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Indication of strong festive season augurs well…

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 | 140 crore

Rationale:

* Channel checks indicating strong start to the festive season. Stores in the eastern region tracking 100%+ pre-Covid levels during Durga Puja festival

* Recovery expected to be more broad based compared to last year with metro cities and non-tier 1 cities witnessing strong green shoots

* Expect primary sales to MBO channels to resume from October onwards

* We introduce FY24E estimates and model earnings CAGR of 30% in FY20- 24E (on a favourable base)

What should investors do? Since our initiation report, the stock price has appreciated ~78% (from | 400 in April 2020 to | 710 in October 2021).

* We maintain BUY recommendation on the stock

Target Price and Valuation: We value TCNS at | 860 i.e. 35x FY24E EPS

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 omni distribution channel with new business models through third party market place and creating ‘online-first’ product ranges

* Setting up a new integrated warehouse to enhance supply chain and scale up its B2C delivery efficiency (to be set up by December 2021)

* 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

* Implemented phase 1 of automated inventory management system and expects to rationalise working capital days by ~15-20 days

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 FY20-26

* BUY with a target price of | 265/share

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