Rekha Jhunjhunwala-owned stock zoomed 12% today; what's fuelling the rally?

Rekha Jhunjhunwala, wife of late ace investor Rakesh Jhunjhunwala, held a 4.8-per cent stake in Metro Brands at the end of December 2023

Rekha Jhunjhunwala-backed Metro Brands was ruling higher in Wednesday's weak session. At the bourses, shares of the footwear retailer soared 12.2 per cent to Rs 1,158 apiece on the BSE in in the intraday trade amid healthy volumes.

Rekha Jhunjhunwala, wife of late ace investor Rakesh Jhunjhunwala, held a 4.8-per cent stake in the company at the end of December 2023. Metro Brands, previously known as Metro Shoes, is a multi-brand footwear retail company, headquartered in Mumbai.

The company started in 1955, and has since evolved into a one-stop-shop for all footwear needs. As of December, 2023, the company operated 857 stores in 192 cities. It plans to open over a hundred stores in FY24, and has added 87 net stores during 9MFY24. 

According to analysts, Metro Brands has a history of robust store economics with 2x revenue productivity (Rs 25,000 revenue per sq. ft.) vs Bata. It generates store-level Ebitda margin of 25 per cent, which results in a superior payback period of less than two years. 

The right store size, a wide product portfolio (with upcoming Fila and Foot Locker), and premiumisation (2x ASP vs. Bata), they believe, may help Metro achieve healthy store economics going ahead.

"Metro Brands' healthy Ebitda margins can be attributed to industry-leading sales throughput, revenue-linked employee cost, saving on logistics costs (third-party brands are shipped directly to MBL's stores), and passing of discounts on the third-party brands without impacting MBL," said analysts at DAM Capital in a March 14 report.

An average Metro/Mochi store requires a capital of Rs 1.2 crore (including working capital and security deposit) and generates cash profit of Rs 0.6 crore per store, implying two mature stores can fund one new store.

Assuming 70 per cent of the stores in the portfolio are matured in the network, Metro Brands can have a self-sustainable growth potential of 35 per cent. Further, uniform revenue per store across tiers and geographies instills confidence in the scalability of the model as it expands further, DAM Capital said as it initiated coverage on the stock with a 'Buy' rating and a target of Rs 1,238.

Analysts believe the company could deliver secular growth over the next five years, driven by its strong execution prowess evident from superlative store economics, a huge runway of footprint addition, excellent cashflow, return on invested capital (ROIC) profile, and new brand additions.

Valuation support

Metro Brands trades at rich valuations of price-to-earnings (P/E) of 55x on FY26 estimates. Analysts at Motilal Oswal Financial Services, however, believe the incremental opportunity in Fila and Foot Locker can further accelerate growth for the company, which is not captured in the valuation. 

"We factor in 21 pr cent/26 per cent growth in revenue/Ebitda for FY24-26E and assign, P/E of 60x on FY26E PAT of Metro's existing portfolio. We have not factored Fila and Foot Locker earnings, but we believe they have revenue potential of Rs 1,500-2,000 crore over the next 3-5 years," the brokerage said. Metro Brands is among the brokerage's top 2024 picks with 'Buy' rating and a target of Rs 1,530 per share.

Over the last one year, shares of Metro Brands have jumped 32.3 per cent on the bourses as against around 25-per cent rally in the benchmark Sensex. The stock hit an all-time high of Rs 1,441.20 on November 30, 2023, and a record low of Rs 426 on December 22, 2021 -- its listing day.

Nuvama Institutional Equities, too, has a 'Buy' rating with a target of Rs 1,365 per share but expects short-term drag on margins due to Cravatex Brands Ltd (CBL) and normalisation of demand post high base of last year.

"We expect margins to stay under pressure on account of CBL and improvement in FY25, owing to the premiumisation drive, normalisation of marketing spends, and expansion in margin for CBL (by the end of FY25). We have revised FY24/FY25 revenue estimate by -10 per cent/-6 per cent, and expect 18 per cent revenue CAGR during FY23-26," it said.