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ABFRL has entered into an agreement for acquiring 51% stake in TCNS, which will be followed by the eventual merger of TCNS into ABFRL via a share swap – both combined suggest trailing EV/sales of 2.4x (EV: Rs29bn), which is at the mid-point of ABFRL’s transactions in the space. For ABFRL, TCNS plugs-in a key portfolio gap in the salwar-kurta industry (Emkay est.: ~30% of women spends) and should help it to unravel the complex ethnic space with TCNS’ established supply-chain/strong ‘omni’ presence via 664 EBOs in >150 cities. TCNS has unique strengths, but is undergoing a rough patch now, given its muted topline growth and stretched WC/cost-base effecting a deterioration in profitability. In our view, improved value proposition and better positioning in Pantaloons/Online should aid topline growth, while backward integration and better negotiations should help resolve cost equations. While we see potential value creation for ABFRL, we retain HOLD with TP of Rs250/sh, on near-term slowdown/potential share supply overhang from TCNS’s existing shareholders.

Potential synergies to aid profitability; complementary offering plugs a key gap TCNS has an established presence in the ethnic salwar-kurta (SK) industry (Industry size: USD8bn; ~30% of overall women spends). Owing to the complex supply-chain, branded penetration is low at ~25% in the category (vs. 30-35% in other categories), supporting stronger growth for players who are able to crack the supply-chain conundrum. TCNS has seen relatively muted topline growth (1-2% CAGR over FY19-23), while its cost-base has expanded due to network expansion and cost inflation, leading to drop in profit (PAT breakeven in FY23E vs. Rs1.3bn PAT in FY19). Such challenges have been led by slower recovery in the category and TCNS-specific issues (ERP, Airport stores and the Autumn-Winter 2022 product failure) over the same period. In our view, an improved value proposition and better positioning in Pantaloons/Online channel should aid top-line growth, while backward integration and better cost negotiations should help balance the cost equations. For ABFRL, TCNS plugs a key portfolio gap in the SK industry and the company has gained an established supply-chain along with strong overall presence via 664 EBOs in >150 cities/+2,500 LFS doors/Online channel.

Acquisition price at the mid-point of ABFRL’s transactions in the ethnic space In our view, the complete 100% stake acquisition (51% stake + eventual merger) is at a consideration of Rs449/sh, implying EV of Rs29bn for TCNS (15x FY25E EBITDA). ABFRL is acquiring TCNS at 2.4x trailing sales vs. 1.5-3.2x for other deals in the space. In our view, TCNS’s W/Aurelia brands are leaders in terms of penetration, with the model also being profitable; this should command better valuations than ABFRL’s other transactions. Valuations per the agreement offer potential for value creation going ahead.

The GIC warrant exercise (Rs14.3bn) should help consummate this acquisition Total transaction cash outgo is Rs16.5bn over coming 9-12mths; 2nd tranche of warrants issued to GIC (Rs14.3bn) is also expected over this timeframe, thus suggesting no major need for increase in long-term debt. Lifestyle business has potential to fund the innerwear/ethnic (Tasva)/Reebok expansion, and Pantaloons can sustain on its own, in our view. Investments in D2C will also be largely done within FY23. While issue of fresh shares shall entail 5.4% equity dilution for ABFRL, we expect the transaction to be accretive to FY25 earnings. Excl. this transaction, ABFRL would close FY23 with Rs9-10bn net debt.

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