Increasing number of working women, higher disposable incomes and growing footprint of organised retail across the country are among factors driving the demand for branded women’s apparel in India. TCNS Clothing is a play on this trend.

Through its initial public offering, the company is raising about ₹1,125 crore. The entire amount is an offer-for-sale by promoters, employees and private equity investor. At ₹714-716, the price-to-earnings multiple for the year ended March 2018 (trailing 12 months) works out to about 44 times.

The company has no like-to-like comparables, although Kewal Kiran Clothing which is of a smaller size, both in terms of revenue and market capitalisation, trades at 24 times. Other bigger players in the apparel retailing space such as Future Lifestyle, Aditya Birla Fashion and Retail, Page Industries and Trent trade anywhere between 60-95 times their trailing earnings. While the asking price is not cheap, TCNS has recorded steady growth in revenues in the last five fiscals since 2014, at a compounded annual growth rate of 49 per cent, to ₹842 crore for FY18. Profits have grown from ₹8.75 crore in fiscal 2014 to ₹98 crore in fiscal 2018. The company’s asset-light model, negligible debt and double-digit margins are key positives.

Company and prospects

Given these factors, investors with high risk appetite and long-term perspective can invest. But return expectations need to be tempered, considering the rich valuation.

TCNS designs, manufactures and retails women’s apparel across brands such as W (premium fusion wear), Aurelia (contemporary ethnic wear) and Wishful (premium occasion wear). While W brings in 55-60 per cent of the revenues, Aurelia chips in with about 30-35 per cent. As of March 2018, the company sold its products through 3,456 points of sale, comprising exclusive brand outlets (EBOs) (45-50 per cent of sales), large-format stores (25-30 per cent of sales), multi-brand outlets (11 per cent of sales) and online channels. Currently, the W brand is the most profitable.

The women’s apparel market in India is expected to grow at 10 per cent CAGR till 2025. The share of the organised branded segment, especially in ethnic wear, is expected to move up sharply. While TCNS has done well so far and will be a beneficiary of this trend, the company’s ability to weather future competitive pressures in the crowded women’s ethnic/fusion wear market will be tested.

Going forward, the company intends to open about 75-85 EBOs in fiscals 2019 and 2020. To grow its revenues from the super-premium Wishful brand, it intends to add up to 10 EBOs for Wishful over the next three fiscal years. It also has plans to extend its product portfolio to women’s accessories such as footwear and fragrances.

Financials

TCNS predominantly enters into leases or franchisee agreements for its EBOs, which helps maintain low upfront costs that can be met through internal accruals. Besides, the company does not own manufacturing facilities and gets its clothes tailored through job workers. It thus, follows an asset-light model and currently has near zero debt.

The company recorded loss of ₹41 crore in the year ended March 2016 and reported only ₹15 crore of profits in the year ended March 2017, due to sharp spike in employee expenses. The company issued bulk of the ESOPs in the years 2014-2015, with vesting periods ranging from one to two/four years. Hence, employee expenses shot up due to writing off the value of these ESOPs.

ESOP-related expenses came down sharply in fiscal 2018 and the company recorded a profit of ₹98 crore. The expense on this front is expected to further decline and taper off in the near- to medium-term. Barring fiscal 2016, operating margins have varied from 10-18 per cent, with 18 per cent recorded in the latest fiscal.

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