Metro Brands is aggressively planning on opening new stores despite COVID-19’s impact on its profits

• Footwear retailer Metro Brands IPO has opened today with a price band of ₹485-₹500 per share.
• Shares of the company are demanding a premium of ₹20 in the grey market today, indicating tepid listing gains.
• While the company’s profits were severely impacted in FY21 due to covid restrictions, the company is planning to open 260 stores in the next three years.

Marquee investor Rakesh Jhunjhunwala-backed Metro Brands, which is one of the largest Indian footwear specialty retailers in India, has opened its initial public offering (IPO) today, December 10.

Started in 1955 as a footwear specialty retailer in India, Metro Brands now caters to footwear needs of men, women, unisex and kids.

The company was performing well until COVID-19 hit the entire footwear retailing segment because of the pandemic led restrictions across the country.

“COVID-19 was a freight truck that hit all the retailers and I think Metro Brands has financial discipline and operational rigour and we’re among the few retailers that did two things. One is to maintain a positive impact (on financials). And of course, we did not see any gross margin erosion,” said Nissan Joseph, chief executive officer at Metro Brands in an interview with Business Insider.

Its revenue from operations declined by 37.75% in FY21. In the meantime, it permanently closed 24 stores, due to significant decline in footfalls on account of COVID-19.

While the fundamentals of the company remain good with close-to-zero debt in its books and generation of profits, the new COVID-19 variant may adversely affect its plan to grow its store sales in the near term.

“A continued decline or fluctuation in footfalls, particularly as a result of the second and any subsequent waves in India, may also affect our ability to effectively manage our inventory of products. Further, stores located in containment zones, as demarcated by the government of India from time to time, may have further restrictions imposed on their operations,” the company mentioned in the DRHP.

While sales through physical stores play a significant role in overall revenues, the footwear retailer has also made some move in the online channels. On a standalone basis, online sales contribute only 6% to the company’s revenues in FY21.

However, the total online product sales have grown at a compound annual growth rate (CAGR) of 72.95% from ₹ 19 crore in FY19 to ₹57 crore in FY21.

As of March 31, 2021, Metro Brands operates 586 Stores in 134 cities across 29 states and union territories in India. Some of Metro’s brands include Mochi, Walkway, Davinchi and J. Fontini, as well as certain third-party brands such as Crocs, Skechers, Clarks, Florsheim, and Fitflop.

“We have built a team with our area mapped out entire [throughout] India and when we see the possibility of expansion we have targeted to open 260 stores [and] are confident that we'll be able to open that many stores,” said Joseph.

On the bright side, Metro Brands had the highest average selling price (ASP) or realisation per unit from fiscal 2019 to fiscal 2021 among its peers such as Bata India Ltd, Khadim India Ltd, Liberty Shoes Ltd and Relaxo Footwear Ltd in the industry.

The company intends to raise ₹1,367 crore with fresh issue of ₹295 crore and an offer for sale of 2.14 crore shares by promoters. Majority of the IPO proceeds will be used to open new stores under brands such as Metro, Mochi, Walkway and Crocs.

Analysts at Angel One believe that the company is demanding an expensive valuation. “The company’s historical net profit growth is low compared to its peer Relaxo Footwears. However, Metro Brands has asset light business, strong brands and wide range of products but we believe that these positives are captured in the valuations commanded by the company. Thus, we have a NEUTRAL rating on the issue,” said the brokerage firm.

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