Maintain REDUCE on TCNS clothing – Exceeds expectations; capital efficiency remains a WIP – HDFC Securities
Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities
TCNS Clothing recovered 45% of base quarter sales, exceeding our estimates (HSIE: 34%). However, within our clothing universe, it lags behind. LFS and Online revenues far exceeded expectations. GMs continue to remain stressed due to greater distortion of the lower GM online B2B channel in the mix and higher dormancy provisioning. EBITDA losses were cut by more than half to Rs. 163mn (HSIE: 362mn). Capital efficiency remains a WIP as WC needs remain high due to high inventory levels and increased supplier base support (debt reduction). As we increase our EBITDA estimates for fiscal year 22/23 from 4% to 8%, we also increase our WC assumptions. We maintain our REDUCE recommendation on the stock with an unchanged target price of Rs based on DCF. 370 / sh (involving 20x Sep-22 EV / EBITDA).
Highlights of 2QFY21: Revenue fell 55.1% yoy to Rs. 1.44 billion (HSIE: Rs. 1.1 billion) as most channels exceeded expectations (EBO / LFS / MBO have down 72/59/77% respectively year-on-year). The increase in revenue was most pronounced on the online channels (up 24% year-on-year) and LFS, with the retailer continuing to increase sales on 3P online fashion websites and continuing to add doors. LFS. The Oct-20 recovery rate at 70% is encouraging (vs. 12/45% at 1Q / 2T). More than 95% of stores are now operational. Online sales now follow pre-COVID sales 2x, while MBO (secondary) sales are gradually picking up, although primary billing has yet to pick up. GMs continue to remain stressed due to greater distortion of the lower GM online B2B channel in the mix and higher dormancy provisioning. EBITDA losses were cut by more than half to Rs. 163mn (HSIE: 362mn).
Outlook: While cash position (1.1 billion cash on the books) + unused bank limits provide comfort, capital efficiency (especially WC) remains a concern (this is also the case before COVID). In addition, with the increasing use of online sales (even post-COVID), the risk of conceding price power, and therefore margins, remains high in TCNS Clothing in the medium and long term. Therefore, we maintain our recommendation to REDUCE on the stock with a target price of Rs unchanged based on DCF. 370 / sh (involving 20x Sep-22 EV / EBITDA).
Shares of TCNS Clothing Co. Ltd were last trading on BSE at Rs 401.6 from the previous close of Rs. 401.65. The total number of shares traded during the day was 978 in over 136 trades.
The share hit an intraday high of Rs. 411.1 and intraday low of 401.2. The net turnover during the day was Rs. 393,614.