TCNS Clothing - Focus on preserving cash and containing costs - ICICI Securities

Key takeaways from TCNS Clothing's (TCNSBR) Q1FY21 earnings: 1) secured 20%+ reduction in fixed cost p.a. through waiver / concession in rental cost, rationalising unsustainable stores, curtailing discretionary / marketing / employee spends; 2) preserving cash through rationalising capex and reducing working capital; 3) ~475 EBOs, ~1,500 LFS doors and 2/3rd MBO counters operational with intermittent lockdown; 4) sales tracking ~40% of pre-Covid levels with online sales growing 1.25x of pre-Covid levels; and 5) net cash stood strong at Rs1.25bn as of Jun'20-end. Factoring extended lockdown, we cut our FY21 and FY22 pre-IndAS116 EBITDA by 20% and 8% and reduce our DCF-based target price to Rs395/share (earlier: Rs425). Maintain ADD.

- Revenue declined 88% YoY to Rs324mn owing to Covid-19 lockdown, while EBITDA loss (including other income) stood at Rs260mn in Q1FY21. Management mentioned sales are tracking at ~40% of pre-Covid levels (on normalised store operational period); however, it has witnessed improvement since Jul'20-end with festive spike.

- Gradual opening of stores with ~475 EBOs (81% of EBOs), ~1,500 LFS doors (77% of LFS doors) and 2/3rd MBOs counters operational with intermittent lockdown as of mid-Aug'20. Malls in few key geographies including Tamil Nadu and Maharashtra are just opening/ yet to open. Besides, recovery in high-streets stores is tracking ahead of malls and airports. Online sales gaining strong traction with growth at 1.25x of pre-Covid levels, while company's own websites accelerated at 2x of pre-Covid levels. Accordingly, revenue share of online channel sharply increased to 57% in Q1FY21.

- FY21 focus remains on cost reductions as management is targeting 20%+ reduction in fixed cost. In rentals, it has already secured full-year savings of ~25% over last year (~30% against the contracted rentals including escalations). It has already registered savings of Rs190mn in Q1FY21 with Rs72mn under rent expenses head and Rs121mn under other income. Accordingly, other income increased by 7.5x YoY to Rs166mn in Q1FY21. Employee cost declined 12% YoY to Rs328mn as salary reduction implemented across the organisation, rationalised staff count between brands at EBOs & LFS doors. Management targeting potential annualised savings of 20%+ with full benefit to flow from Q2FY21. Besides, there is complete freeze on ATL/ BTL marketing spend, focus on sales linked marketing spends, and zero-based budgeting for overhead costs.

- Preserving cash via rationalising capex & reducing working capital: TCNSBR has strong balance sheet with net cash of Rs1.25bn. Management is minimising new store opening apart from the ones in the pipeline and looking to close many unprofitable stores. TCNSBR has closed 16 stores in Q1FY21 with ~25 stores under consideration for closure, while 10 stores are identified for conversion to dual stores.

Shares of TCNS Clothing Co. Ltd was last trading in BSE at Rs.347.25 as compared to the previous close of Rs. 345.15. The total number of shares traded during the day was 832 in over 121 trades.

The stock hit an intraday high of Rs. 355.6 and intraday low of 345. The net turnover during the day was Rs. 291388.

Source : Equity Bulls

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