Metro Brands IPO: How good is it?

In our story, Metro Brands IPO: Information analysis, we shed light on the key details of the IPO, along with important information about the company. Here we will answer some questions about Metro Brands and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. In the last 12 months ended September 2021, the company's earnings before tax stood at Rs 184.5 crore.

2) Will the company be able to scale up its business?
Yes. Given its asset-light model and favourable industry dynamics (in terms of a lower share of organised players), the company would be able to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. The company's various brands are highly valued by its customers.

4) Does the company have high repeat customer usage?
Yes. In FY21, repeat sales by the members of the company's loyalty programs accounted for 55.7 per cent of total store product sales (excluding 'Walkway' stores).

5) Does the company have a credible moat?
Yes. Its asset-light model, a vast vendor network and a strong combination of in-house and third-party brands provide the company with a credible moat.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company is sufficiently robust to major regulatory or geopolitical risks.

7) Is the business of the company immune from easy replication by new players?
No. While it is not easy to replicate the store and distribution network, the company needs to expand its online presence, given the increased penetration of e-retailing.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. There are no substitutes for footwear.

9) Are the customers of the company devoid of significant bargaining power?
Yes. Over FY19-21, the company sold (through its stores) more than 90 per cent of its products at their MRP.

10) Are the suppliers of the company devoid of significant bargaining power?
No. Its key raw materials include ethylene-vinyl acetate and other polymers, which are crude derivatives. Thus, the company is a price taker.

11) Is the level of competition the company faces relatively low?
No. The industry is highly competitive, with the presence of many large players. Moreover, the increasing presence of e-retailing enhances competition.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 75.9 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. MD Farah Malik Bhanji (one of the promoters) has been associated with the company since 2000.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.

16) Is the company's accounting policy stable?
Yes. As per the auditors' report, the accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledging.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
No, the company managed to generate a three-year (FY19-21) average return on equity of 16.6 per cent and a return on capital employed of 18.5 per cent. For FY21, the company generated a return on equity of 7.6 per cent and a return on capital employed of 9.6 per cent.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company has reported positive operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
No. The company's revenues decreased from Rs 1,217.1 crore in FY19 to Rs 800.1 crore in FY21.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. The company's interest-coverage ratio stood at 5.1 as of September 2021.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company had a working-capital cycle of 56 days for FY21. Its asset-light model doesn't require huge working capital.

23) Can the company run its business without relying on external funding in the next three years?
Yes. The company has planned to utilise the proceeds from IPO to open new stores. Moreover, it makes adequate free cash flows to self-sustain for the next three years.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. short-term borrowings have fallen from Rs 9.9 crore in FY19 to Rs 0.9 crore as on September 30, 2021.

25) Is the company free from meaningful contingent liabilities?
Yes, the company does not have any contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No. The stock will only offer an operating-earnings yield of 1.2 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
No. Post-IPO, the company's stock will trade at a P/E of around 88.2, which is greater than its peers' median P/E of 39.9.

28) Is the stock's price-to-book value less than its peers' average level?
No. Post-IPO, the company's stock will trade at a P/B of around 15.8, which is greater than its peers' average P/B of 8.2.

Also read about Metro Brands IPO: Information analysis to learn about key IPO details and important company information.

Disclaimer: The authors may be an applicant in this Initial Public Offering