We have seen a slew of tech IPOs. Now, investors have an old-school brick and mortar business to evaluate -- shoe retailer Metro Brands, which sells shoes under its own brand names like Metro, Mochi, Walkway, etc, and also sells third-party brands like Crocs and Fitflop. The company also counts Rakesh Jhunjhunwala as an investor.

In the pre-IPO analyst call, the company explained that it will continue to open new stores and expand its e-commerce reach. It is one of the largest footwear specialty retailers, and aims to be a one-stop-shop for the footwear needs of its customers. It operates company-owned stores in 30 states and union territories across India, with over 60% of its revenues coming from West and South India. Nearly 2/3 of its total revenues come from metropolitan and tier 1 cities.

The reliance on physical stores to sell its products makes it difficult to run its operations during a pandemic, and as a result, makes it heavily dependent on footfalls into its stores. The company’s online revenues were around 9% of its total at the end of H1FY22, which is higher than 6.2% at the end of FY21. Still, the reliance on physical stores means its fortunes change when authorities impose restrictions on the movement of people in cities.

Most of the company’s revenues comes from its own brands, while around 30% comes from third party brands like Crocs, Clarks and Skechers.

The third party brands are usually premium products, and helps the company maintain its higher average revenue per unit sold.

Even with this higher revenue per unit sold, the company’s IPO seems to be priced quite conservatively.

The Rs 1,367.50-crore issue consists of a fresh issue of shares worth up to Rs 295 crore and an offer for sale of share up to Rs 1,072.50 crore by promoter and investor selling shareholders. Out of the fresh issue, the company plans to use Rs 225.4 crore to set up new stores, with Rs 17.1 crore in FY22, Rs 68.61 crore in FY23, Rs 75.8 crore in FY24 and Rs 63.9 crore in FY25.

Post the IPO, the promoter and promoter group entities will hold slightly less than 75% stake in the company, which means they won’t have to do another share sale in the future to meet the public shareholding norms.

The price band of the issue is Rs 485-500, which values the company at nearly 200 times its FY21 earnings at the lower end and nearly 206 times FY21 earnings at the upper end. If we annualise Metro Brands’ H1FY22 earnings, we get a valuation of nearly 150 times at the lower end and 154 times at the upper end. In comparison, Bata India, Relaxo Footwears, Khadim India are trading at a TTM PE of nearly 1,082 times, 110 times, and 40 times, respectively.

Pandemic doesn’t wipe out cash flows

Metro Brands’ reliance on in-store sales meant lockdowns will impact its revenues and profits. But what seems interesting is the company managed to eke out a positive operating cash flow in both H1FY22 and H1FY21. These two periods witnessed intense lockdowns during the first and second wave of the pandemic.

The company’s products are meant for men, women and kids. It also sells accessories like belts, bags and wallets, but these don’t make up a large proportion of its revenues (8-9%).The company also sells products in the economy, mid and premium segments of the footwear market. This allows it to play at different price points and capture the growth in demand for footwear in these market segments. Over 80% of Metro Brand’s revenues from stores comes from products priced above Rs 1,500. This helps the company report high EBITDA margins.

Resilient but not immune to lockdowns

The company operates through leased stores, and sources its products from around 250 vendors with whom it has long-standing relationships, with some over 20 years. Its focus on running a demand-led lean inventory model helps to limit the money locked up in products stocked in stores. Discounted sales over the past three completed financial years, and first six months of FY21 and FY22 were in the range of 6.6%-9.2% of total sales.

But the reliance on physical stores did bite when governments forced them shut during the lockdowns.

According to CRISIL Research, the Indian footwear market is expected to rise to 2.87 billion pairs by FY25 from 1.68 billion pairs at the end of FY21. The footwear market in India is expected to grow to Rs 1.45 lakh crore at the end of FY25 from a size of Rs 63,000 crore at the end of FY21. There is also an ongoing shift in taste for high-value products, which will help companies like Bata India, Khadim, Relaxo, and Metro Brands gain from this change in customer tastes.

For investors who might be looking at Metro Brands’ IPO as an investment option, the choice is simple. If they want to own a company that has a premium niche in the footwear market, high margins, average revenue per unit, and other decent operating metrics, then this is a business worth looking at.