Maintain REDUCE on TCNS Clothing - Not out of the woods yet! - HDFC Securities

TCNS Clothing's recovered 72.3% of base sales, marginally missing estimates (HSIE: 73.6%). However, recovery has been more arduous vs peers (given its an ethnic wear play). GMs contracted 670bp YoY due to (1) higher dormancy provisioning, (2) higher online sales in mix (23% of sales vs 13% in 3QFY20). While the company was back in the black, cost normalisation continues to outpace offline revenue recovery (64%). EBITDAM contracted 446bp to 16.2% (HSIE: 17%). Cash position improved by Rs. 450mn courtesy (1) WC release and (2) internal accruals (albeit more needs to be done on this front). We revise our FY22/23 EBITDA estimates downwards to account for moderation in revenue/higher cost of retailing expectations in a post-pandemic world and maintain our REDUCE recommendation on the stock with a revised DCF-based target price of Rs. 400/sh (implying 20x FY23 EV/EBITDA).

- 3QFY21 highlights: Revenue declined 27.7% YoY to Rs. 2.38bn (HSIE: Rs. 2.42bn) as recovery in offline business lagged expectations (EBO/LFS/MBO declined 36/33/76% YoY respectively). Online sales grew 28% YoY (secondary sales at 1.7x pre-COVID, primary sales up 15% YoY). GMs contracted 670bp YoY due to (1) higher dormancy provisioning, (2) higher online sales in mix (23% of sales vs 13% in 3QFY20). While the company was back in the black, cost normalisation continues to outpace offline revenue recovery (64%). This is despite the company securing 35% rental savings for FY21 (Rs. 60mn in 3Q). EBITDAM contracted 446bp to 16.2% (HSIE: 17%). Cash position improved by Rs. 450mn courtesy (1) WC release and (2) internal accruals (although more needs to be done on this front). PAT declined 77% YoY to Rs. 127mn (HSIE: Rs. 135mn)

- Outlook: Rs. 1.55bn cash + unutilised bank limits give comfort; capital (especially WC) efficiency remains a concern for the category (holds true pre-COVID too). Immediate peers are worse off. Also, with increasing online reliance (even post-COVID), the risk of conceding pricing power, ergo margins, remains high in TCNS Clothing over the medium-to-long term. Hence, we maintain our REDUCE recommendation on the stock with revised DCF-based target price of Rs. 400/sh (implying 20x FY23 EV/EBITDA).

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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