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  • Why what women wear matters to TCNS Clothing stock

    Publish Date: September 18, 2018

    Over the years, women have taken flak for their so-called affinity for shopping. Shopping has been described as an unproductive activity. Labels such as ‘spendthrift’ and ‘shopaholic’ have been tossed around with amazing alacrity. Yet, what women wear matters. Let us look at a company where investors, irrespective of gender, have put more than Rs 4100 crore as indicated by its market value. Since the company's IPO, the stock has not moved much and that is an opportunity waiting to be tapped. With a reliable track record of scaling up new brands, stable margin profile, and anticipated improvement in cash generation, it offers an attractive proposition. If women spend more on apparel, that’s good news for this recently listed stock, which promises out-sized gains. This potential winner is about our womenfolk and shopping. Read on to know more.

    Multi-channel womenswear

    TCNS Clothing Co. is a leading designer and retailer of women's ethnic wear. Over the years, it has built a leadership position in the under-penetrated branded womenswear market. This has led to the creation of a brand that enjoys a strong pull. Over the last 16 years, TCNS has introduced three brands. ‘W’ (launched in 2002) and ‘Aurelia’ (2009) have already scaled Rs 500 billion in gross sales, and they are not running out of gas any soon.

    The flagship brand ‘W’ is known to be a premium ethnic wear brand for women. It emphasises fusion wear and western silhouettes. ‘Aurelia’ has become stronger and now accounts for one-third of the company’s revenues. In fact, it has grown faster than ‘W’ over FY2015–18.

    The company can reap rich dividends if it manages to scale up its third brand ‘Wishful’, which is designed as a non-mass market offering. Besides, initiatives like the introduction of complementary product lines such as footwear and artificial jewellery can ensure the footfalls of women shoppers.

    The company continues to invest in additions to points of sale. We feel all these will lead to an estimated 20% revenue growth during FY2018–21. If the company keeps exploring nearby categories in womenswear in the future, TCNS will be set to gain a greater share of the fast-growing branded apparel space.

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    Growth story

    TCNS has a lot going for it. We forecast healthy revenue, profit, and earnings per share growth in the range of 20–23% over FY2018–21. Steady same-store sales growth (SSSG), additions to points of sale, and cool margins of about 21% are key ingredients for building a business that will last.

    The company is set to generate more cash as well. With future year-on-year revenue growth at 19–21% over FY2019-21 from elevated levels in the past, working capital needs will soften. A lower working capital need is better for cash generation. This can improve free cash flow (FCF) generation at TCNS.

    There are, however, some risks. Changing customer preferences need to be monitored. Inventory becoming out of sync with consumer demands is concern. Plus, competitive intensity coming from private labels and e-retailers can put pressure on margins. We also feel that a future grant of employee stock options (ESOPs) will result in further dilution. Besides, a stake sale by existing holders may dampen the excitement.

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    Primed for success

    Our house has initiated coverage on TCNS Clothing (TCNS) with a 'Buy' rating. This is because TCNS is uniquely positioned to benefit from rising spends on branded apparel. You can sell smartphones, apparel, or shoes, but at the end of the day, the trick lies in running the shop.

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    TCNS has a proven track record of scaling up new brands. It maintains solid presence across multiple retail channels. All this has not compelled it to lose focus on its rock-steady margin profile. As return ratios remain steady and the company churns out gradual improvement in FCF, TCNS is quite well placed from an investment perspective.

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