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Metro Brands IPO - All You Need to Know

Dec 10, 2021 9:52 AM 6 min read

Metro Brands Ltd. (hereinafter referred to as "Metro") launched the three-day subscription process for its IPO today.  

As one of the largest footwear specialty retailers in India, backed by the ace investor Rakesh Jhunjhunwala, the company's maiden issue is drawing quite an attention. The issue was subscribed 27% on its first day of bidding.  

Let's delve into the fine prints of the issue to know if it might be a good buy.

IPO Stats

  • Issue Size: ₹1,367.51cr ($181.2m), out of which, ₹295cr ($39m) is from fresh issue and ₹1,072.51cr ($142.2m) is from the offer for sale)
  • Market Lot: 30
  • Face Value: ₹5
  • Issue Price: ₹485-500 ($6.5) per share
  • Issue Breakup: QIBs (50%), NIIs (35%) and Retail Investors (15%)
  • Issue Date: December 22nd 2021

As per the prospectus (Link here), the company's promoters will sell close to 10% stake in the IPO. Currently, the promoters and the promoter group combinedly own 84%. Rekha Jhunjhunwala, spouse of Rakesh Jhunjhunwala, is the third-biggest shareholder with a stake of 14.73%.

The grey market premium for the issue stands at ₹80 ($1.1) at the end of today. 

The proceeds from the issue are to be used to meet the expansion targets of the company as well as for general corporate purposes.


Company Profile

Originally known as "Metro Shoes", the company opened its first store in 1955 in Mumbai. In January 1977, the company was rebranded and incorporated as Metro Brands Ltd. From there, it gradually evolved into a one-stop-shop for all footwear in multiple locations across India. As of September 30th 2021, it operates 598 stores across 136 cities spread across 30 states and union territories. 

Metro targets mostly the economy-, mid- and premium-segments in the footwear market. It retails its footwear under its own brands of Mochi, Walkway, Da Vinchi, J Fontini etc. It also sells selective third-party brands such as Crocs, Skechers, Clarks, Florsheim and Fitflop. 

The company's retail operations are carried out through the stores and distributors as well as through the online channels (omnichannel presence). The company-owned-and-operated model of retailing through multi-brand outlets and exclusive brand outlets (third-highest in India, as per the prospectus) has been the defining point of its business. 

The model has been employed successfully to optimise a mix of in-house as well as third-party brands in the stores to increase customer footfalls, improve sales and margins. The business is highly customer-centric and is incentivised through a mix of supply chain statetegisation (inventory management, product assortment etc.) as well as sales and management incentives (loyalty programs, staff remuneration etc.).

Metro operates on an asset-light model by marketing third-party products to a great extent. This means that it doesn't have a manufacturing facility but is instead required to pay for products to the third party only once the products are sold. A part of the inventory risk, however, is minimised under certain arrangements by mandating the return of ageing inventory to the brand owner.


Company Financials

The company categorises itself as an "aspirational" Indian brand in the footwear category which is indicative of its rising intent to expand presence across the country. By catering to a section of core consumers across Tier I, Tier II and Tier III cities, Metro has maintained its aspirational brand identity through fashion-forward designs and affordable product ranges.

As per its prospectus, the company recorded the highest Realisation per Unit (Revenue from Total Product Sales divided by volume of Total Product Sales) and one of the highest operating margins among the key players in India in the last two financial years (pg. 153, RHP).

Gross margin and EBITDA margin for the company averaged over FY19-21 were recorded at 55.2% and 25.5% respectively. 

However, online sales remain as low as 7% (as of FY21) which isn't promising keeping in mind the explosive growth of online retail businesses in India over the last decade. The reduced footfalls at the stores on account of the pandemic dipped the company's revenue from operations by 37.8%, an outcome that could have been at least partially hedged with a rise in online sales. 

This is evident from the spurt In sales by 12% during April-September in FY22 due to the company's commensurate expansion in online operations during the same time. 

Although the asset light model is advantageous to retailers in terms of capital expenditure, it does put them at the risk of disruption in the vendors' manufacturing facilities. Long-term vendor relationships, like the ones evidently cultivated by Metro, are certainly beneficial to procure products. 

However, in case of failure to make timely deliveries, the company's inventories would be significantly affected, thereby impacting its business operations adversely. This is particularly necessitated due to the fact that about 30.8% of Metro's overall revenue is garnered from third-party brands.  

At the higher end of the price band, Metro is being valued at a P/E multiple of 82.6x on FY20 earnings (the implied multiple on FY21 would be 200x+ largely due to the industry wide COVID-driven downswing and is as such less relevant). On a like-for-like basis, this is at a premium-to-peer average of 71.7x.

However, as one of the largest footwear retailers in India with an approximate market share of 3-4% in the organised space, it has reported consistently strong financial performance with a robust cash flow generation resulting in a fairly debt-free balance sheet. It is also worthwhile to note that the company paid a dividend of ₹5.9 ($0.07) in FY19 and ₹3.75 ($0.04) in FY21. 

Having said that, the company's historical net profit growth is lower in comparison to industry peers like Relaxo. But the aggressive plans of store addition and expansion in product portfolio are expected to drive sustainable earnings growth for Metro in the days to come. 


Industry Overview and IPO Feels

India's organised footwear market is valued at around ₹22,900cr ($3bn). However, the market is severely fragmented with the organised share at around 35%. The organised space is also highly competitive and dotted with the presence of both domestic (Bata India, Relaxo Footwear, Paragon Group, Mirza International, Liberty Shoes, Campus Activewear, Khadim India etc.) as well as international brands (Hush Puppies, Marks & Spencer, Nike, Nine West, Paul & Shark etc.).  

With Indian footwear consumption poised to grow at 15-17% CAGR between FY22 and FY25, the market share of organised players is expected to rise as well, given the shift in consumer preferences towards premium retail segments. A shift towards online purchases also generally bodes well for organised operators such as Metro.

Although brands like Bata and Relaxo command a greater number of exclusive retail stores, Metro holds the advantage in finances boasting the top industry parameters in gross margins, net margins and Realisations per Unit. 

The company's strength lies in its pan-India presence, efficient business model and financial discipline (consistent shareholder dividends since 2000). With a successful track record of incubating and scaling up retail brands, it has also emerged as one of the most sought-after platforms of choice for third party brands looking to expand in India. 

With a strong promoter background and experienced management team at the helm, the company has also shown efficient and proven track records and a well-developed business history. 

With store expansion and pursuit of new business opportunities through multi-channel operations lying at the heart of its ongoing business strategy, the future looks promising. If it's able to keep up the growth momentum and successfully fend off pricing pressures and increased competition in the expanding retail footwear segment in India, then business is sure to remain upbeat for a long time to come. 

Let's hope this issue does well and better than that of Star Health, another Jhunjhunwala-backed IPO that listed on a tepid note earlier today. 


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