Maintain REDUCE on TCNS Clothing - Outdoes expectations; capital efficiency still a WIP - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

TCNS Clothing's recovered 45% of base quarter sales, outdoing our estimates (HSIE: 34%). However, within our apparel universe, it remains a laggard. Revenue from LFS and Online significantly exceeded expectations. GMs continue to remain stressed due to higher skew of lower GM online B2B channel in the mix and higher dormancy provisioning. EBITDA losses more than halved to Rs. 163mn (HSIE: 362mn). Capital efficiency remains a WIP as WC needs remain elevated on the back of elevated inventory levels and higher support to vendor base (reducing payables). While we increase our FY22/23 EBITDA estimates by 4-8%, we also increase our WC assumptions. We maintain out REDUCE recommendation on the stock with an unchanged DCF-based target price of Rs. 370/sh (implying 20x Sept-22 EV/EBITDA).

2QFY21 highlights: Revenue declined 55.1% YoY to Rs. 1.44bn (HSIE: Rs. 1.1bn) as most channels exceeded expectations (EBO/LFS/MBO declined 72/59/77% YoY respectively). The revenue beat was more pronounced across online (up 24% YoY) and LFS channels as the retailer continued to push sales through 3P online fashion websites and also continued to add LFS doors. Oct-20 recovery rate at 70% is encouraging (vs 12/45% in 1Q/2Q). 95%+ stores are now operational. Online sales are now tracking 2x pre- COVID sales, while MBO sales (secondary) are gradually recovering, although primary billing is yet to resume. GMs continue to remain stressed due to higher skew of lower GM online B2B channel in the mix and higher dormancy provisioning. EBITDA losses more than halved to Rs. 163mn (HSIE: 362mn).

Outlook: While cash position (1.1bn cash on books) + unutilised bank limits give comfort, capital (especially WC) efficiency remains a concern (holds true pre-COVID too). Also, with increasing reliance on online sales (even post-COVID), the risk of conceding pricing power, ergo margins, remains high in TCNS Clothing over the medium-to-long term. Hence, we maintain our REDUCE recommendation on the stock with an unchanged DCF-based target price of Rs. 370/sh (implying 20x Sept-22 EV/EBITDA).

Shares of TCNS Clothing Co. Ltd was last trading in BSE at Rs.401.6 as compared to the previous close of Rs. 401.65. The total number of shares traded during the day was 978 in over 136 trades.

The stock hit an intraday high of Rs. 411.1 and intraday low of 401.2. The net turnover during the day was Rs. 393614.

Source : Equity Bulls

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