Metro Brands has a spring in its step, but valuations are expensive

While more store addition is a good thing, it also means higher employee costs, which in turn affects margins. In Q3, EBITDA (earnings before interest, tax, depreciation and amortization) margin stood at 34.3%, down 44 basis points (bps). However, gross margin at 59.2% was above the guided levels of 55%-57%.

Healthy store additions are expected to continue. Metro is looking to achieve the target of adding 260 stores in FY23-25. The company is currently present in 164 cities and sees great potential for further expansion.

“The Growth Runway (of store edition) offers the right mix of brands from Metro Brands. Its focus on financial discipline along with balance sheet strength gives confidence in execution. Moreover, a platform of choice for international brands instills confidence in the new avenues (of growth),” said a report by ICICI Securities on January 17.

Meanwhile, to bridge the gap in its portfolio, Metro acquired Kravetex Brands Limited, which is present in the sports and athletic segment. It owns the sportswear brand ‘ProLine’ and holds the exclusive license to ‘Fila’.

Analysts say general demand in the footwear segment has come down after the festive season. Although the metro had reported some weakness in November, it saw a strong December and as such saw no reduction in overall demand. Nevertheless, demand trends should be observed carefully. Furthermore, whether Q3 performance holds up in terms of gross margin and in-store growth needs tracking. If Metro falters on this front, it could be disappointing. That seems to have fueled investors’ optimism enough. The stock has rallied nearly 43 per cent in the last one year, making valuations expensive. Bloomberg data shows that the stock is trading at around 54 times FY24 earnings. Given this, the sharp rise in the stock appears capped, at least in the near term.