Buy Metro Brands Ltd for the Target Rs. 1,325 by Motilal Oswal Financial Services Ltd
Largely in line; consistent double-digit growth remains key
* Metro Brands’ (MBL) 1QFY26 revenue grew 9% YoY on a low base (-1% YoY in 1QFY25), driven by a 45% growth in E-commerce and a modest ~4% YoY growth in in-store sales (on the back of ~8% YoY area additions). ? EBITDA grew 8% YoY (6% miss), as margin contracted ~45bp to 30.9% due to higher marketing spends and ~15bp dip in gross margin.
* 1QFY26 was impacted by a shift in Eid dates, early monsoon, and subdued consumer sentiments. However, management reiterated its long-term target of 15-18% revenue CAGR, driven by mid-to-high single digit SSSG, store additions, and rising contribution from newer formats. Further, with its robust cost controls and strong store economics, management continues to target over 30% EBITDA and mid-teen PAT margins.
* We cut our FY26-27E EBITDA and PAT estimates by ~5-6%, driven by slower store additions and muted SPSF. Overall, we build in revenue/EBITDA/PAT CAGR of 14%/15%/16% over FY25-28E.
* We reiterate our BUY rating on MBL with a revised TP of INR1,325, premised on 65x Sept’27 EPS. Consistent double-digit growth and ramp-up of newer formats such as FILA, Foot Locker, and Clarks remain key re-rating triggers for the stock.
Slightly weaker growth; EBITDA hurt by higher marketing spends
* Consolidated 1QFY26 revenue grew ~9% YoY on a weak base to INR6.2b (2% below), driven by an increase in wedding-related footfalls.
* The growth was driven by area additions and robust E-commerce sales, as quarterly SPSF declined ~3% YoY to INR4,350/sq ft.
* In-store sales grew modest ~4% YoY (vs. ~5% YoY in 4QFY24), driven largely by 8% YoY area additions.
* The company added 23 stores and closed three stores, bringing the total count to 928. Format-wise, MBL added five stores in Metro, nine in Mochi, two in Crocs, and four in Walkway. ? E-commerce sales grew ~45% YoY to INR840m.
* Gross profit grew 9% YoY to INR3.7b as margins moderated 15bp YoY to 59.3% (~20bp below our estimate), likely due to a higher share of ecommerce (+330bp YoY) and lower share of own brands (-100bp YoY).
* EBITDA grew 8% YoY to INR1.9b (6% miss) due to weaker growth and a 13% YoY increase in other expenses on account of elevated marketing spends on brand building and positioning.
* EBITDA margin contracted ~45bp YoY (115bp miss) due to a 13% YoY (5% above) increase in other expenses.
* PBT at INR1.3b grew 6% YoY (broadly in line), as lower EBITDA was offset by higher other income and lower finance costs. ? PAT grew 7% YoY to INR0.99b (in line).
Key takeaways from the management commentary
* Demand: Demand trends were broadly in line with expectations, though impacted by the shift in Eid dates (to 4QFY25) and the early onset of monsoon. These factors were offset by higher wedding-related footfalls. Management noted that early festive will influence sales dispersion in 2Q (vs. 3Q). ? Regional trends: Management indicated that MBL was impacted by the early monsoon in Maharashtra and Gujarat and witnessed relatively soft demand in South India, potentially due to a slowdown in the IT sector. However, management believes this is temporary and not a long-term concern. ? Store openings: MBL opened 23 new stores and closed three stores during 1Q. Management indicated that rentals have come off slightly, but the company continues to focus on opening profitable stores and is not chasing any particular number for store additions. Further, the company expects to open three Foot Locker stores before the festive season, scale up New Era from 2QFY26 onwards, and open FILA EBOs from 2HFY26. ? Guidance: Management reiterated its long-term guidance of 15-18% CAGR, driven by mid-to-high single digit SSSG, new store openings, and rising contribution from newer banners. Further, driven by its robust cost controls and superior store economics, the company aims to deliver 30%+ EBITDA margin and mid-teen profit margin.
Valuation and view
* Concerns around Fila's liquidation and BIS-related challenges are now well behind the company. Its strategic focus has shifted toward ramping up FILA, Foot Locker, and the newly added Clarks.
* We 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. ? We cut our FY26-27E EBITDA and PAT estimates by ~5-6%, driven by slower store additions and muted SPSF.
* Given the strong runway for growth in the Metro, Mochi, and Walkway formats, along with significant growth opportunities in FILA/Foot Locker/Clarks, we build in revenue/EBITDA/PAT CAGR of 14%/15%/16% over FY25-28E. ? We reiterate our BUY rating on MBL with a revised TP of INR1,325, premised on 65x Sept’27 EPS. Consistent double-digit growth and the ramp-up of newer formats such as FILA, Foot Locker, and Clarks remain key re-rating triggers for the stock
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