Hold TCNS Clothing of Rs 570: Emkay Global Financial

Emkay Global Financial's research report on TCNS Clothing

Q3 EBITDA was in line-with our estimates but was 30% lower than street’s estimates. On expected lines, Q3 saw a 7% revenue decline, led by TCNS-specific fabric issue in brand W, nil B2B online sales (7% growth impact), and challenges in Future-Group operated Central stores. TCNS indicated a decent pick-up in ethnic sales and attributed weak TCNS performance to its own issues. There is some left-over impact of Q3 challenges, which shall have an effect in Q4 as well. For the upcoming season (SS-23), TCNS expressed confidence regarding stronger traction, as fabric issues have been taken care of in the new season launch. EBITDA margin dipped by ~600bps to 13% in Q3, largely led by negative operating leverage and 16 net-new store openings. Our FY24E revenue estimates factor in ~8% LTL growth vs. pre-Covid, which seems fair, given the introduction of accessories and price hikes.

Outlook

The stock has seen a significant correction, but we maintain our Hold rating with an unchanged TP of Rs570 (on 27x its FY25E EPS), given visible near-term challenges. Stronger traction in the bottom-wear brand, Elleven, and faster SSG/margin improvement remain potential upside risks .