Goldman Sachs initiates coverage on Metro Brands, sees 28% upside in 12 months
The global brokerage has given a ‘buy’ rating for Metro Brands and sees an upside of 28 per cent on the stock in the next 12 month at a target price (TP) of ₹1,450. Goldman Sachs has also initiated coverage on Bata India with a ‘neutral’ rating as sees a seven per cent upside on the stock at a TP of ₹1,470.
Also Read: Bata India Q3 Results: Net profit drops 30% to ₹58 crore on muted demand, revenue up marginally
‘’Bata India’s new initiatives towards portfolio premiumization, increase in marketing spends etc. have not managed to revive growth yet (9MFY24 revenue growth vs pre-Covid at ~10 per cent vs ~80 per cent for Metro Brands),” it added.
According to Goldman Sachs, branded footwear penetration in India has been rising (unbranded / small brands’ market share down from ~85 per cent to ~75 per cent in past decade) driven by a combination of rising income levels, brand consciousness and improving availability of branded footwear.
The four key structural trends of India’s footwear market are as follows:
-Rising S&A penetration: Goldman Sachs expects branded S&A footwear to grow at 13 per cent CAGR over FY25-45E)
-Premiumization: The brokerage expects double digit growth for mid and premium price segment)
-Women’s footwear growth faster than overall footwear market (branded women’s footwear grew at ~13 per cent CAGR over FY15-20 vs men’s at ~11 per cent)
-Rising share of online channels: It rose from seven per cent of footwear sales in 2019 to 13 per cent in 2023.
Coming to Metro Brands, the brokerage said that it sees a significant headroom for store growth for the company’s existing business (Metro, Mochi, Crocs) when compared with premium players in other industries like Tanishq in jewellery.
‘’We expect Metro Brands to continue to have a strong margin profile (~30%+, highest in the industry) given its premium product mix, merchandising expertise, policy of not participating in irrational discounting, and variable store cost structure.,” said Goldman Sachs in its report.
Let’s look at the top six key growth drivers mentioned by Goldman Sachs for Metro Brands and Bata India:
Metro Brands
1. Leverage S&A opportunity with Fila: Metro Brands recently entered its first S&A brand strategic agreement, with Fila. The company will start scaling up Fila in FY25 through its existing Metro and Mochi store network, new Fila exclusive brand outlets and the online channel.
‘’Our estimates imply that Fila will have a value market share of low to mid single digit (4-6 per cent) of the branded S&A market in India by FY35E,” said Goldman Sachs. ‘’We see Fila revenue rising from negligible in FY25 to ~ ₹7 billion in FY30E (~11 per cent of total revenues), and to ~ ₹21 billion in FY35E (~17 per cent of total revenue),” it added.
The brokerage sees new S&A business contributing ~four per cent additional revenue CAGR to the company’s existing business over FY24-30 and ~six per cent additional revenue CAGR to the existing business over FY24-35.
2.Strong margin profile: Over FY19 to FY23, the gross margin improved from ~55 per cent to ~58 per cent driven by premiumization, along with industry leading ~15 per cent sales CAGR. Over FY19-23 the reported EBITDA margin went up ~400 basis points (bps) from 27.7 per cent to 31.9 per cent.
‘’We forecast a 58.5 per cent gross margin for METB for FY24-27E. On a reported basis, our EBITDA margin estimate is in the 30.5 per cent-31.5 per cent range over FY24-27 (including a 10-50 bps impact from the S&A business scale up),” said the brokerage.
3.Double-digit growth in mid and premium price segments: Metro Brands is better positioned to benefit from this tailwind as ~87 per cent of its product portfolio is at a price point > ₹1,500. Also, the management is very focused on maintaining ‘premium’ perception for its brands, and does not participate in excessive discounting.
The company has historically remained disciplined even in times of irrational discounting by competitors. Metro Brand’s discounted product sales are typically ~8-9 per cent of sales vs as high as 30 per cent for other players.
Bata India:
1.Low price hikes passed to consumers: Bata India is India’s largest organised footwear retailer by revenue. The company has a diversified product portfolio with a tilt towards economy and mass market segments – ~40 per cent of its revenues are from price points below ₹1,000.
Consumers are taking time to absorb the sharp price hikes. As of 3QFY24, there have been no price hikes for six quarters in a row. In 3QFY24, Bata’s below- ₹1,000 price point sales were still declining.
As of 3QFY24,~12-13 per cent of BATA’s revenues are from the distribution channel (wholesale) – where it supplies its product to other multi-brand stores. As of FY23, it had four manufacturing units across the country with a capacity of 21 million pairs of footwear.
2.Retail network/ revenues to grow at a 7%/8% CAGR over FY24-27, led by franchise stores: The brokerage estimates a high single-digit FY24-27 revenue CAGR from retail at best (around eight per cent) as franchise stores have lower revenue per store and Bata passes on ~30-35 per cent margin to franchise stores, hence the realized revenue for BATA is lower (outright sales model).
The management expects the distribution channel to contribute ~20 per cent of Bata’s revenues over the medium term. ‘’We expect a 15 per cent revenue CAGR from the online channel over FY24-27. Our overall revenue growth CAGR estimate for BATA over FY24-27 is nine per cent,” said Goldman Sachs.
3.EBITDA margin to see gradual improvement: The brokerage sees downward pressure on gross margin because of the higher share of revenue from franchise stores (Bata passes on a 30-35 per cent margin to the franchisee). However, the EBITDA margin is likely to see a gradual improvement on the back of increasing mix of franchise stores .
Franchise stores are EBITDA margin accretive as all of gross margin flows to the EBITDA level. The normalization of some one-off costs like IT investments, higher-than-usual store renovation costs and operating leverage will also help in margin. ‘’By FY27, we model an EBITDA margin of ~25 per cent. Our estimates imply an EBITDA CAGR of 12.7per cent over FY24-27 (low base effect),” said the brokerage.
Also Read: Metro Brands sprints ahead of peers, but premiumization is key
Key risks
A few risks that Goldman Sachs identified for Metro Brands include longer-than-expected slowdown in industry demand, delay or failure in expansion of Fila, and rapid shift of consumers to the online channel.
For Bata India, the brokerage identified both upside and downside risks. Key upside risks include faster/sharper-than-expected growth in the mass and economy segments, success in S&A / S&A apparel business, and significant contribution from the export opportunity.
The key downside risks for Bata India include lower-than-expected growth in the franchisee network, lack of pick-up in revenue, and growth trajectory despite management’s initiatives.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 22 Mar 2024, 09:52 PM IST
