Metro Brands coming with an IPO to raise Rs 1377 crore

Metro Brands

• Metro Brands is coming out with a 100% book building; initial public offering (IPO) of 2,75,32,574 shares in a price band Rs 485-500 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  
• The issue will open for subscription on December 10, 2021 and will close on December 14, 2021.
  
• The shares will be listed on BSE as well as NSE.
  
• The face value of the share is Rs 5 and is priced 97 times of its face value on the lower side and 100 times on the higher side.
  
• Book running lead managers to the issue are Axis Capital, Ambit, DAM Capital Advisors, Equirus Capital, ICICI Securities and Motilal Oswal Investment Advisors.
  
• Compliance Officer for the issue is Tarannum Yasinhusein Bhanpurwala.
  

Profile of the company

The company is one of the largest Indian footwear speciality retailers, and is among the aspirational Indian brands in the footwear category. It opened its first store under the Metro brand in Mumbai in 1955, and has since evolved into a one-stop shop for all footwear needs, by retailing a wide range of branded products for the entire family including men, women, unisex and kids, and for every occasion including casual and formal events. The company target the economy, mid and premium segments in the footwear market, which together are expected to grow at a higher rate compared to the total footwear industry between Fiscal 2020 and 2025. The company retail footwear under its own brands of Metro, Mochi, Walkway, Da Vinchi and J. Fontini, as well as certain third-party brands such as Crocs, Skechers, Clarks, Florsheim, and Fitflop, which complement its in-house brands. These brands have a pan-India appeal across regions. It also offers accessories such as belts, bags, socks, masks and wallets, at its stores. It also retail footcare and shoe-care products at its stores through its joint venture, M.V. Shoe Care, making it a ‘one-stop-shop’ for all footwear and related accessories to its customers.

The company endeavour to drive its sales through a strong focus on product assortment - a Theory-of-Constraints (TOC) method for its supply chain, offering greater availability and reducing stock-outs. This is coupled with an incentive-based remuneration system for its front-end and backend sales staff. The company operates on an asset light model with third-party manufacturing through long-standing vendor relationships, optimum store size and layout, and long-term lease arrangements. It introduces new designs frequently through its vendor engagements based on its combined understanding of prevailing trends and regional sensitivity. To efficiently manage inventory for its wide range of products, it follow a pull model for product availability at its stores where product placement is led by a demand driven inventory replenishment method. This helps it ensure optimum inventory management and accessibility to the latest products.

Proceed is being used for:

• Expenditure for opening new stores of the company, under the Metro, Mochi, Walkway and Crocs brands (New Stores).
  
• General corporate purposes.
  

Industry overview

The Indian footwear industry has witnessed increase in activity over the last few years, with the changing consumer attitude towards footwear. Shoes, initially positioned as a value purchase, are now transcending into a lifestyle purchase. The demand for athleisure and sportswear is specifically expected to increase post the pandemic due to an increased awareness about healthy living amongst the urban youth. The footwear segment comprises approximately 1.5% share of total retail industry as of Fiscal 2020. Like the apparel segment, the footwear segment is characterised by fashion designs and trends, high margins and presence of private labels. The segment is estimated at Rs 1 trillion as of Fiscal 2020. The segment witnessed a decline of approximately 31% in Fiscal 2021 due to the lockdown restrictions imposed throughout the country to fight the coronavirus pandemic. Going forward, CRISIL Research expects growth momentum to pick up and the segment to reach an estimated Rs 1.4 trillion by Fiscal 2025, growing at a CAGR of approximately 21% between Fiscal 2021 and 2025.

Globally, India is ranked second among footwear-producing countries in terms of unit pairs, China being first. China, India, USA, Indonesia, Brazil, Japan, Pakistan, Germany, France, UK and Italy are some of the major footwear-producing nations worldwide. China has largest production capacity and accounts for more than half of the world’s footwear production. According to industry associations, global footwear production is estimated at 24.3 billion pairs as of 2019. Footwear industry will benefit from the rise in retail and consumer expenditure on account of rising disposable incomes of Indian consumers, desire for better standard of living, higher favourable working age group, nuclearisation of families, and change in consumer attitudes towards branded products. Along with the common set of growth drivers, the footwear industry will witness growth on account of change in consumer attitude to footwear, from utility to fashion wear, higher demand for active footwear, growing fashion and lifestyle market, and penetration of Indian as well as foreign brands in footwear.

