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Focus back to growth

Key takeaways from TCNS Clothing’s (TCNSBR) Q4FY21 earnings:

1) Revenue was up 1% YoY (in-line with expectations) and was impacted from mid-Mar’21 due to lockdowns owing to resurgence in covid cases; 2) LFS revenue remained flat YoY, while EBO & MBO revenue declined 23% YoY and 60% YoY respectively owing to channel rationalisation; online revenue grew 2.5x YoY on a low base in Q4FY21; 3) company is targeting net addition of +60 EBOs in FY22; 30 EBOs already signed up and likely to open in H1FY22; and 4) cost rationalisation and working capital release led to Rs110mn cash accretion to Rs1.82bn during FY21.

Factoring-in the impact of recent lockdowns, we reduce our FY22E EBITDA though we maintain it for FY23E. Maintain ADD with revised DCF-based target price of Rs630/sh (earlier Rs430/sh) on better cash flows and half-yearly rollover to Mar’23E. Key risk: lower discretionary spends & increasing online competition.

* Revenues were up 1% YoY to Rs2.2bn, while post Ind-AS 116 EBITDA including other income stood at Rs410mn vs Rs40mn in Q4FY20. W and Wishful revenues fell 2% YoY and 23% YoY respectively; while Aurelia revenue was up 11% YoY. Company closed 10 EBOs - 8 EBOs for W and 2 EBOs for Aurelia in Q4FY21. Post EoSS, recovery in mid-Feb-Mar’21 stood at 90-95% of normal levels in tier 2&3 cities while for tier 1 cities it stood at ~70%. As on date, 60% of offline network is operational with stipulated restrictions while supply chain is back to normalcy. Management stated it has completed rationalisation of MBOs and expects recovery from Q2FY22-end. B2C sales grew 7x YoY on low base and constituted 1/3rd of third party online sales. Share of full price sale in online channel increased from midsingle digits in FY20 to double digit in FY21.

* Reported gross margin remained broadly flat YoY at 57.5%. TCNSBR achieved 30%+ cost savings YoY in FY21 led by 45% savings in rent expenses, 23% savings in employee-related costs and 29% savings in overheads. Company is investing in automated inventory management system which is likely to reduce 10-15% inventory stocking at store level. Investment in integrated warehouse will result in more efficient direct-to-consumer delivery model and cost rationalisation over long term.

* TCNSBR is targeting to add net 60+ EBO stores (after accounting for ~15 usual store closures during the year) and addition of 200-250 LFS doors in FY22. Total capex planned for FY22 & FY23 stands at Rs250-300mn p.a. towards store additions (Rs150mn), warehouse integration (Rs80-100mn) and software for inventory management (Rs50mn).

* Net cash increased to Rs1.82bn from Rs1.71bn in FY20 on account of cost rationalisation, one-time income tax refund and working capital release. Management is targeting to reduce working capital days from 120 days to 105 days in short term and in double-digit days in the medium-term.

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