TCNS prospects good but there’s little room for near-term growth

TCNS Clothing Company is coming with an Initial Public Offer (IPO) of equity, involving an offer for sale of 15.71 million shares. Its business prospects look good, with healthy past performance and experienced management; however, the stock valuation suggests investors looking for immediate gains might get disappointed. Analysts, thus, suggest only long-term investors should subscribe.

TCNS is a leading women’s branded apparel company, the target customers being those with jobs. Set up in December 1997, it had cumulative annual sales growth of 32 per cent during FY16-18. Its portfolio has three prominent brands—W (58 per cent of sales in FY18), Aurelia (34 per cent) and Wishful (eight per cent). During this period, net profit grew 57 per cent annually.

A deceleration in FY18 sales growth was, says the management, mainly due to adoption of IND-AS accounting norms. However, the gross margin of over 60 per cent pushed up its operating margin to about 22 per cent in FY18, from 18 per cent in FY16. So, going ahead, some moderation in margin is not ruled out, even as the company sounds confident.

“Though we’ll get cost reduction opportunity as we are opening manufacturing facilities in non-NCR (Delhi) region and evaluating locations like Jharkhand and Odisha where governments offer incentives, this will be invested or passed on to consumers. Thus, we will maintain the margins at least at current levels (FY18),” says Venkatesh Tarakkad, group finance head.

Vineeta Sharma, head of research at Narnolia Securities, says inventory management is key, as any loss or gain here impacts operating margins in this business. In 2017-18, the firm introduced 1,600 new apparel (size and colour variants, too), indicating the inventory management required.

The vast network adds to its strengths. With 465 exclusive business outlets or EBOs (either leased or franchised, 50 per cent of sales in FY18), 1,469 large format stores (28 per cent of sales) and 1,522 multi-brand outlets (11 per cent of sales), the firm has panIndia presence. TCNS caters to consumer demand through online retailers such as Myntra, Jabong and Amazon, 10 per cent of its FY18 sales.

It plans to expand its distribution network further by opening 75-85 stores annually for the next three to five years, says Tarakkad. He also expects the share of online distribution, including omni-channels, in total sales to go up to 15-20 per cent in five to seven years. Importantly, the company has products across most price points, from ~700 to as much as ~5,000 a piece. And, with a strong in-house research and design team, it covers a significant part of the women wear market, and is placed well to capture coming opportunities.

As of FY17, the women’s apparel market in India, growing faster than that of men’s wear, was $19 billion (nearly ~1.3 trillion) and is expected to reach $42 billion by FY25. This augurs well for TCNS. However, the market is also highly competitive, with firms in the unorganised segment dominating the space with around 75 per cent market share.

Even so, says Ambit Capital, with the increasing number of working women, the market has evolved from sarees to fusion wear. Rising per capita income too is likely to push up share of organised players.

TCNS has positioned itself well (offering apparels in seven different sizes versus five by peers), and has plenty of opportunities. However, at the offer price for the share, the valuation works out to 44 times the FY18 earnings (after employee stock options adjustment). This is not cheap and leaves little room for a rise in the near term. IPO ANALYSIS