% in FY24 to ~70% by FY2035.

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