Buy TCNS Clothing Company Ltd For Target Rs. 700 - ICICI Direct
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Building enablers to achieve accelerated growth…
TCNS Clothing reported decent Q4FY21 results with marginal revenue growth of 1% YoY to | 221 crore. On adjusted base, recovery was ~76% of pre-Covid levels (vs. 72% in Q3FY21). The revenue recovery rate would have been better but the pace of recovery was hampered by partial lockdowns in various states from mid-March onwards. Non-metro cities continued to recover at a swift pace with Tier II, III cites recovering at ~95% of pre-Covid levels. Stores in metro cites are lagging behind with 75% recovery rate. Gross margins remained flattish YoY at 57.4% but continue to remain below average level of 60%+ due to a change in channel mix (higher online sales).
Sustained focus on sharp rationalisation of operating overheads resulted in the company reporting EBITDA of | 23.0 crore vs. loss of | 4.8 crore in Q4FY20. PAT for the quarter was at | 3.9 crore vs. net loss of | 23.7 crore in Q4FY20. Despite significant loss in revenues and profitability during the year, the company has maintained its balance sheet strength with cash & investments worth | 181 crore as on FY21 (vs. | 171 crore in FY20).
Focus on cost saving initiatives to continue
During FY21, the company secured significant savings that were ahead of targets. Rental expenses de-grew 65% YoY to | 66 crore whereas employee expenses de-grew 23% YoY to | 121 crore. Furthermore, TCNS shut ~45 unviable and non-performing stores (EBOs: 551 as on Q4FY21). The company expects majority of expenses to revert back but is targeting ~10% cost savings in FY22E from FY20 levels.
Store expansion, efficient supply chain to aid performance
The company has embarked on several initiatives to fuel revenue recovery from FY22 onwards. It is expected to accelerate expansion plans and is targeting 60 new EBO stores in FY22E (already signed 30 EBOs, slated to open in H1FY22). Higher focus is on expanding network in tier III, IV cities mainly through franchisee led model. It is also focusing on increasing its LFS touchpoints through addition of 200-250 touchpoints. Over the last three years, TCNS had taken a strategic decision to exit certain long credit cycle customers through rationalisation of MBO outlets (from 1522 in FY18 to 1011 in FY21).
The rationalisation is now complete and the company has resumed primary sales through MBO route with SS21 season launch in February. The company is setting up a new integrated warehouse to enhance supply chain and scale up its B2C delivery efficiency (to be set up by November 2021). TCNS has also implemented phase 1 of automated inventory management system and expects to rationalise working capital days by ~15-20 days.
Valuation & Outlook
We are positive on the long term outlook, considering the company’s strong brand franchise and healthy balance sheet. Accelerated store addition plans, coupled with diversification into newer categories (footwear, Aurelia Girls) is expected to fuel growth, going forward. We bake in earnings CAGR of 33% in FY20-23E and, given the capital efficient business model, expect TCNS to report healthy RoIC of ~ 30% in FY23E. We reiterate BUY rating on the stock with target price of | 700 (35.0x FY23E EPS, earlier TP: | 540).
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