TCNS Clothing - Focus back to growth - ICICI Securities

Key takeaways from TCNS Clothing's (TCNSBR) Q3FY21 earnings: 1) revenues declined 28% YoY with EBITDA margin shrinking 450bps mainly due to inventory dormancy provisions; 2) EBOs and LFS are broadly on similar recovery trajectory (33-36% YoY decline), while online business grew 1.7x the pre-Covid levels in Q3FY21; 3) company has secured ~30% reduction in fixed costs for FY21; 4) it is embarking on an accelerated store expansion plan with targeted addition of 60-70 EBOs in FY22; and 5) working capital release led to Rs450mn cash accretion to Rs1.55bn during the quarter; management expects cash by Mar'21 to be higher than it was in Mar'20. We maintain our FY22E-FY23E EBITDA and our DCF-based target price of Rs430/sh. Reiterate ADD. Key risks: lower discretionary spend, and increasing competition.

- Revenues declined 28% YoY to Rs2.4bn, while post Ind-AS 116 EBITDA declined 43% YoY to Rs385mn in Q3FY21. W and Aurelia revenues fell 27% YoY and 23% YoY respectively while Wishful revenues were down 51% YoY. Revenue recovery in metros was lower at 55%, tier-1 cities at ~70%, and tiers-2&3 cities at ~85%. Overall revenue recovery in Jan'21 was better than in Dec'20. Revenue share of online sales increased 1,000bps YoY to 23% in Q3FY21: Online secondary sales tracking at ~1.7x pre-Covid levels in Q3, while primary sales grew ~15% YoY. Brand.com grew 150% over pre-Covid levels with Dec'20 registering its highest ever sales. Primary billing in MBO channel resumed with launch of SS'21.

- Gross margin declined 670bps YoY to 61.1% owing to higher online sales and ~400bps inventory dormancy provisions. Management expects steady-state gross margin of 64-66% even with higher online sales. Higher online sales do not necessarily impact profitability at EBITDA level, hence EBITDA margin decline was restricted to 450bps. TCNSBR has already secured full-year savings of ~35% against the contracted rentals and accounted Rs60mn (Rs390mn in 9MFY21) savings in Q3FY21. Employee costs were down 38% YoY and management expects potential annualised savings of ~20% in FY21. Control on discretionary spends continued in Q3FY21 though non-discretionary spends reverted to normal levels. Company had directed spending on measurable direct-to-consumer initiatives and remained focused on driving online sales through performance marketing spends.

- TCNSBR is embarking on an accelerated store expansion plan and targeting 60-70 EBO stores and addition of 200-250 LFS doors in FY22. Nine new stores were opened and 22 bottom performing stores were closed in Q3FY21.

- Working capital release led to Rs450mn cash accretion to Rs1.55bn; management expects cash by Mar'21 to be higher than in Mar'20 (Rs1.7bn). Company is setting up a Rs100mn warehouse in Haryana, which will be fully operational by Q2FY22.

Shares of TCNS Clothing Co. Ltd was last trading in BSE at Rs.419.2 as compared to the previous close of Rs. 398.75. The total number of shares traded during the day was 5039 in over 510 trades.

The stock hit an intraday high of Rs. 420.3 and intraday low of 405. The net turnover during the day was Rs. 2080471.

Source : Equity Bulls

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