Buy Metro Brands Ltd For Target Rs.1,525 by Motilal Oswal Financial Services Ltd
In-line results; pace of store additions to pick up in FY26
* Metro Brands (MBL) reported in-line 3Q results, with revenue growth recovering to ~11% YoY (vs. 5% YoY in 2Q), driven by a 43% YoY growth in Ecommerce sales. In-store sales grew ~8% YoY (vs. 5% YoY in 2Q), led by ~9% YoY area additions.
* Gross profit grew 8% YoY (in-line) as margin contracted ~125bp YoY due to higher e-commerce sales and the residual impact of the FILA inventory liquidation (~50bp impact).
* EBITDA was up ~13% YoY (in-line), as better cost controls offsets tad weaker gross margin, while adjusted PAT grew 22% YoY (in-line).
* Despite weaker store additions in 9MFY25, management maintained its guidance of opening 225 stores over FY25-26, with 140-145 store additions targeted for FY26.
* We lower our FY26-27E EBITDA by a marginal 1-2% on account of slightly weaker productivity assumptions (primarily due to a change in the format mix).
* Given the strong runway for growth in Metro, Mochi, and Walkway formats, along with significant growth opportunities in FILA/Foot Locker, we build in revenue/EBITDA/PAT CAGR of 13%/17%/20% over FY24-27E.
* We reiterate our BUY rating on MBL with a revised TP of INR1,525 (earlier INR1,460) based on 70x Mar’27 EPS (earlier Dec’26).
In-line results; revenue growth picks up
* Consolidated revenue stood at INR7b (in-line), up 11% YoY (vs. 5% YoY in 2Q), as E-commerce sales grew 43% YoY.
* MBL’s in-store sales grew ~8% YoY (vs. 5% YoY in 2Q), led by 9% YoY area additions and a 1% YoY decline in revenue per sqft to INR5,150.
* Gross profit grew 8% YoY to INR4.1b (in-line) and margins contracted 125bp YoY to 58.6% (~85bp miss), due to higher growth in E-commerce sales, along with some impact from the liquidation of the residual FILA inventory.
* EBITDA grew 13% YoY to INR2.3b (in-line) as better cost control offsets gross margin contraction.
* EBITDA margin expanded 70bp YoY to 32% (40bp beat).
* Depreciation/finance costs rose 12%/15% YoY, while other income grew 45% YoY.
* Resultantly, PAT (adjusting prior period taxes of INR257m, primarily related to FILA) grew 22% YoY to INR1.2b (in-line).
* 9MFY25 revenue/EBITDA/PAT grew 5%/4%/9% YoY. Based on our estimates, the implied 4Q revenue/EBITDA/PAT growth is 11%/18%. However, we believe MBL is likely to fall short of its ~10-12% YoY revenue growth target.
Store additions likely to be lower in FY25, but pick up in FY26
* The company added 24 stores (expanding into five new cities) and closed 2 stores, bringing the total count to 895.
* Format-wise, the company added 6 Metro stores, 4 Mochi stores, 4 Crocs stores, 3 Walkaway stores, 1 FitFlop store, and 3 New Era EBOs, and also launched its first Foot Locker store during 3Q.
* Annual store addition guidance likely to be missed: MBL opened 56 net new stores in 9MFY25 and as a result, net new store openings for FY25 are expected to fall short of the guidance of 100 stores.
* 225 store addition target for FY25-26 maintained: The company remains committed to its overall target of 225 store openings over FY25-26, with 140- 145 store additions expected in FY26.
Key takeaways from the management commentary
* Demand environment: Diwali was two weeks earlier this year, driving strong growth in Oct’24. While growth continued in November, it began to slow slightly in December due to the early onset of EOSS by several retailers. Management expects demand to remain reasonably strong in 4Q, supported by a more weddings.
* Guidance: The management expects to clock ~15-18% revenue CAGR over the long term, with gross margins in the ~55% plus range and EBITDA in the ~30% plus range.
* Store additions: Management indicated that its target of 100 store additions for FY25 will likely be missed. However, it reiterated the guidance of opening ~225 stores over FY25-26, with ~140-145 store additions expected in FY26 (ex-FILA).
* BIS: There is no impact from the BIS implementation on MBL’s core businesses (Metro/Mochi). Further, management expects BIS-related challenges to resolve in the medium term, as several factories in Southeast Asian countries (Vietnam and Indonesia) have started receiving BIS certifications.
Valuation and view
* We lower our FY26-27E EBITDA by a marginal 1-2% on account of slightly weaker productivity assumptions (primarily due to a change in the format mix).
* MBL’s FILA and Foot Locker ramp-up has been impacted due to challenges posed by BIS implementation. However, we believe these are short-term bumps and remain positive on MBL’s long-term outlook, given a) its superior store economics, with industry-leading store productivity and strong cost controls, and b) a long runway for growth, largely funded through internal accruals, backed by a strong balance sheet and a healthy RoIC of ~30%+.
* Given the strong runway for growth in Metro, Mochi, and Walkway formats, along with significant growth opportunities in FILA/Foot Locker, we build in revenue/EBITDA/PAT CAGR of 13%/17%/20% over FY24-27E.
* We value MBL at 70x Mar’27 P/E to arrive at a valuation of INR1,550 per share. We have not factored in any significant contributions from FILA and Foot Locker in our estimates till FY27, and a faster ramp-up could provide a further upside potential. We reiterate our BUY rating on MBL.
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