Metro Brands IPO Detailed Analysis

One of the largest Indian Footwear Retailers- Metro Brands has come up with its Initial Public Offer, its subscription window is open between 10^th December 2021 to 14^th December 2021. Let’s discuss more this IPO in detail with its positives and negatives in this article.

1) IPO Details:

• The IPO Window of Metro Brands is open between 10^th December 2021 to 14^th December 2021.
• The Issue Size of the IPO is Rs. 1,367.5 Cr. which consists of Fresh Issue and Offer for Sale.
• The IPO consists of a Fresh Issue of Rs. 295 Cr. and Offer for Sale (OFS) worth Rs. 1,072.5 Cr. The OFS consist of selling 21,450,100 Equity Shares.
• The IPO is getting listed at both the stock exchange- Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
• The price band of the IPO is Rs. 485 to Rs. 500 per equity share.
• The Face Value is Rs. 5 per equity share.
• The Investor Quota of the IPO is as follows Qualified Institutional Buyers (QIB)- 50%, Non-Institutional Investors (NIIs)-15%, and Retail Investors- 35%.
• The IPO Lot consists of 30 shares in 1 lot and multiples thereof up to 13 Lots.
• The Allotment Date for Metro Brands IPO is 17^th December 2021 and it will get listed on the Stock Exchange on 22^nd December 2021.
• The objective of the Issue :
• Expenditure for opening new stores of the Company, under the “Metro”, “Mochi”, “Walkway” and “Crocs” brands (“New Stores”)- Rs. 225 Cr.
• General Corporate Purposes- Rest of the Proceeds
• The stake of Promoter’s & Promoter’s Group in the company Pre-IPO was 84.02% which will go down to 74.27% post listing of the IPO.
• The Selling Shareholders are:

1) Promoter & Promoter’s Group:

• Aziza MalikS Family Trust- Up to 37.37 Lakh Shares
• Rafique Malik Family Trust- Up to 36.6 Lakh Shares
• Farah Malik Bhanji- Up to 28.09 Lakh Shares
• Alisha Rafique Malik- Up to 28.09 Lakh Shares
• Zarah Rafique Malik- Up to 28.09 Lakh Shares
• Zia Malik Lalji- Up to 28.09 Lakh Shares
• Sabina Malik Hadi- Up to 28.09 Lakh Shares
• Rakesh Hridyanarayan Pathak- Up to 8,100 Shares

2) About Company:

• Metro Brands was incorporated in 1977 and is one of the largest Indian footwear specialty retailers, and is among the aspirational Indian brands in the footwear category. The company has a keen focus on economy, mid, and premium segments.
• As of September 30, 2021, the Company operates 598 Stores across 136 cities spread across 30 states and union territories in India. It had the third-highest number of exclusive retail outlets in India
• Metro Brands is having its 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 also offers accessories such as belts, bags, socks, masks, and wallets at stores. The Company also retail foot care and shoe care products at stores through a joint venture, M.V. Shoe Care Private Limited, making it a ‘one-stop-shop’ for all footwear and related accessories
• Metro primarily follows the “company-owned and company-operated” (“COCO”) model of retailing through its own Multi Brand Outlets (“MBOs”) and Exclusive Brand Outlets (“EBOs”), to better manage customer experience.
• They operate on an asset-light model with third-party manufacturing through long-standing vendor relationships and long-term lease arrangements. As of September 30, 2021, they operated 2 warehouses in India, both located at Bhiwandi in Maharashtra, on a leave-and-license basis.

Geographical Presence:

As of September 30, 2021, Metro Brand had a pan-India presence through 598 Stores (across Metro, Mochi and Walkway branded MBOs, Crocs™ branded EBOs, and Walkway franchisees and SIS) located in 136 cities spread across 30 states and union territories in India.

3) Industry Overview:

• Organized Retail Penetration is expected to grow owing to urban consumers moving up the economic ladder, increasing preference for branded products, and the youth becoming more aspirational.

• Global average per capita annual consumption is approximately 3.2 pairs as of 2019. India’s per capita annual consumption is very low, compared to its peers, at approximately 1.9 pairs.
• In volume terms, the Indian footwear consumption has grown from 205 Cr. pairs in FY15 to 256 Cr. pairs in FY20, at a CAGR of 4.5%.
• The volume growth has been supported by a rise in disposable incomes, urbanization levels, and greater availability of footwear due to the growth of shopping formats.
• Indian Footwear Market is expected to grow at a healthy double-digit return of 17% between FY20-FY25, on the grounds of Rising in income levels, the standard of living, footwear as a fashion statement, footwear volumes in urban areas with different footwear purchased for different occasions, women workforce participation, and brand awareness will contribute to the growth of footwear market.

4) Financials:

i) Revenue & EBITDA:

• The Revenue of the company has shown a de-growth of 18.9% on a CAGR basis between FY19 to FY21.
• The Revenue of the company stood at Rs. 1,217 Cr. in FY19, which rose to Rs. 800 Cr. in FY21.
• The EBITDA of the company has also shown a similar trend like Revenue, where EBITDA has shown de-growth of 28.8% between FY19-FY21.
• The EBITDA margin has remained almost consistent and witnessed a little dip in FY21 from 27.7% in FY19 to 27.5% in FY20, and finally to 21.4% in FY21. The EBITDA margin in H1FY22 stood at 24.4%.
• The company in terms of profitability has shown some good figures of 152.7 Cr. in FY19 to 160.6 Cr. in FY20 but fell to 64.6 Cr. in FY21.

