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Building levers for sustainable growth…

About the stock: Given its multi-distribution channel approach and robust supply chain infrastructure, TCNS has emerged as the market leader in women’s ethnic space through its three popular home grown brands

* TCNS follows an asset light business model, with production outsourced on a job work basis. This enables the company to generate high RoIC

* Healthy balance sheet with cash reserves worth | 160 crore

Rationale:

* Revenue recovery rate improved gradually to ~75% of pre-Covid levels in Q2FY22. Festive season witnessed healthy 100% revenue recovery rate

* On the new product launches, the footwear range has seen strong traction and is already contributing ~10% in selected ‘W’ stores. TCNS is planning a full-scale rollout of footwear in SS22 with presence in more than 150 EBOs

* Undertaking category expansion (beyond its core ethnic wear) in a bid to tap opportunities across non-apparel categories. Foraying into make-up, colour cosmetics under brand ‘Aurelia’. Over longer term, the management aspires to achieve 20-25% contribution from non-apparel segment

What should investors do? Since our initiation report, the stock price has appreciated ~2.2x (from | 400 in April 2020 to | 885 in November 2021).

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value TCNS at | 1120 i.e. 4x FY24E EV/Sales (earlier TP: | 860)

Key triggers for future price performance:

* Healthy store addition pipeline for FY22 with opening of 60+ new stores on a net basis (40+ stores already signed)

* Continues to scale up its omni distribution channel with new business models through third party market place and creating ‘online-first’ product ranges

* Setting up a new integrated warehouse (~1.4 lakh sq ft) to enhance supply chain and scale up its B2C delivery efficiency

* Upgraded and expanded ~15 existing stores across key malls and high streets at attractive long term leases

* Higher focus on expanding network in tier III/IV cities mainly through franchisee led model

Alternate Stock Idea: Apart from TCNS, in our retail coverage we also like ABFRL

* ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (| 21000 crore) by FY26E, translating to 15% CAGR in FY20-25

* BUY with target price of | 350/share

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