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Inching back to pre-covid sales

TCNS Clothing’s (TCNSBR) Q2FY22 revenues grew 66% YoY (implying recovery to ~75% of pre-covid sales) with Q3FY22-TD sales already back to pre-covid levels. Gross margin improved sharply both QoQ and YoY to 62.7% (just 230bps lower than pre-covid) despite share of online sales increasing to 22% from 12% pre-covid. Online D2C business contributed >50% to the e-commerce business. Company added eight stores during Q2FY22 and is targeting a net addition of >60 EBOs in FY22. As highlighted in our recent note, Margins to surprise as demand bounces back, we believe earnings of apparel brands and retail companies may surprise positively led by faster-than-expected demand recovery and expect consensus to turn more constructive with Q2FY22 management commentary. Maintain ADD with a revised DCF-based target price of Rs865/sh (earlier: Rs725/sh) on better cashflows. Key risks: lower discretionary spends, and increasing online competition.

* Revenues up 66% YoY to Rs2.4bn while post Ind-AS 116 EBITDA (including other income stood) at Rs451mn vs loss of Rs69mn in Q2FY21. W, Wishful, and Aurelia revenues increased 63%, 66%, and 70% YoY, implying a pre-covid recovery of 72%, 47% and 85% respectively. South and West markets (ex-Mumbai) saw better performance while North remained impacted in Q2FY22. Number of operational days stood at 90% in Q2FY22 vs 48% in Q1FY22. LFS, EBO and MBO revenues recovered to 69%, 68% and 37% of pre-covid levels, respectively. Festivities, reopening of offices and store expansions are likely to provide better revenue momentum going ahead. MBO sales are back on track. Q3FY22-TD revenues are back to pre-covid levels with management expecting H2FY22 sales to exceed the same

* TCNSBR targets to add >60 exclusive brand stores in FY22E. Company is on track to open a store every ~3 days in H2FY22. The larger new stores (~5-6) are clocking 1.5x pre-covid revenues. TCNSBR opened eight stores (net) during the quarter taking the total store count to 557 as at Q2FY22-end.

* Plans to expand beyond apparels and build a comprehensive portfolio to offer a top-to-toe look. While the company focuses on product innovation and supply chain efficiencies for the core brands of W and Aurelia, it plans full-scale rollout of Wishful and footwear by W. Company also plans low-risk rollout of sustainable Indian craft led fusion wear Folksong by W and footwear by Aurelia in 1-2 channels. It has recently done pilot launch of bottomwear brand Elleven, an online exclusive range by Aurelia, and beauty and personal care cosmetics by W in a single go-to-market channel with limited merchandise. Management expects new businesses to contribute Rs2bn-3bn of revenues over next 4-5 years. Overall EBITDA margins are unlikely to be impacted meaningfully with the launch of these new businesses.

* Gross margin improved sharply both QoQ and YoY to 62.7%, just ~230bps below pre-covid levels despite online share increasing to 22% from 12% pre-covid. Company targets to achieve gross margins in the range of 62-64% going ahead. Management believes the share of online business will continue to be in the range of 20-25% going ahead. Company has so far saved Rs200mn in rent concession in H1FY22. It expects limited savings in employee costs and other expenses for FY22. Rental savings is estimated at ~20% (Rs250mn) for FY22E.

Net cash increased to Rs1.6bn in mid-Nov’21 from Rs1.1bn YoY in mid-Nov’20. Operating cash outflow post working capital release of Rs158mn stood at Rs80mn in H1FY22 vs Rs614mn post working capital requirement of Rs223mn in H1FY21.

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