TCNS Clothing is the market leader in women’s ethnic space: ICICI Direct

Store addition, online thrust to aid faster recovery…

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 Rs 140 crore

Q1FY22 Results: Covid induced lockdowns weighed on the performance with revenue recovery rate declining from ~76% in Q4FY21 to ~35% in Q1FY22.

 On a low base, revenue grew 189% YoY to Rs 93.8 crore (down 58% QoQ)

 Reported EBITDA loss of Rs 23.5 crore in Q1FY22 (Q1FY21: (-) Rs 42.7 crore)

 Reported a net loss of Rs 36 crore (Q1FY21: (-) Rs 45 crore)

What should investors do? Since our initiation report, the stock price has appreciated by ~38% (from Rs 400 in April 2020 to Rs 570 in August 2021).

 We maintain BUY rating on the stock with an unchanged target price

Target Price and Valuation: We value TCNS at Rs 700 i.e. 35x FY23E 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 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 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 Aditya Birla Fashion & Retail (ABFRL)

 ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (Rs 21000 crore) by FY26E, translating to 15% CAGR in FY20-26E

 It has enhanced focus on ethnic wear (through its recent acquisitions)

 BUY with a target price of Rs 265/share