Metro Brands

Well-known footwear retailer

Company intends to expand its store network in existing and new Indian cities

Metro Brands is one of the India’s largest footwear retailers and is among the aspirational Indian brands in the footwear category. Company opened its first store under the Metro brand in Mumbai in 1955 and have since evolved into a one-stop shop for all footwear needs, by retailing a wide range of branded products for the entire family including men, women, unisex and kids, and for every occasion including casual and formal events.

Company’s total Store count has grown from 504 in 116 cities as of March 31, 2019, to 586 stores across 134 cities as of March 31, 2021, and to 598 stores across 136 cities as of September 30, 2021.Company had the third highest number of exclusive retail outlets in India, in FY 2021.

Company recorded a Realization per Unit, of Rs 1,321.29, Rs 1,345.80, Rs 1,327.96, Rs 1,279.85 and Rs 1,381.27, in Fiscal 2019, 2020 and 2021 and in the six months ended September 30, 2020, and September 30, 2021, respectively.

As of March 31, 2019, 2020 and 2021 and as of September 30, 2020, and September 30, 2021, Company operated Stores with a total Retail Business Area of 643,442 square feet, 694,955 square feet,720,994 square feet, 692,211 square feet and 734,217 square feet respectively.

Company recorded Revenue per Square Ft. of more than Rs 17,500, Rs 16,800, Rs 10,150, Rs 2,275 and Rs 5,400 in Fiscal 2019, 2020 and 2021 and in the six months ended September 30, 2020, and September 30, 2021, respectively.

Company retails footwear under its own brands of Metro, Mochi, Walkway, Da Vinchi and J. Fontini, as well as certain third-party brands such as Crocs, Skechers, Clarks, Florsheim, and Fitflop, which complement in-house brands.

Metro brands primarily follow the “company-owned and company operated” (COCO) model of retailing through its Multi Brand Outlets (MBOs) and Exclusive Brand Outlets (EBOs), to better manage customer experience at stores. The company and its Subsidiary Metmill also operate shop-in-shops (SIS) in major departmental stores across India.

In Fiscal 2021, In-Store Product Sales, Online Product Sales, and Omni-Channel Product Sales represented 91.93%, 6.15%, and 1.09%, of the Company’s total revenue from operations, respectively (on a standalone basis). In the six months ended September 30, 2021, In-Store Product Sales, Online Product Sales, and Omni-Channel Product Sales represented 87.17%, 8.90%, and 3.03%, of the Company’s total revenue respectively.

Revenue from sale of in-house brands and third-party brands in Multi Brand Outlets (MBO) represented 69.24% and 30.76% of the company’s revenue in FY 2021, respectively. while in the six months ended September 30, 2021. Revenue from sale of in-house brands and third-party brands in Multi Brand Outlets (MBO) represented 71.08% and 28.92% of Company’s revenue.

As of March 31, 2019, 2020 and 2021 and as of September 30, 2020, and September 30, 2021, Club Metro had more than 37.5 lakh, 44.5 lakh, 48.5 lakh, 45.5 lakh and 50.9 lakh members, respectively, and My Mochi had more than 24 lakh, 29.5 lakh, 32.9 lakh, 30.2 lakh and 34.7 lakh members, respectively. The loyalty program for Crocs was launched in Fiscal 2020, and had more than 2.4 lakh, 4.5 lakh, 3.1 lakh and 5.9 lakh members as of March 31, 2020, and 2021 and as of September 30, 2020, and September 30, 2021, respectively.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 295 crore and an offer for sale of Rs 1072.51 crore by existing shareholders.

The price band for the IPO is Rs 485 to Rs 500 per equity share of face value Rs5 each.

Objectives for the fresh issue are investment of Rs 225.37 crore for opening new stores of the company, under the “Metro”, “Mochi”, “Walkway” and “Crocs” brands and remaining amount will be used for general corporate purposes.

