TCNS Clothing Results Review Report - Not out of the woods yet! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

TCNS Clothing recovered its baseline sales in 4Q (in-line). However, recovery has been more arduous vis-a-vis peers. While 4Q typically is a low GM quarter, gross profitability remained weak vs history as (1) reliance on online channels remains high and (2) dormancy is higher. Pre-IND-AS 116, EBITDA losses are estimated to have reduced to ~INR 125mn (HSIE: INR 155mn). Cash position improved marginally to INR 1.8bn, courtesy WC release in 2H (albeit more needs to be done on this front). We revise our FY22 revenue/EBITDA estimates downwards meaningfully to account for the second wave impact. FY23 estimates remain largely unchanged. We downgrade the stock to SELL (from REDUCE) with a revised DCF-based target price of INR 430/sh (implying 13x Jun-23 EV/EBITDAR).

4QFY21 highlights: Revenue grew 1% YoY to INR 2.2bn (in-line). Ex-LFS, recovery in offline revenue lagged expectations (EBO/MBO sales declined 22/56% YoY respectively while LFS sales grew 1%). Online channel grew 3.5x YoY. GMs contracted 45bp YoY (57.5%) and remained weak vs history due to (1) higher dormancy provisioning and (2) higher online sales in mix (21% of sales in 4QFY21 vs 6% in 4QFY20). TCNS achieved its FY21 cost saving guidance of: (1) 23% lower employee costs, (2) 45%+ rental savings, and (3) 29% cut in other overheads. However, a sizeable portion of these savings are likely to mean revert. Hence, if revenue recovery disappoints, margins are likely to remain under pressure. Pre-IND-AS 116, EBITDA losses are estimated to have reduced to ~INR 125mn (HSIE: INR 155mn). Reported EBIT margin stood at -0.9%. Cash position improved marginally to INR 1.8bn, courtesy WC release in 2H (albeit more needs to be done on this front). PAT stood at INR 39mn.

Trends called out: Management highlighted that there is (1) consistent offline sales recovery with many tier 2/3 geographies tracking near pre- COVID level sales, (2) sustained momentum in online sales, and (3) strong pick-up in MBO secondary sales, although primary billings are yet to resume.

Outlook: While INR 1.8bn cash + unutilised bank limits give comfort, capital (especially WC) efficiency remains a concern for the category (as was the case 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 for TCNS Clothing over the medium-to-long term. Hence, we downgrade the stock to SELL with a revised DCF-based target price of INR 430/sh (implying 13x FY23 EV/EBITDAR).

Shares of TCNS Clothing Co. Ltd was last trading in BSE at Rs.564.9 as compared to the previous close of Rs. 574.75. The total number of shares traded during the day was 6650 in over 665 trades.

The stock hit an intraday high of Rs. 586.8 and intraday low of 557. The net turnover during the day was Rs. 3810695.

Source : Equity Bulls

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