Metro Brands (METRO) reported weak revenue growth of 6% YoY (12% miss) as same-store sales declined 10% due to a high base last year (Covid) and a soft demand and pricing environment. A higher growth contribution of INR3000+ ASP products boosted gross margins, which resulted in adj. EBITDA margin/PAT margin of 33.6%/18% (in line). In the near term, we believe that the risk of soft demand, potential losses in Fila, and a moderation in margins could weigh on growth. But, in the long term, healthy store economics, steady store adds and a growth opportunity in Fila/Foot Locker should drive a CAGR of 22%/32% in revenue/PAT over FY24-26. We reiterate our BUY rating on the stock.
OutlookWe have not factored in Fila and Foot Locker earnings, but we believe they have revenue potential of INR15-20b over the next 3-5 years (i.e., 30-40% share of METRO). Since both the brands are at the initial stage of investing, we value Fila/Foot Locker at a ~75% discount to the potential value, which creates an option value of INR150 (Exhibit 2), thus arriving at a valuation of INR1,380 per share.
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