Hold TCNS Clothing; target of Rs 630: Emkay Global Financial

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Emkay Global Financial's research report on TCNS Clothing

TCNS’s Q2 EBITDA was ~17% lower than street/our estimates, led by ~300bps miss on the margin front. Lower margins were led by higher marketing/growth investments, which are expected to continue. For Q3 (festive sales), Aurelia brand has returned to pre-Covid levels on LTL basis, but recovery for W brand is lagging due to slower traction in certain styles (fabric issue). Ongoing festive recovery is slower vs. our expectations of ~15% LTL growth (vs. pre-Covid) across channels, leading to a ~10% cut in our FY23 revenue estimates. Our FY24E revenue estimates factor in ~8% LTL growth vs. pre-Covid, which seems fair given introduction of accessories and price hikes.

Outlook

However, we have cut FY24/25E margin estimates by 70-90bps [16-17% EPS cut], led by need for growth investments. Lower margin expectations also leads to cut in our medium-term RoIC assumption to 28% vs. 35% earlier, effecting a multiple reduction to 29x Dec-24E EPS vs. 33x earlier. With slower ethnic recovery and margin miss, we downgrade our rating to Hold with a revised TP of Rs630 (vs. Rs800 earlier). Slower store addition is a potential downside risk. Stronger traction in bottom-wear brand Elleven and faster SSG/margin improvement remain potential upside risks.

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TCNS Clothing - 14 -11-2022 - emkay