Emkay Initiates Coverage On Metro With 'Buy' Given Financial Discipline And Exclusive Formats
Emkay has initiated coverage on Metro Brands with a 'buy' rating on Saturday with the Discounted Cash Flow based target of Rs 1,500.
"Our extensive research around scope for existing formats, global benchmarking of potential for new and exclusive formats, and Metro's long-term financial discipline grants confidence that Metro deserves superlative valuations," according to the brokerage.
According to the brokerage, Metro is the epitome of financial discipline, given long-term mid-teen revenue CAGR. The company has also managed consistent rewards to shareholders with up to 30% dividend payout.
The brokerage's extensive analysis around global benchmarking suggested that Metro has potential to achieve 4x topline in the coming decade, with up to 1,500 store additions across formats or 2.5x.
Its demand-driven agile supply-chain ensures best-in-class mix of fresh sales and shortest store paybacks of two to three years, according to the brokerage. It deserves superlative valuation on the back of best possible growth longevity and strong free cash flow generation. The brokerage also cites that the delay in the ramp-up of FILA/Foot Locker is a potential downside.
Timely Investments
Timely investments in sports and athleisure category bode well for growth sustenance. The Indian sports and athleisure category is clearly leading growth for the overall industry, with financial year 18-23 CAGR of up to 20% for major players. The company also has brought 7 to 8% in casual, fashion, formal categories.
The brokerage also believes that Metro has gained exclusive rights in a timely manner for FILA/Foot Locker. "We see long-term potential of over 1,000 to 200 stores for FILA/Foot Locker, which should add up to 250 basis points of incremental growth. This should also enable Metro to deliver mid-teen topline growth over the next decade," according to the brokerage.
Demand-Based SourcingÂ
Metro offers best-in-class proposition across key parameters, according to the brokerage. Metro offers a wide assortment of products and addresses consumer needs across a large price bracket with separate formats. With an average selling price of Rs 700 to 12,000, Metro has perfected demand-based sourcing.
This ensures in-demand styles, prevents stock-outs, and drives higher throughputs with 90-95% fresh mix. The work culture of the company is also highly progressive, with up to 30% of employee payouts linked to store sales. The motivated employees, along with a strong loyalty program, ensure better self-sustainable growth trends of 3-4%.
Financial Discipline
The company offers calls for superlative valuations, according to the brokerage. Metro has delivered revenue CAGR of up to 15% over the last decade and has strong potential to surpass this in the coming decade.
Metro has exemplary financial discipline, giving 21 to 22% EBITDA margin and up to 60% CFO/EBITDA. This ensures growth through internal accruals, future growth optionality, and consistent reward to shareholders, according to the brokerage.
The Business
The company is a one-stop-shop for footwear across a wide range of price-points with an average selling price of Rs 700 to 12,000. It is also gradually evolving into a giant in the sports and athleisure market, with FILA or Foot Locker. Metro is a platform of choice for third-party brands looking to enter India, and offers a multi-decade opportunity of double-digit growth. This is supported by lower penetration of existing formats, ramp-up of new formats, and future portfolio additions.
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