Metro Brands shares rise on Motilal Oswal’s bullish outlook; 21% upside seen

The right store size, a wide product portfolio with upcoming Fila and Foot Locker, and premiumization will help Metro Brands achieve healthy store economics.

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Shares of Metro Brands jumped more than 2 percent on January 11 after Motilal Oswal selected it as one of its top stock picks for the year 2024. Despite weak demand trends in the discretionary category over recent quarters, the brokerage expects Metro to sustain a 20 percent growth in the next five years.

The growth projection is underpinned by Metro’s strong execution capabilities, demonstrated by impressive store economics, substantial opportunities for footprint expansion, robust cash flow, high return on invested capital (ROIC), and the incorporation of new brands.

At 10:14 am, Metro Brands shares were trading 2 percent higher at Rs 1,284.30 on the National Stock Exchange (NSE).

According to Motilal Oswal, Metro Brands has consistently achieved industry-leading growth, primarily due to continuous expansion. While there might be a moderation in same-store sales growth (SSSG) and margin adjustments in the short term, the Jhunjhunwala-backed company is expected to see steady growth.

The brokerage has put a target price of Rs 1,530 on the stock, implying a 21 percent potential upside from the January 10 closing price of Rs 1,258.

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Robust store economics

Motilal Oswal highlighted Metro’s history of having robust store economics with 2x revenue productivity (Rs 25k revenue per sq ft) vs Bata. It generates a store-level EBITDA margin of around 25 percent, which results in a superior payback period of less than two years, the brokerage said. The right store size, a wide product portfolio with upcoming Fila and Foot Locker, and premiumization will help the company achieve healthy store economics.

New growth engines

Fila and Foot Locker offer new growth engines. In the next three to five years, both brands could see about 400-500 store additions similar to top sportswear brands such as Puma, Adidas, and Sketchers. With an average revenue per store of Rs 2-3 crore (similar to Metro stores), both brands could garner about Rs 800-1,000 crore revenue from EBOs, online and other channels.

“Thus, Metro has an opportunity to leverage both brands in India to potentially generate Rs 1,500-2,000 crore in sales in the next three to five years, garnering about 50 percent of consolidated revenue with 20 percent pre-Ind-AS EBITDA margin and 15 percent profit (PAT) margin,” said Motilal Oswal.

Robust cash flow, store additions

Metro Brands has 795 stores across 5 formats in 189 cities whereas Bata has around 2,150 stores in 725 cities, highlighting the huge growth potential ahead, the brokerage said it factors 21 percent revenue CAGR over FY24-26E, led by 13 percent footprint CAGR.

Metro Brands is poised to generate a robust operating cash flow of Rs 600 crore during FY24-25E, facilitating the addition of more than 250 stores annually. With solid store economics, upcoming formats, and a decade-long consistent track record of store expansion, analysts believe that the company is well-positioned to drive growth from internal accruals.

Also Read | Axiscades Technologies zoom 8% on Rs 500-crore QIP launch

Rich Valuations

According to Motilal Oswal analysts, Metro trades at rich valuations with a P/E of 55x on FY26 estimates, backed by a strong runway for growth largely funded through internal sources, given its strong OCF-to-EBITDA ratio of over 50 percent, and superior store economics reflected in the balance sheet and a healthy RoIC of over 50 percent.

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