Buy TCNS Clothing target of Rs 410: ICICI Direct

ICICI Direct's research report on TCNS Clothing

As expected, Q1FY21 was a washout quarter for TCNS Clothing marred by store closures for a major period during the quarter. The main emphasis in Q1 was on sharp rationalisation of operating overhead. Revenue for the quarter fell 88% YoY to Rs 32.4 crore. For offline sales, normalcy levels reached 40% of pre-Covid sales with strong traction in e-commerce channel (1.3x of pre-Covid levels). Provision for dormancy on unsold inventory (~Rs 3 crore) and change in channel mix (higher share of e-commerce) led gross margins to contract to 50.7% vs. 67.2% in Q1FY20. In a bid to minimise cash burn, the company rationalised operating overheads through a reduction in rental expenses (secured full year savings of ~25% over last year with Rs 19 crore savings accounted in Q1) and employee expenses down 12% YoY to Rs 33.0 crore (full benefit to flow in Q2). Hence, EBITDA losses were curtailed, to a certain extent, to Rs 43.0 crore. PBT losses were at Rs 60.4 crore with net loss at Rs 45.3 crore (tax write back: Rs 15.1 crore). TCNS continues to have a healthy b/s with debt free status and Rs 125.0 crore cash and investments.

Outlook

We expect certain reduction in expenses to be structural in nature. Being a net cash positive company (Rs 125.0 crore cash & investment, unutilised bank limit), TCNS would be better positioned to tide over the current turbulent market scenario vs. small peers. On a moderate base of FY20, we bake in 28% earnings CAGR in FY20-22E. We reiterate BUY on the stock with a revised TP of Rs 410 (25x FY22E EPS, previous TP: Rs 445).

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