Promoters of the company are Rafique A. Malik, Farah Malik Bhanji, Alisha Rafique Malik, Rafique Malik Family Trust and Aziza Malik Family Trust. Promoters and promoter group holds an aggregate of 223,088,220 equity Shares, aggregating to 83.99% of the pre-Offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 74.27%.

Rakesh/Rekha Jhunjhunwala holds 14.73% of pre-offer equity.

The issue, through the book-building process, will open on 10 December 2021 and will close on 14December 2021.

Strengths

Metro Brands is one of the largest Indian footwear specialty retailers. In FY 2021, it had the third highest number of exclusive retail outlets in India.

Company recorded the highest Average Selling Price (ASP) from FY2019 to FY2021 among key players. In FY2021, the average selling price for the company was Rs 1328 compared to Rs 534 and Rs 519 for Bata India and Khadim India, respectively.

The Indian footwear consumption in value terms is expected to grow at a CAGR of 15% to 17% between FY2022 and FY2025. This is also expected to drive growth of the market share of organized players like Metro Brands.

Company offers wide range of brands and products catering to all occasions across age groups and market segments. This allows company to operate across the economy, mid and premium segments.

Company has witnessed a high proportion of repeat sales. In FY2019, 2020 and 2021 and in the six months ended September 30, 2021, repeat sales by members of loyalty programs represented 45.08%, 49.69%, 55.71% and 54.31% of Total Store Product Sales (excluding sales at its stores).

Company has long-standing relationships with many of its vendors. It has been dealing with certain vendors for over 20 years.

Company sources all its products through outsourcing arrangements without its own manufacturing facility, resulting in an asset light model. Asset light model is based on third-party manufacturing by long-standing vendor relationships, and supported by active brand portfolio management, optimum store size and layout, and long-term lease arrangements.

Company operates stores of both MBO and EBO formats. It also operates a broad retail distribution set-up that is complemented by scalable e-commerce capabilities including through tie-ups with select commercial partners. Further, company operates websites for various brands and have an extensive online presence.

Company has grown to be a platform of choice for other national and international third-party brands looking to expand in India. This has been reflected through its successful partnership with Crocs, a global brand offering innovative casual footwear for women, men and children, with a focus on its molded products.

Weaknesses

Company operates in a highly competitive footwear retail market and rely on the continued demand for its products in the markets. Changing customer preferences or evolving trends may decrease the demand for its products, which may adversely affect business.

Company has closed/ relocated 44 Stores due to commercial considerations in the last three fiscals and closed another 14 in the six months ended September 30, 2021. While the number of stores closed in each of the periods was less than 5% of stores at the beginning of the period, however, there can be no assurance that store closures in future will not adversely impact business.

Company stores are operated on properties that are either leased or obtained on a leave and license basis. If company fails to renew these leases on competitive terms, its results of operations would be materially affected. In Fiscal 2019, 2020 and 2021, and in the six months ended September 30, 2021, 10, 10, 24, and 14 agreements, respectively, for its stores were terminated and such stores accounted for 1.98%, 1.81%, 4.10%, and 2.34% of total stores respectively.

Company is dependent on third parties for the manufacturing of all its products. Any disruptions at such third-party manufacturing facilities, or failure of such third parties to adhere to the relevant quality standards may have a negative effect on company’s reputation and business. In FY 2019, 2020 and 2021, and the six months ended September 30, 2020, and September 30, 2021, top 50 vendors contributed 69.95%, 71.26%, 75.27%, 89.95% and 77.07% of total in-house products respectively.

Company has entered and may continue to enter related party transactions which may not always enable it to achieve the most favorable terms. In FY 2019, 2020, and 2021, and in the six months ended September 30, 2020 and September 30, 2021, the aggregate amount of such related party transactions was Rs 87.88 crore, Rs 36.69 crore, Rs 62.93 crore, Rs 37.68 crore, and Rs 38.55 crore, respectively.

The operation of Crocs Exclusive Brand Outlets (EBOs) depends on material agreements with Crocs, which impose certain restrictions like, Company is required to seek the prior approval of Crocs, amongst others, for opening of new stores. These restrictions and limitations could adversely affect business.

