Metro Brands IPO: Take a cautious call

Metro Brands Limited is tapping the capital markets with its fresh issue for Rs 295 crores and an offer for sale of 2,14,50,100 shares in a price band of Rs 485-500. The issue has opened on Friday (December 10) and would close on Tuesday (December 14).

The company completed allocation to anchor investors by allotting 82,05,030 shares to 21 anchor investors comprising 28 entities. Five anchors were each allotted 5,40,000 shares or 6.58 per cent of the allocation. They were ICICI Prudential ESG Fund, Goldman Sachs, HDFC, Kotak and Abu Dhabi Investment Authority. This was followed by five entities being allotted 4,00,020 shares or 4.88 per cent of the anchor book. The top-ten anchors were allotted 57.30 per cent of the anchor book. Nine Domestic Funds comprising of 11 entities were allotted 27,40,050 equity shares or 33.39 per cent of the anchor book. The anchor book is well distributed and has a fair mix of domestic and foreign mutual funds.

The company is into retailing of shoes, leather accessories and allied products. It operates close to 600 stores across four verticals. These are Metro, Mochi, Walkway and Crocs brand. The objects of the fresh issue are to open 260 stores across various formats in the next three plus years. It costs between Rs65 lakhs to Rs100 lakhs to open a store depending upon the size, format and model. Typically, they tend to break even anywhere between 18-24 months. In the current year they have also tied up with a popular shoemaker brand 'Fitflop' and would be marketing these shoes through their network as well.

Metro brands is a pure retailing company and outsources all its products from vendors across the country and also international locations. They have over 250 vendor relationships for the outsourcing of their products and these relationships are long standing in nature. They have the third highest exclusive retail number of outlets across footwear stores. The company has a number of brands of their own and also retails through third party brands.

Their product price range varies from Rs350-10,000 and they have products for all members of a family whether it is children, men and women. About 45 per cent of the revenues comes from products in the Rs1,500-3000 price point. In terms of geographical reach, they are strong in West, South and North and have a smaller sale in the East of their total revenues.

The company is increasing its presence in tier-I and tier-II towns. This helps in getting higher revenues as the aspirational demand from these centres is rising quite rapidly across products and categories. The stores are operated on a COCO model where they are company owned and company operated. This does not mean that the real estate is owned but only leased by the company.

The company is an omni-channel company and just under nine per cent of its sales comes from online platforms. Its products are also retailed through seven e-commerce platforms.

The companies' revenues which were at Rs 1,217 crores in FY19 and at Rs 1,285 crores in FY20 fell quite sharply to Rs 800 crores for the year ended March 2021. Its profit after tax was Rs 150 crores, Rs 160 crores and then fell sharply to Rs 64.62 crores. It reported an EPS of Rs 2.43 for the period ended March 21. Based on this EPS, the PE for the issue is a never heard of 205.76 times at the top end of the band. In the six-month period ended September 2021, revenues have improved to Rs 456 crores and the profit after tax was Rs 43.07 crores. The EPS was Rs 1.62 and even at this EPS, on an annualized basis the PE is a staggering 154.32 times. The company is valued in excess of Rs 13,000 crores and would trade at 16.6 times the revenue.

Beats me how such valuations can be ascribed for this company. For the discerning investor, Bata India reported revenues of Rs 1,800 crores for the year ended March 2021 and currently has a market capitalisation of 26,000 crores. One must also keep in mind that being a bricks and mortar company, Bata has been manufacturing shoes and has a huge factory in Kolkata, West Bengal in Bata Nagar. They also own some prime land where some of their flagship stores are owned by them. While a detailed value of the land bank may not be available, smart investors feel that the real estate of Bata India is a significant portion of the current market capitalisation of the company and this is not reflected in the values.

At the time of writing this article midway through the issue subscription on the second afternoon, the retail portion is just about 0.74 times subscribed with about 2.05 lakh applications received. This would probably be the first IPO in over a year, where the retail portion is yet to get subscribed.

Readers would be well advised to take a cautious call on subscribing considering the fact that there is hardly any comfort in terms of the grey market premium which normally acts as a cushion.