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Encouraging recovery in ongoing end-of-season-sales

* TCNS’ ~Rs0.2bn EBITDA loss in a challenging Q1 was in line with our/street expectations. Revenue recovery at ~35% was in line with peers and PBT loss at Rs0.5bn was lower than Rs0.6bn last year, despite lower rental savings of Rs30mn vs. Rs190mn in Q1FY21.

* Per-store recovery at ~70% in the ongoing EOSS has been faster vs. last year. TCNS expects a full per-store revenue recovery in FY23, aided by pent-up demand and rise in occasion-specific spends. TCNS retained its FY22 target of adding 60 net EBOs. Of the 40 EBOs signed so far, 15 are in the most coveted markets at attractive long-term rates.

* TCNS does not plan to raise additional capital to fund organic growth. Notably, TCNS was also able to tide through the FY21 Covid crisis with a stronger debt-free balance sheet, unlike many apparel peers, which raised capital to either fund losses or pursue growth.

* We increase FY23/24 EPS estimates by 20%/4% on front-loading of per-store recovery in FY23E vs. FY24E earlier. TCNS’ design/sourcing edge, agile back-end and strong online presence keep us positive. Maintain Buy with a revised TP of Rs860 (vs. Rs800 earlier).

Online channel drives better recovery:

Revenue recovery of ~35% in Q1 was in line with peers and better than ~10% recovery seen last year. Better recovery was aided by a healthy 112% recovery in the ‘online & others’ channel. The physical channels (EBO/LFS) remained impacted with a 15-20% recovery due to store closures for half of Q1 and operational restrictions upon opening. TCNS, however, indicated a faster recovery of ~70% for operational stores and a better fresh sales mix in the ongoing EOSS.

Going ahead, TCNS expects a strong festive season with a rise in occasion-specific spends and pent-up demand for ethnic-wear. TCNS attributed a relatively stronger online recovery to its ahead-of-the-curve investments in the omni-channel across both own-websites/third-party marketplaces and a higher mix of D2C sales (~50% of online sales), where TCNS has better control over discounting.

Store additions were muted, but TCNS retained its FY22 target of 60 net EBO openings, with 40 EBOs already signed. Of the signed stores, TCNS has been able to secure attractive long-term leases for 15 flagship stores in the most attractive retail markets in India.

Relatively lower loss despite low rental savings: PBT loss at Rs0.5bn was lower than the Rs0.6bn loss last year, led by better gross margins (up ~500bps) and despite lower rental savings at Rs30mn vs. Rs190mn last year. TCNS expects margins to gradually return to preCovid levels, led by per-store sales recovery, agile back-end and favorable online margin mix.

Category leader with long growth runway (IC Report): TCNS is a leader in the SalwarKameez industry with design-sourcing advantage, 2x-3x penetration potential compared to Reliance Trends/ABFRL and a strong online presence. We expect TCNS to deliver an industry-leading EBITDA CAGR of ~33% over FY20-24E. Maintain Buy with a revised TP of Rs860 (vs. Rs800 earlier), based on an unchanged 40x Sep’23E EPS.

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