Buy Metro Brands Ltd for the Target Rs.1,075 by Motilal Oswal Financial Services Ltd
Festive shift hurts growth; margins resilient
* Metro Brands (MBL)’s revenue growth further moderated to ~12% YoY in 2Q (from ~15%/20% YoY in 1QFY27/4QFY26) due to a shift in festive dates.
* However, reported EBITDA surged ~16% YoY, as ~215bp YoY gross margin expansion offsets the drag from higher minimum wages.
* MBL’s 1HFY27 revenue and reported EBITDA grew ~13% YoY. However, operating deleverage from higher rentals and lower treasury income lead to a muted ~8% and 2% YoY growth in pre-IND AS EBITDA and PAT, respectively.
* MBL management continues to guide for 15-18% revenue growth over the medium term. However, muted store openings in 1HFY27, a conservative approach to store openings, and BIS-related challenges persisting in the S&A portfolio (Foot Locker, FILA, and MetroActiv) could create short term bumps in the growth rates, in our view.
* We cut our FY27-29E pre-IND AS EBITDA/PAT by 3-6% and model a 13%/12%/11% CAGR in revenue/pre-IND AS EBITDA/PAT over FY26-29E.
* We reiterate our BUY rating with a revised TP of INR1,075, premised on ~35x Dec’28 pre-IND AS EV/EBITDA (implying ~53x Dec’28 EPS).
Higher rentals weigh on pre-IND AS EBITDA and profitability in 1HFY27
* MBL’s 1HFY27 consol. revenue/EBITDA/PAT grew ~13%/13%/2% YoY, as higher D&A (+17% YoY) and lower other income (-13% YoY) weighed on profitability.
* Its 1H Pre-Ind AS EBITDA grew 8% YoY to INR2.45b, as margin dipped ~85bp YoY to 16.9%, due to higher rentals (+21% YoY) from new format additions.
* Net working capital days increased to ~94 days (vs. 82 days in 1HFY26), driven by an increase in inventory days to 115 (from 109 YoY) and lower payable days (36 vs. 44 YoY). Absolute Core WC stood at INR7.8b (up 33% YoY).
* MBL’s 1H pre-IND AS OCF improved to INR812m (vs. INR31m in 1HFY26), largely driven by a lower working capital build-up (INR1.1b vs. INR1.8b YoY). Further, with capex moderating ~8% YoY, 1H pre-IND AS FCF improved to INR248m (vs. an FCF outflow of INR580m YoY).
* Based on our estimates, the implied ask-rate for 2HFY27 revenue/EBITDA/PAT stands at 15%/13%/10%, with a lot resting on the festive quarter (3QFY27).
Valuation and view
* Management continues to guide for 15-18% revenue growth over the medium term, driven by
1) store additions
2) mid-single digit SSSG
3) ramp-up of the newer formats (Clarks, Foot Locker, FILA).
* However, muted store openings in 1HFY27, a conservative approach to store openings, and BIS-related challenges persisting in the S&A portfolio (Foot Locker, FILA, and MetroActiv) could create short-term bumps in growth rates.
* We remain positive on MBL's long-term outlook, supported by
1) industryleading store productivity and disciplined cost controls
2) strategic partnerships with global brands, and 3) a long runway for growth across both core and emerging formats, funded largely through internal accruals.
* We cut our FY27-29E pre-IND AS EBITDA/PAT by 3-6% and model a 13%/12%/11% CAGR in revenue/pre-IND AS EBITDA/PAT over FY26-29E.
* We reiterate our BUY rating on the stock with a revised TP of INR1,075 (vs. INR1,100 earlier), premised on ~35x Dec’28 pre-IND AS EV/EBITDA (implying ~53x Dec’28 EPS).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
