Buy Metro Brands Ltd for the Target Rs.1,215 by Motilal Oswal Financial Services Ltd by Motilal Oswal Financial Services Ltd
Growth visibility strengthens with replacement demand kicking in
We recently interacted with Mr. Kaushal Parekh, CFO, Metro Brands (MBL). Below are the key takeaways:
* MBL continues to guide a 15 - 18% long - term revenue CAGR. However, the confidence in delivering the growth guidance has improved, driven by 1) early signs of replacement demand kicking in (after a lumpy wardrobe refresh postCovid in FY23), 2) acceleration in store openings with moderating rental inflation, and 3) strong traction and opportunity in partner brands such as Clarks, and FILA, and acceleration of the Walkway (value) format.
* Return to mid - single - digit SSSG, ~10% annual footprint addition, and annualization of contribution from the stores opened last year should help deliver ~15% growth, with the remaining to be contributed from the scaleup of relatively nascent brands.
* Given the strong store economics and robust cashflow generation in the core Metro and Mochi formats, a large runway for growth in the Walkway format, and significant growth opportunities in FILA/Foot Locker/Clarks, we model a revenue/EBITDA/adj. PAT CAGR of 15%/15%/11% over FY25-28E.
* We reiterate our BUY rating on MBL with a revised TP of INR1,215, premised on ~40x Mar’28 pre - IND AS EV/EBITDA (implied 65x FY28E EPS).
* Following the recent correction, the stock now trades at 55x FY27 P/E (one SD below its LT one-year forward mean P/E). Consistent double - digit growth remains the key re-rating trigger.
Replacement demand recovery and network expansion to drive growth
* Management indicated that comfort in guiding a 15 - 18% revenue growth over the long term has increased, with early signs of replacement demand coming back (after the lumpy wardrobe refresh post-Covid).
* MBL is targeting 15%+ revenue growth driven by equal contribution from: 1) mid - single-digit SSSG, 2) ~10% annual net footprint addition (partial contribution), and 3) annualization of stores opened last year.
* Management believes further acceleration is possible over the medium term as nascent brands such as FILA, Foot Locker, and MetroActiv scale up.
* Robust store economics (40%+ store RoIC, ~2 - year payback), and strong cashflow generation (can potentially open 200 new stores annually from internal accruals), provide a long runway for growth in core Metro/Mochi formats.
* The company has fine - tuned the economics in its value format, Walkway, and expects to deliver ~25% RoCE in the format over the long term (lower than the core formats but better than the ~7% yield on cash balance).
* Clarks is witnessing strong traction within Metro/Mochi stores without cannibalizing the sales of the company’s other own brands. The plans for opening Clarks EBO by 3QFY27 remain on track.
* We model ~15% revenue CAGR over FY26-28E, driven by mid-single-digit SSSG and ~12% CAGR in area additions.
Robust store economics and strong cash generation provide a long runway
* MBL is present in ~212 cities across 31 states and UTs, with its core Metro format spanning 182 cities. Management believes that the core Metro format still has significant headroom for expansion into new cities, while the opportunity for other banners is even higher.
* Further, management indicated that even in its core market, such as Mumbai, the company’s presence beyond Borivali/Thane remains sparse, and it sees significant room for expansion in adjacent locations such as Vasai, Kalyan, etc.
* Management indicated that the rental spike from the post-Covid bump-up period now appears to be easing out as several brands face profitability pressures. While the company does not guide explicit store addition targets, the annual cashflow generation could support ~20% store additions yearly.
* As the company is more confident in accelerating the Walkway format, there is a significant opportunity to deepen its presence in Tier II and smaller towns, where Metro’s current presence is limited (1.2-2 stores/city beyond metros).
* FILA, Foot Locker, and MetroActiv provide MBL with a comprehensive portfolio to tap into the fast-growing sports and athleisure (S&A) space.
Brand portfolio well-positioned across price points and usecases
* The portfolio is well segmented across price points and use cases, with management systematically addressing white spaces. This approach enables a clear multi-brand growth strategy with minimal cannibalization.
* The recent additions in the Clarks Cloudsteppers range have helped MBL address the gap in its women’s footwear segment in the mid-premium range (INR 3.5-5k). MBL indicated that Clarks is witnessing strong early traction in the Metro/Mochi stores without cannibalizing sales of its own existing brands. It remains on track to open Clarks EBOs by 3QFY27.
* Walkway, a value-focused format, has now achieved product-market fit and is now seeing acceleration in store addition (20 net additions in 9MFY26 on an FY25 base of 70 stores). The format benefits from the recent GST rationalization and remains a profitable venture. Over time, management expects to reach ~25% RoCE in the format (lower than 40%+ in its core formats but better than a 7% yield on cash balance).
* FILA is a strategic, long-gestation play currently in the incubation and brandbuilding phase. The initial focus was on localizing the supply chain and improving the design quotient; however, management now expects FILA to scale up from FY27/28, driven by a large TAM in the S&A category. Further, the license provides for control on pricing (which would lead to better intake margins), category extension (apparel, accessories), and a foray into neighboring SAARC countries.
* Management is calibrating the near - term expansion plans at Foot Locker due to the challenges posed by BIS in sourcing high-end merchandise, which dilutes the customer experience. However, it expects the supply challenges to ebb over the next 6 - 9 months.
Valuation and view
* MBL's revenue growth has experienced a pick - up since 2HFY25, driven by rising traction in e-commerce, acceleration in store additions, and likely replacement demand kicking in after a three-year hiatus.
* While BIS - related challenges persist for the S&A category (Foot Locker and FILA), MBL has intensified its focus on the value category (Walkway), signed strategic partnerships (New Era and Clarks), and launched a new sports performance format (MetroActiv). These initiatives should help sustain double-digit growth over the medium term.
* We remain positive on MBL's long-term outlook, given 1) its superior store economics, with industry-leading store productivity and strong cost controls; 2) the strategic tie-ups with leading brands; and 3) a long runway for growth in its core formats, primarily funded through internal accruals.
* We marginally fine-tune our growth and margin estimates for FY26 - 28. Given the strong runway for growth in the Metro, Mochi, and Walkway formats, along with significant growth opportunities in FILA/Foot Locker/Clarks, we model a revenue/EBITDA/adjusted PAT CAGR of 15%/15%/11% over FY25 - 28E.
* We assign a 40x Pre - IND AS EV/EBITDA multiple (implied ~65x FY28 P/E) and reiterate our BUY rating on MBL with a revised TP of INR1,215 (earlier INR1,315).
* Following the recent correction, MBL now trades at ~55x FY27 P/E (1 SD below its LT one - year forward avg. P/E). Consistent double-digit revenue growth and ramp-up of newer formats, such as FILA, Foot Locker, and Clarks, remain the key re - rating triggers.
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