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Tackling multiple headwinds

Unimpressive revenue print led by; (1) ~7% revenue-impact (related to primary billing) of change in revenue/inventory accounting for B2B business from outright-sale model to SOR (sale or return) model; where-in revenue is booked only after actual sales happen. In SOR; inventory is on the books of TCNS. This trend (of shifting to SOR) is likely to continue due to regulatory requirement (online companies shall not be holding inventory in their books) and post achieving critical-mass, step-down subsidiaries of the online companies requesting branded companies to sell directly. (2) business closure at Central (Future Group company); impact of this is not in the base quarter. (3) Range failure in W brand has been a critical issue which may have potentially impacted the brand-image (negatively). In apparel retailing; winning back customer is extremely tough. Hence, we would expect TCNS to not have such issues repeated in future. We like the relative success in Elleven brand; added 17 stores over last nine months (vs 12 Aurelia stores).

We have a constructive view on the company. The potential for scaling up; W, Aurelia and Elleven brands (in women ethnic wear segments) is high with moderate competitive intensity (absence of competition from MNCs like; Zara, Marks and Spencer etc). However, temporary headwinds on revenue growth is concerning. We maintain ADD with a revised DCF based target price of Rs510 (was Rs660).

* Multiple headwinds impact revenue print (still below pre-covid): Revenue decline 7%YoY/13%QoQ (93% of pre-covid) led by (1) accelerated shift from B2B to D2C; under this, inventory which were earlier sold to third-party retailers on outright basis will now be in the books of TCNS and hence, revenue is recorded when actual sales take place (inventory risk shifts to TCNS books). This has significantly (~7% of revenue) impacted primary billing in Q3FY23. (2) impact of closure of LFS partner (Central). (3) range failure in W due to some fabric/product issue. Revenue from W, Aurelia and Wishful declined; 9%, 4% and 7% YoY respectively. Channel wise revenue from EBO grew 10% (15% retail expansion) while from LFS, MBO and Online declined; 9%, 25% and 34% YoY respectively

* Retail expansion on track, Elleven getting good traction: TCNS added 16 EBOs during the quarter (to 664 stores) while upgraded 4 stores under project Rise. On YTD basis; TCNS added 65 stores; 52% of W brand, 26% of Elleven, 18% of Aurelia and 3% of Wishful. Higher commitment of resources towards scaling-up of Elleven brand is positive. Revenue from brand website grew +31%YoY vs other channels (now contributes ~25% of online sales).

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