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Delayed expansion to impact growth

Metro Brands’ (METROBRA IN) Q3FY25 revenue and EBITDA were lower by 3.0% and 2.3%, respectively versus our estimates. However, PAT was 21.9% lower on account of one-time tax adjustment for the Fila business. In Q3, demand recovered, driven by the festival and wedding seasons, following a subdued H1FY25. Store opening was below our estimates and guidance. METROBRA retained its guidance of 225 new store openings in FY25-26, implying higher store openings in FY26. We pare down our earnings estimates by 20.6% for FY25E, 19.9% for FY26E and 22.5% for FY27E, taking into consideration postponement of store additions, leading to delayed volume strength and increased other income. Thus, we also lower our TP to INR 1,457 from INR 1,873, based on 75x FY27E P/E. We maintain Buy.

Uplift from festival season moderates; store additions lag: Q3 revenue grew 10.6% YoY, led by implied volume growth of 10.6% as average selling price (ASP) was flat YoY. Revenue per sqft fell 1.0% YoY to INR 5,150 – Demand was subdued for the period other than festival and wedding seasons. We expect a revenue CAGR of 12.7% in FY24-27E, driven by new store openings, integration of brands and premiumization strategy. METROBRA added 24 stores in Q3, offset by two stores closing, resulting in 8.4% YoY store growth, taking the total to 895 in Q3FY25. Gross store additions stood at 64 and net additions at 57 in 9MFY25. METROBRA pared its store opening guidance of 100 stores in FY25, but retained its guidance to open 225 stores by FY26. We assume 205 store additions in the same period. We expect store network to post a CAGR of 10.7% in FY24-27E to reach 1,134 stores by FY27E. With completion of Fila inventory liquidation and compliance with BIS norms, we expect store expansion for Fila and Footlocker to gain traction in H2FY26.

Steady margin outlook maintained: Q3 gross margin declined 125bps YoY to 58.6% from 59.9% in Q3FY24, led by higher discounting on account of Fila inventory liquidation. EBITDA margin expanded 70bps YoY to 32.0% from 31.3% in Q3FY24, led by lower other expenses. We expect EBITDA margin to touch 30.8% by FY27E, led by premiumization and operating leverage. METROBRA retained its guidance of ~30%+ EBITDA margin in FY25. PAT declined 3.7% YoY to INR 951mn, hit by one-time charge of INR 250mn related to the reconciliation of tax balances for the Fila business and supported by higher other income. Adjusting for this, PAT would have been INR 1,201mn, largely inline with our estimates.

Maintain Buy with a lower TP of INR 1,457: We expect a revenue CAGR of 12.2%, an EBITDA CAGR of 14.1% and an earnings CAGR of 8.7% in FY24-27E. We maintain our stance that METROBRA is well positioned to leverage the improvement in demand, led by strong brand positioning and recall, continued store expansion and strong FCF generation. We lower our TP to INR 1,457 from INR 1,873, based on 75x (maintained) FY27E P/E. Risks to our call are lower-than-expected new store openings and extended subdued demand trend.

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