Metro Brands IPO: Footwear Firm On Strong Financial Footing Files For IPO, Plans To Raise Rs 250 Crore

Rakesh Jhunjhunwala-backed footwear retail company Metro Brands recently filed a draft red herring prospectus (DRHP) for an initial public offering (IPO). The company is looking to raise upto Rs 250 crore through a fresh issue while the promoter group and other selling shareholder will offload a part of their holdings.

Metro operates retail stores that sell in-house brands and third-party brands to consumers. The company sells shoes through its multi-brand outlets (MBOs), exclusive brand outlets (EBOs), shop-in-shops (SIS) and a few franchisees. In addition to physical stores, the company operates various websites and also sells on online marketplaces.

While MBOs sell the company’s own brands as well as third-party brands, the company outsources the manufacturing for its own brands to third-party manufacturers. EBOs have been focused on selling Crocs shoes in a partnership with Crocs Inc. SIS are usually located in departmental stores.

Metro’s wide range of partnerships has allowed it to operate in economy, mid and premium segments. The company’s total store count has grown from 504 in 116 cities as of 31 March 2019 to 586 stores across 134 cities as of 31 March 2021.

However, the company operates on a rental model with either a fixed lease or a revenue sharing arrangement. The asset-light model has helped it turn a profit even during the Covid-19 pandemic situation unlike other retail companies.

Given the customer-centric nature of the business, Metro runs a loyalty programme in order to attract and retain customers. Its Club Metro programme had 48 lakh customers and My Mochi had 33 lakh customers as of March 2021. Its Crocs Club programme has 4 lakh members.

However, the only requirement to become a loyalty member is to buy a product and enrol in the programme. In the Club Metro programme, the customer receives points worth 4 per cent of his next purchase that can be redeemed on the next purchase.

Jhunjhunwala had invested in the company in 2007. According to a Forbes interview, the promoter family decided to bring in Jhunjhunwala as a way to create more accountability within the organisation. Jhunjhunwala’s close aide, and Rare Enterprises’ chief executive officer, Utpal Sheth is a member of Metro’s board.

Metro’s revenue has fallen from Rs 1,285 crore to Rs 800 crore due to the pandemic situation. For financial year 2019 (FY19) and FY20, its EBIDTA (earnings before interest, taxes, depreciation and amortisation) margins were at 27 per cent which fell to 21 per cent for FY21. In the past, the footwear sector has shown vulnerability to commodity cycles. Metro’s performance during periods of volatile commodity prices remains to be seen.

Given its asset-light model, Metro has a net fixed asset turnover of around six times for both FY19 and FY20.Therefore, for every rupee invested in fixed assets, Metro makes a sale of Rs 6. Its debt to equity ratio is almost zero as it has used internal accruals to fund expansion. This is further evidenced by the strong cash flow from operations generated by the company. Nevertheless, Metro has lease liabilities of almost Rs 500 crore, stemming from the leases for its stores.

Overall, Metro’s financials look quite healthy with virtually no debt and strong free cash flows.

Key Risks

Termination of contract with Crocs and other brands: The company has a contract with Crocs Inc to sell Crocs and Jibbitz brands under its retail stores. It is a non-exclusive retail licence agreement under which the company must take permission from Crocs before setting up new stores. In addition, if the company fails to achieve targets and comply with the standards, it might have to face contract termination.

Competition: The company faces strong competition from organised and unorganised players. The footwear sector also struggles from the issues of smuggled goods, first-copies etc. That might prove to be detrimental to organised businesses. The growth of e-commerce poses another risk to Metro as a major part of its sales come from physical stores.

Covid-related lockdown or restrictions: The business has been affected by Covid-related lockdowns, with its revenues falling to two-third of the FY20 levels for FY21. The drastic fall in revenues stemmed from supply chain disruptions and local lockdown which affected the company’s physical store business.