A significant portion of company’s revenue is generated from sale of third-party brands, any loss of one or more such brands, could adversely affect its profitability. In Fiscal 2019, 2020 and 2021, and the six months ended September 30, 2020, and September 30, 2021, revenue from sale of third-party branded products at its MBOs generated Rs 299.49 crore, Rs 310 crore, Rs 189.53 crore, Rs 45.14 crore and Rs 94.54 crore, representing 29.67%, 30.62%, 30.76%, 36.34% and 28.92% of Company’s total revenue from MBOs respectively (on a standalone basis).

Company’s operations are manpower intensive and is dependent on store managers and sales personnel for a significant portion of operations. Business may be adversely affected by work stops, increased wage demands by employees or increase in minimum wages across various states.

Company does not have definitive agreements or fixed terms of trade with most of its vendors. Further, company is dependent on a few key vendors for its operations, Purchases from top five vendors was Rs 253.35 crore, Rs 251.60 crore, Rs 94.69 crore, Rs 15.72 crore, and Rs 94.91 crore, representing 20.82%, 19.58%, 11.84%, 8.90% and 20.81% of total revenue in Fiscal 2019, 2020 and 2021, and in the six months ended September 30, 2020, and September 30, 2021, respectively.

The growth of online retailers may create pricing pressures, increase competition, and adversely affect business. Company’s Total Online Product Sales amounted to Rs 19.10 crore, Rs 30.62 crore, Rs 57.15 crore, Rs 20.56 crore and Rs 52.54 crore in FY 2019, 2020 and 2021, and in the six months ended September 30, 2020, and September 30, 2021, respectively, representing 1.65%, 2.53%, 7.25%, 11.60% and 11.93% of total revenue, respectively (on a standalone basis).

Covid pandemic has affected and can continue to affect the company’s operations and financials.

Valuation

For FY 2021, consolidated sales went down by 37.75% to Rs 800.06 crore compared to FY 2020. OPM decreased by 600 bps to 21.44% which led to 51.36% decrease in operating profit to Rs 171.53 crore. Other income increased 202.95% to Rs 78.48 crore, while interest cost rose 10.38% to Rs 43.66 crore and depreciation increased 1.03% to Rs 121.84 crore. PBT after EO decreased 61.73% to Rs 83.91crore. Tax expenses for FY2021 was of Rs 19.29 crore compared to tax expense of Rs 58.69 crore in FY2020.Net profit fell 56.48% to Rs 68.20 crore.

For H1FY2021, consolidated sales were up by 158.29% to Rs 456 crore compared to H1 FY2020. OPM increased by 3105 bps to 24.44% which led to operating profit of Rs 111.44 crore compared to loss of Rs 11.68 crore. Other income decreased 35.42% to Rs 33.27 crore, while interest cost rose 7.25% to Rs 23.58 crore and depreciation increased 5.28% to Rs 65.15 crore. PBT after EO stood at Rs 55.96crore compared to loss of Rs 45.72 crore. Tax expenses for H1 FY2021 was of Rs 12.89 crore compared to tax credit of Rs 2.60 crore in H1 FY2020.Net profit stood at Rs 41.53 crore compared to loss of Rs 39.43 crore.

The TTM EPS (excluding extraordinary items and relevant tax) on post-issue equity works out to Rs 5.49. At the upper price band of Rs 500, P/E works out to 91.07.

As of 8 December 2021, its listed peers such as Relaxo Footwears trades at TTM P/E of 110.49 and Bata India trades at TTM P/E of 877.73.

At the higher price band of Rs 500, the offer is made at Post-issue EV/ TTM Sales of 12.49 times, on a post-issue equity share capital of Rs 135.75 crore of face value of Rs 5 each. Listed industry peers of the company are Relaxo Footwears which trades at 12.28 times its EV/ TTM sales and Bata India trades at 11.92.