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Targeting positive cashflow from Q3FY21

Key takeaways from TCNS Clothing’s (TCNSBR) Q2FY21 earnings: 1) Over 95% offline stores are operational as of Q2FY21-end with sales tracking ~70% of preCovid levels in Oct’20 with festive spike; 2) EBOs and LFS are broadly on similar recovery trajectory; primary billing in MBO channel is yet to resume, while online is growing 2x of pre-Covid levels in Q3; 3) secured ~30% reduction in fixed costs in FY21; and 4) expecting positive cashflow in Q3FY21 on the back of progressive sales recovery on lower cost and significant inventory reduction in H2FY21. We maintain our FY22E EBITDA and increase our DCF-based (Sep’22) target price to Rs430/share (earlier: Rs395) on half-yearly rollover. Maintain ADD.

* Revenue declined 55% YoY to Rs1.4bn, while EBITDA loss (including other income) stood at Rs117mn vs EBITDA of Rs420mn and EBITDA loss of Rs463mn in Q2FY20 and Q1FY21, respectively. W and Aurelia revenues declined by 57% YoY and 51% YoY, respectively, in Q2FY21. Gross margin sharply declined 1,334bps YoY to 51.6% owing to change in sales mix, inventory dormancy provision and higher discounting. Pre-IndAS EBITDA loss (our estimates) stood at Rs330mn vs EBITDA loss of Rs524mn in Q1FY21 and EBITDA of Rs400mn in Q2FY20.

* EBOs and LFS broadly witnessing similar sales recovery along with strong run up in festive season. While MBO secondary sales are gradually recovering, primary billing is yet to resume (from Q4FY21 onwards). Online sales are growing strongly at 2x pre-Covid levels in Q3FY21, while brands website are growing higher at 3x on low base and registered highest ever monthly sales in Oct’20. Accordingly, revenue share of online channel sharply increased to 38% vs 12% in Q2FY20 on low sales.

* Incubating new categories for future growth: W footwear launched in select pilot stores, Aurelia ethnic wear for girls introduced and opened 4 Elleven EBO stores with launch planned with select LFS and online partners.

* Secured ~30% reduction in fixed costs in FY21. TCNSBR has already secured full-year savings of ~35% against the contracted rentals and accounted Rs140mn (Rs330mn in H1FY21) savings in Q2FY21 with Rs86mn under rent expenses and Rs55mn under other income. Employee costs declined 24% YoY; management expects potential annualised savings of 15-20% in FY21.

* Targeting positive OCF Q3FY21 onwards: TCNSBR has strong balance sheet with net cash of Rs1.1bn (down from Rs1.7bn in Mar’20). Management is targeting positive OCF Q3FY21 onwards with cash burn reduced to Rs150mn per quarter on the back of progressive sales recovery on lower cost and significant inventory reduction in H2FY21 (largely in Q4FY21). TCNSBR has closed net 21 unprofitable stores in H1FY21 with 15-20 stores under consideration for closure in H2FY21.

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