ROCE & ROE:

• The Return on Capital Employed (ROCE) of the company, as well as Return on Equity, has been falling consistently YoY.
• ROCE of the company in FY19 was 25.9% to 20.07% in FY20, and 9.54% in FY21. While ROE has also shown a similar trend where it has decreased from 22.8% in FY19 to 19.3% in FY20, and 7.6% in FY21.
• Further, looking at the Sales Figure of the company based on Area-Wise, it seems that the Company is a key player in Metro Cities and Tier-1 Cities, where the sales of Metro Brands stands at Rs. 244 Cr. and 239 Cr. respectively as of FY21.

Peer Comparison:

• While comparing some of the parameters of Metro Brands with other peers like Bata India, Khadim, Relaxo, and Liberty, Metro Brands is quite ahead.
• Firstly, the Average Selling Price of Metro Brands stood at Rs. 1,328 as of FY21, while the same is Rs. 534 for Bata India, Rs. 423 for Khadim, Rs. 124 for Relaxo, and Rs. 400 for Liberty, appearing to be much ahead of other players.
• In terms of Gross Margins (%) also, Metro Brands records the highest Gross Margin of 37.4% as of FY21, while the same stands 24.8%, 16.7%, 30.8%, and 35.7% for Bata India, Khadim, Relaxo, and Liberty respectively.
• The EBITDA Margin of Metro Brands for FY21 is 22.1%, which is again much higher than others.
• And Lastly, the Net Profit Margin of Metro Brands is 8.1%, standing next to Relaxo, which has a Net Profit Margin of 12.2%.

5) Key Strengths & Risks:

Key Strengths:

i) One of India’s largest pan India footwear retailers with a brand appeal among aspirational consumer segments in the fast-growing footwear retail industry. The company operated a total Retail Business Area of 734,217 sq. ft., through its Stores as of September 30, 2021.

ii) Efficient operating model through deep vendor engagements and TOC based supply chain

iii) Asset light business with an efficient operating model leading to sustained profitable growth

iv) Presence across multiple formats and channels- own and operate stores of both MBO and EBO formats

v) Platform of choice for third party brands looking to expand in India

vi) Strong promoter background and an experienced and entrepreneurial management team with a proven track record and a high degree of employee ownership- Chairman and Promoter, Mr. Rafique A. Malik, has over 50 years of experience in the footwear retail business

Key Risks:

i) The cumulative cost of the total number of stores opened by the Company across regions may not be indicative of the market capitalization of the Company after the Offer as the basis are independent of each other.

ii) Inability to identify customer demand accurately and maintain an optimal level of inventory in stores may impact operations adversely.

iii) Inability to promptly identify and respond to changing customer preferences or evolving trends may decrease the demand for products among the company’s customers, which may adversely affect business, profitability, and results of operations.

iv) Company is dependent on third parties for the manufacturing of all the products. Any disruptions at such third-party manufacturing facilities or failure of such third parties to adhere to the relevant quality standards may hurt the reputation, business, and financial condition of the business.

v) Outstanding litigation proceedings against Company, Directors, and Promoters

vi) Increasing Competition, presence of strong brands, and rising competition from online retailers.

6) Valuations:

• Metro Brands is having a very expensive P/E ratio as per FY21 EPS of 2.43 of 205.76.
• The Expected market cap of the company at the time of listing is around Rs. 13,575 Cr.
• The Company’s Market Cap to Sales Ratio stands at 15.5x.
• The other listed players in the market include big names Bata India, Relax Footwears, etc.

Positives of Metro Brands IPO:

i) Metro Brands is among the top-five footwear brands in India and is ranked fourth in the domestic footwear market (in terms of sales in FY21).

ii) Asset-light business model, strong brand value, and a wide range of products.

iii) To continue to tap for accretive inorganic growth opportunities and expansion of product portfolio.

iv) Strong Network

v) Experienced and entrepreneurial management team

vi) Strives to Optimize the mix of in-house brands (70% of revenue) and third-party brands (30% of revenue) in MBOs

Negatives of Metro Brands IPO:

i) Majority Part of Offering is Offer for Sale (OFS) i.e., worth Rs. 1,072.5 Cr. out of total IPO Size of Rs. 1,367.5 Cr. The Promoter’s and Promoter’s Group Shareholding will fall by 9.75% to 74.27% post issue.

ii) Non-Encouraging Financials, consistent fall in ROCE & ROE.

iii) Not Strong Competitive Edge over peers, presence of established players like Bata, Relaxo, Khadim, etc.

iv) High Attrition rate of employees

v) Expensive Valuations

Should you Invest?

The Footwear Retail Industry and the overall retail industry in India are highly underpenetrated in India and hence a good space available is for the company to grow. Currently, the Grey Market of this IPO is around Rs. 25 per share and hence a decent listing gain is available. Investors who are looking at this stock for the long-term, should wait for a while and analyze the performance of the company for a few more quarters, and then should take a call.