IPO Size: Rs. 1,368 cr

• 78% is offer for sale (OFS) by promoters, to cut 84% holding to 74%
• Rs. 295 cr is fresh issue, for opening 260 new stores till FY25, with Rs 225 cr investment

Allotted shares worth Rs. 3 cr at Rs. 450 per share last month to enable 91 individuals/ partners/vendors participate in future growth.

Price band: Rs. 485-500 per share

Mcap: Rs. 13,575 cr, implying 10% dilution

IPO Date: Fri 10^th Dec to Tue 14^th Dec 2021, Listing Wed 22^nd Dec 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Strengths:

1. To increase store count by 43% over next 2.5 years, from current 598 stores (across brands Metro, Mochi, Crocs, Walkway) which provides double-digit growth visibility annually till FY25E, supported by rising discretionary consumption as well as conversion of unorganized to organized retail.
2. Profitable in covid year FY21, as contribution margin of 55% was maintained, and unlike many other retailers, company did not post loss for FY21. Tight cost control and new store openings lead to net profit of Rs. 65 cr in FY21, with net margin contracting only to 8.1%, from 12.5% in pre-covid years.
3. Healthy Margin of 29% at EBITDA level and 12.5% at net level, since many costs, including rental and employee are variable in nature. Outsourcing of manufacturing and leasing of retail outlets makes the business asset-light. This has led to high cash generation, resulting in surplus cash of Rs. 420 cr, or about Rs. 16 per share.  

Concerns:

1. Covid drops Revenue: Company posted revenue of Rs. 1,200 cr and Rs. 1,300 cr for FY19 and FY20 respectively, which dropped to Rs. 800 cr in FY21, due to covid-induced lockdown. While H1FY22 revenue recovered to Rs. 456 cr, it may be unable to reach pre-covid levels in FY22. Thus return to pre-covid levels will be at best in FY23E.
2. Metro’s average selling price per unit of about Rs. 1,300 is higher than most footwear retailers’ Rs. 200-600, limiting its presence to the mid and premium segment of the market, which is less than 20% in value terms. Company’s same store sales growth (SSSG) is estimated to be in low, although not quantified.
3. Fully Priced Issue: On a pre-covid basis, Metro’s revenue multiple is 10x and PE multiple 84x, both higher than Bata’s multiples of 8x and 73x respectively, despite Bata topline being 2.5x that of Metro, with comparable margins and MNC parentage. While Metro’s financials are better than most footwear retailers Mirza and Khadim, its valuation premium to Bata is unwarranted. Comparison with Relaxo is not made, which reported profit growth in FY21.