TCNS Clothing Company Limited - IPO Note - Angel Broking

TCNS Clothing Co. Ltd. is the leading Indian women's branded ethnic apparel company with brands like W, Aurelia and Wishful under its portfolio. It has the widest distribution network (in woman apparel) with 465 exclusive brand outlets, 1,469 large format store outlets and 1,522 multi-brand outlets.

Positives - 1) Early mover in category which helped in establishing strong brands and generating industry above gross margins, 2) the widest distribution network in the category via 3400+ stores across India 3) innovative designs and optimizing fit and sizes, 4) longstanding relationships with suppliers (currently 181 suppliers across India supplying printed fabrics, unprocessed fabrics) and job workers (currently 78 which manufactures finished goods) and 5) its outsourced business model helps in generating robust return ratios (30%+).

Negatives/risks -1) Its above industry gross margin (55-60%) could be dented by value focused fashion retailers and the high premium enjoyed by its brands may not be sustainable, 2) consumer taste constantly keeps changing, hence any inability to keep up with the latest trends would be negative, 3) promoters' stake further coming down to ~32% post IPO from pre IPO stake of 44%.

Outlook & Valuation: The company has posted excellent CAGR of 49%/83% in revenue/ PAT over FY2014-18 (although on a low base), driven by increase in its product offerings and retail stores. Gross margin have been excellent at 55-60% over the same period. However, its employees cost has been high over FY2016-17 owing to the ESOPs expense which dented earnings in those years. At the upper end of the price band, the PE multiple works out be 44x FY2018 earnings (an exceptionally profitable year), which appears on the higher side when compared to large established listed retail players like Arvind (available at 34x FY2018 PE). Hence, for its limited financial history, singular focus on ethnic woman apparel and demanding valuations, we recommend 'Neutral' on the issue.

Source : Equity Bulls

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