Pros and strengths

One of India's largest pan India footwear retailers: The company is one of the largest Indian footwear speciality retailers, and is among the aspirational Indian brands in the footwear category. It also had the third highest number of exclusive retail outlets in India in Fiscal 2021. As of September 30, 2021, the company had a pan-India presence through 598 Stores (across Metro, Mochi and Walkway branded MBOs, Crocs branded EBOs, and Walkway franchisees and SIS) located in 136 cities spread across 30 states and union territories in India, operated by the company. The company operated a total Retail Business Area of 734,217 sq. ft., through its stores as of September 30, 2021. The operations are well-spread across metro cities, tier I, II and III cities and towns, and across all four zones of India.

Wide range of brands and products catering to all occasions: Across the various brands, the company is a one-stop-shop family retailer catering to the footwear needs of men, women and children for different occasions including casual and formal events. The men’s, women’s and children’s product lines benefit from the Metro reputation for style, quality, comfort, innovation and affordability. The wide range of brands allows the company to operate across the economy, mid and premium segments. Due to large network of multiple store formats located in key markets, and its ability to leverage the omni-channel presence in India, the company has become a partner of choice for third-party brands. As of September 30, 2021, the company sold footwear as well as accessories across more than 10 owned brands and more than 25 third-party brands. In its experience, the company are able to evenly distribute its sales with low seasonality in operations through its active brand portfolio management ensures that the company pick third-party brands which complement in-house brands and which the company view to have high growth potential. The company key third-party brands include Crocs, Skechers, FitFlop, Clarks, I-D, PRO and Von Wellx.

Efficient operating model through deep vendor engagements: The company have long-standing relationships with many of its vendors, and work with them to continuously introduce new designs, which are regularly updated. In the last three Fiscals and six months ended September 30, 2021, the company dealt with over 250 vendors for its products. The company has been dealing with certain of its vendors for over 20 years, and leverage these relationships together with its combined understanding of evolving customer preferences, regional sensitivities, and prevailing trends, to frequently introduce new designs and styles. Through its merchandising and design team and continued engagements with its vendors, the company is able to translate trends into products efficiently and remain relevant to its growing customer base by catering to various segments across price points. To efficiently manage its extensive vendor network, supply chain, and inventory for its wide range of products, the company follows a pull model for product availability at its stores where product placement is led by a demand driven inventory replenishment method. The company’s demand driven lean inventory norms ensures optimum capital employed, minimizes stale stock, thereby reducing discounting of products and improving its gross margins.

Platform of choice for third party brands looking to expand in India: The company has grown to be a platform of choice for other national and international third-party brands on the back of its footwear focused retailing experience since 1955, track record of successfully incubating and scaling up various retail brands, and extensive pan-India operations through which the company has gained strong insight on evolving customer preferences across demographics. This has also been reflected through its successful partnership with Crocs, a global brand offering innovative casual footwear for women, men and children, with a focus on its moulded products. The company has entered into a retail license arrangement with Crocs in 2015, and has since expanded Crocs branded EBOs throughout the country. The company opened 110 Crocs EBOs in the last three Fiscals and in the six months ended September 30, 2021 and had 159 crocs EBOs in its network as of September 30, 2021.

Risks and concerns

Inability to identify customer demand accurately: The success of this business depends upon its ability to anticipate and forecast customer demand and trends. Any error in its forecast could result in either surplus stock, which the company may not be able to sell in a timely manner, or at all, or under stocking, which could affect its ability to meet customer demand. An optimal level of inventory is important to its business as it allows it to respond to customer demand effectively and to maintain a full range of products at its stores. The company estimates its monthly sales for every fiscal prior to the commencement of the fiscal considering the estimated growth rate of every store, festive periods and other factors. Monthly inventory is monitored based on actual sales and other relevant factors. The company typically introduces new styles every week. Since the company needs to maintain stock inventory for all styles in different sizes and colours, the company keep a few months' inventory in its stores. Orders are placed every week for replenishment. Further, the company keeps back up inventory for a few days in its warehouses providing it flexibility in transporting merchandise of particular style to a store where it is selling quickly while avoiding piling of non-moving inventory. If a particular style is not selling well in certain stores, the company may undertake cross shipment of such styles to stores where it is selling faster. The slow moving styles are monitored and additional incentives may be offered to minimise inventory build-up for discounted sales periods. The discounted sale period is scheduled twice a year as an end-of-season sale.

Unable to effectively manage or expand its retail network and operations: Expansion into new geographic regions, including different states in India, subjects to various challenges, including those relating to its lack of familiarity with the culture, legal regulations and economic conditions of these new regions, language barriers, difficulties in staffing and managing such operations, and the lack of brand recognition and reputation in such regions. The risks involved in entering new geographic markets and expanding operations, may be higher than expected, and the company may face significant competition in such markets. By expanding into new geographical regions, the company could be subject to additional risks associated with establishing and conducting operations, including: its ability to position its new stores to successfully establish a foothold in new markets and to execute its business strategy in new markets; the demand of products in such new markets; its ability to get suitable properties at commercially viable prices; its ability to successfully integrate the new stores with its existing operations and achieve related synergies; its ability to introduce an optimal mix of merchandise which successfully meets local customer preferences at attractive prices; its ability to negotiate and obtain favourable terms from its vendors; the effectiveness of its marketing campaigns; its ability to hire, train and retain skilled personnel; the competition that the company face from incumbent and new footwear retailers in the region; and exposure to expropriation or other government actions; political, economic and social instability.

Dependent on third-parties for manufacturing of all products: The company engage third party service providers and vendors for the procurement of all its products, including footwear under the brands Metro, Mochi and Walkway. Any unscheduled, unplanned or prolonged disruption of operations at its vendors’ manufacturing facilities, including on account of power failure, fire, mechanical failure of equipment, performance below expected levels of output or efficiency, obsolescence, non-availability of adequate labour or disagreements with workforce, lock-outs, earthquakes and other natural disasters, industrial accidents, any significant social, political or economic disturbances or infectious disease outbreaks, could affect its vendors’ ability to meet its requirements, and could consequently affect its operations. The company is also exposed to the risk of its service providers and vendors failing to adhere to the standards set for them by the company and statutory bodies in respect of quality, safety and distribution which in turn could adversely affect its sales and revenues.

Operates in competitive market: The company faces competition from existing footwear retailers, both organised and unorganised, and potential entrants to the footwear retail industry that may adversely affect its competitive position and its profitability. The competition could increase with new entrants coming into footwear retail industry, who may have more flexibility in responding to changing business and economic conditions, and existing players consolidating their positions. Some of its competitors may have access to significantly greater resources, including the ability to spend more on advertising and marketing and hence the ability to compete more effectively. Some of its competitors are larger and have greater financial resources or a more experienced management team than the company. Like the company, they may also benefit from greater economies of scale and operating efficiencies. Competitors may, whether through consolidation or growth, present more credible integrated or lower cost solutions than the company do, which may have a negative effect on its sales. Further, its competitors may set up stores in the vicinity of its existing stores and may offer their products at lower prices, resulting in a decreasing of sales of its projects.

Outlook

Metro Brands is one of the largest Indian footwear specialty retailers, in India. The company caters to the footwear needs of customers through a wide range of branded products for the entire family including men, women, unisex and kids, and different occasions. Across the company’s various brands, it is a one-stop-shop family retailer catering to the footwear needs of men, women and children for different occasions including casual and formal events. Its men’s, women’s and children’s product lines benefit from the Metro reputation for style, quality, comfort, innovation and affordability. Its wide range of brands allows it to operate across the economy, mid and premium segments. It takes into account feedback from its customers while developing new designs and products. In addition, sharing consumer insights across its businesses further strengthens its ability to connect with its end consumers more effectively. On the concern side, the company’s operations are subject to government regulation concerning retail and it is required to obtain and maintain several statutory and regulatory permits and approvals under central, state and local government rules for operating its business generally, including tax registrations, shops and establishment registration and trade license. Both its warehouses are located in Bhiwandi in the state of Maharashtra in India. Any materially adverse social, political or economic development, natural calamities, civil disruptions, or changes in the policies of the state or local governments in this region could adversely affect operations at its warehouses.

The issue has been offered in a price band of Rs 485-500 per equity share. The aggregate size of the offer is around Rs 1335.32 crore to Rs 1376.63 crore based on lower and upper price band respectively. On the performance front, total income decreased by 32.99% from Rs 1311.07 crore in Fiscal 2020 to Rs 878.54 crore in Fiscal 2021 primarily due to the impact of the COVID-19 crisis and the temporary closure of a number of its stores across India due to the lockdown related restrictions on its business operations commencing from end of Fiscal 2020, as well as reduced store-level operations, including reduced operating hours in line with GoI guidelines, which resulted in a significant decrease in customer footfalls at its stores given the lockdown, and significant decrease in same-store sales. The company has recorded a restated profit after tax for the year of Rs 64.62 crore in Fiscal 2021 compared to Rs 160.58 crore in Fiscal 2020. The company intends to leverage its existing capabilities to increase its e-commerce operations. It intends to integrate its omni-channel model as well as apply new technologies to further expand and improve its operations to handle individual customer deliveries and enhance customer buying experience with faster dispatches. It also intends to grow its dedicated team of e-commerce operations. It proposes to make further investments in digital marketing to build an omni-channel engagement experience for its customers.